Local government revenue and expenditure: First quarter local government section 71 report for the period: 1 July 2021 – 30 September 2021
National Treasury has released the local government revenue and expenditure report for the first quarter of the 2021/22 financial year. This report covers the performance against the adopted budgets of local government for the first quarter of the municipal financial year ending on 30 September 2021 and includes spending against conditional grant allocations for the same period.
The report was prepared by using figures from the Municipal Standard Chart of Account (mSCOA) data strings. The mSCOA Regulations were promulgated on 22 April 2014 and prescribes the uniform recording and classification of municipal budget and financial information at a transaction level. All municipalities and municipal entities had to comply with the Regulations by 01 July 2017. The mSCOA Regulations require that municipalities upload their budget and financial information in a data string format to the Local Government portal across the six mSCOA regulated segments.
The report is part of the In-year Management, Monitoring and Reporting System for Local Government (IYM), which enables provincial and national government to exercise oversight over municipalities and identify possible challenges in implementing municipal budgets and conditional grants.
The credibility of the information contained in the mSCOA data strings is a concern but is improving as the reform is maturing. At the core of the problem is:
• The incorrect use of the mSCOA and municipal accounting practices by municipalities;
• A large number of municipalities are not budgeting, transacting and reporting directly in and from their core financial systems. Instead, they prepare their budgets and reports on excel spreadsheet and then import the excel spreadsheets into the system. Often this manipulation of data lead to unauthorised, irregular, fruitful and wasteful (UIFW) expenditure and fraud and corruption as the controls that are built into the core financial systems are not triggered and transactions go through that should not; and
• Municipalities are not locking their adopted budgets or their financial systems at month- end to ensure prudent financial management. To enforce municipalities to lock their budgets and close their financial system at month-end in 2021/22, the Local Government Portal will be locked at the end of each quarter. System vendors were also requested to build this functionality into their municipal financial systems.
The actual COVID-19 expenditure reported by municipalities for the first three months of the 2021/22 municipal financial year is included as a separate Annexure to this publication.
The Section 71 report facilitates transparency in reporting, better in-year management as well as the oversight of the financial performance of municipalities against their adopted budgets. This report is therefore a management tools that serves as an early warning mechanisms for councils, provincial legislatures and municipal management to monitor and improve municipal performance timeously. The improvement of the credibility of the data strings is a priority for national and provincial treasuries and the submitted data strings are analysed monthly and errors are communicated to municipalities for correction.
KEY TRENDS:
Aggregate trends
1. On aggregate, municipalities spent 21.5 per cent, or R111.9 billion, of the total adopted expenditure budget of R521.3 billion as at 30 September 2021 (first quarter results for the 2021/22 financial year). In respect of revenue, aggregate billing and other revenue amounted to 25.3 per cent, or R130.6 billion, of the total adopted revenue budget of R516.7 billion.
2. Of the adopted operating expenditure budget amounting to R452.3 billion, R103.8 billion or
22.9 per cent was spent by 30 September 2021.
3. Municipalities have adopted the budget for salaries and wages expenditure at R138 billion, which is R11.5 billion more than the adopted budget of R126.5 billion reported in the first quarter of the 2021/22 municipal financial year. This constitutes 30.5 per cent of their total adopted operational expenditure budget of R452.3 billion. As at 30 September 2021, spending on salaries and wages is 21.6 per cent, or R29.8 billion.
4. In the period under review, capital expenditure amounted to R8.2 billion, or 11.9 per cent, of the adopted capital budget of R69 billion.
5. Aggregated year-to-date operating expenditure for metros amounts to R64.8 billion, or 24.2 per cent, of their adopted budget expenditure of R268 billion. The aggregated adopted capital budget for metros in the 2021/22 financial year is R34.4 billion, of which 7.6 per cent, or R2.6 billion, has been spent as at 30 September 2021.
6. When billed revenue is measured against their adopted budgets, the performance of metros reflects a shortfall on electricity services for the first quarter of the 2021/22 financial year. This does not take into account the collection rate:
• Billed water revenue billed was R7.8 billion against expenditure of R7 billion;
• Energy sources revenue billed was R25.1 billion against expenditure of R25.2 billion;
• The revenue billed for waste water management was R2.5 billion against expenditure of R1.6 billion, and
• Levies for waste management billed were R3.2 billion against expenditure R2 billion.
7. As at 30 September 2021, aggregated revenue for secondary cities is 25.2 per cent or R18.1 billion of their total adopted revenue budget of R72 billion for the 2021/22 financial year. The year-to-date aggregated operating expenditure level of the secondary cities is
25.5 per cent or R18.6 billion of the total adopted operating budget of R72.8 billion for the 2021/22 financial year.
8. The performance against the adopted budget for the three core services for the secondary cities for the first quarter 2021/22 also shows deficit position against billed revenue without taking into account the collection rate:
• Water revenue billed was R2.3 billion against expenditure of R4.4 billion;
• Energy sources revenue billed was R6.9 billion against expenditure of R6 billion;
• The revenue billed for waste water management was R945.5 million against expenditure of R1.3 billion; and
• Levies for waste management billed were R813.7 million against expenditure of R974 million.
9. Capital spending levels are low at an average of 10.2 per cent or R768.6 billion of the adopted capital budget of R7.5 billion.
10. Aggregate municipal consumer debts amounted to R264.7 billion (compared to R194.2 billion reported in the first quarter of 2020/21) as at 30 September 2021. Government debt accounts for 7.4 per cent, or R19.6 billion (R16.7 billion reported in the fourth quarter of 2020/21). The largest component of this debt relates to households which account for 70.5 per cent or R186.6 billion (72.6 per cent or R168.9 billion in the fourth quarter of 2020/21).
11. It needs to be acknowledged that not all the outstanding debt of R214.3 billion is realistically collectable, as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.
12. If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R50.2 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.
13. Metropolitan municipalities are owed R125.6 billion (R78.9 billion reported in the first quarter of 2020/21) in outstanding debt as at 30 September 2021. The largest contributors were the Cities of Johannesburg at R38.2 billion, Ekurhuleni at R22.6 billion, Tshwane at R17.1 billion, eThekwini at R17.7 billion and Nelson Mandela Bay at R10.4 billion.
14. Households in metropolitan areas are reported to account for R91.6 billion or 72.9 per cent of outstanding debt to metros, followed by businesses which account for R28.1 billion or
22.4 per cent. Debt owed by government agencies is at R5.4 billion or 4.3 per cent of the total outstanding debt owed to metros.
15. Secondary cities are owed R50.6 billion (R49 billion reported in the first quarter of 2020/21) in outstanding consumer debt. The majority of debt is owed by households, which amount to R34.3 billion, or 67.8 per cent, of the total outstanding debt. An analysis by customer group indicates an amount of R44.3 billion or 87.5 per cent, has been outstanding for more than 90 days.
16. Municipalities owed their creditors R78.3 billion as at 30 September 2021 and provinces with the highest percentage of outstanding municipal creditors in the category greater than 90 days include Free State at 90 per cent, Mpumalanga at 82.7 per cent, Northern Cape at 82 per cent and North West at 79.7 per cent. An increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges and consequently are delaying the settlement of outstanding debt owed.
17. The total balance on borrowing for all municipalities equates to R69.4 billion as at 30 September 2021. This includes long term loans of R50 billion, long term marketable bonds of R10.7 billion, and other long term non-marketable bonds of R5.7 billion. The balance represents other short- and long-term financing instruments.
18. As at 30 September 2021, the total investments made by municipalities equates to R39.4 billion. This is R5.4 billion more than the R33.9 billion reported in the first quarter of 2020/21. Investments includes Bank Deposits of R35.1 billion, guaranteed endowment policies (sinking funds) of R3.6 billion, Listed Corporate Bonds of R582.3 million and other smaller investments.
Conditional Grants
Conditional Grants Expenditure as at 30 September 2021
19. The Division of Revenue Act, 2021 (Act No. 9 of 2021) (DoRA) gazetted on 28 June 2021 provides for the equitable division of nationally raised revenue between the three spheres of government (National, Provincial and Local Government). DoRA further provides that all conditional grants allocated to municipalities must be spent subject to the legislated conditions as articulated in the respective conditional grant frameworks.
20. Section 11 and 12 of the 2021 DoRA requires municipalities to report information on conditional grants received, withheld or stopped and their performance on their allocations in accordance with sections 71 and 74 of the MFMA, 2003 (Act No. 56 of 2003) on a monthly and quarterly basis
21. The DoRA allocated a total amount of R130.6 billion to local government for the 2021/22 financial year. This allocation includes unconditional transfers in the form of the Equitable Share (R77.9 billion), direct conditional grants allocated for capacity grants (R2.3 billion), direct conditional grants for infrastructure projects (R43.1 billion, including of the Urban Settlements Development Grant (USDG) of R7.4 billion)) and indirect conditional grants (R7 billion - a slight decrease from the R7.5 billion allocated in 2020/21). Transfers to local government continue to grow above inflation over the medium term, particularly the Equitable Share allocations to accommodate the rising cost of providing Free Basic Services to poor households. These allocations exclude the General fuel levy to metropolitan municipalities to the amount of R14.6 billion (R14 billion was allocated in the previous year).
22. As at the 30 September 2021, of the R35.7 billion (excluding USDG) allocated to municipalities in direct conditional grants for 2021/22, R12.3 billion or 33.1 per cent was transferred to municipalities. The reported expenditure as at the end of September 2021 by the transferring officers was a mere R5.2 billion or 13.7 per cent. This was a slight improvement from the 11.1 per cent achieved in the same period in the 2020/21 financial year. However, the reported expenditure by municipalities is significantly low at six per cent.
23. The eight metropolitan municipalities are the largest contributors to the economy in the country and are therefore allocated the lion’s share of transfers from national government to municipalities of R10.8 billion in direct conditional grants. From this allocation R3.3 billion or
30.6 per cent was transferred as at 30 September 2021 and R860.4 million or 25.8 per cent of the transferred amount was reported as spent. This excludes supplementary grants such as the Urban Settlements Development Grant (USDG) as the grant is reported as part of the overall capital budget of the receiving metropolitan municipalities
24. Similar to the same period last year, the highest performing metro was eThekwini Metropolitan Municipality having reported expenditure of R330.4 million or 20.7 per cent of the R1.6 billion allocation in direct conditional grants. The City of Tshwane followed with reported overall expenditure of R165.4 million or 12.3 per cent on the allocated amount. This expenditure is mainly informed by performance of capital grants.
25. The lowest performing metropolitan municipality (similar to the same period last year) was the Nelson Mandela Bay Metropolitan municipality which reported an overall expenditure of R23.5 million which equates to 3.6 per cent of the allocated amount or 11.8 per cent of the transferred amount.
26. With regard to expenditure performance on operating grants, the highest performing metro was eThekwini metropolitan municipality, followed by Buffalo City Metropolitan Municipality with reported overall expenditure of 19.7 per cent and 14.9 per cent which translates respectively into R7.9 million and R173.7 million expenditure on the transferred amount.
27. The lowest performing metropolitan municipality was the Nelson Mandela Bay Metropolitan Municipality which reported an overall expenditure of R770 thousand which equates to 0.2 per cent of the amount transferred to the municipality.
28. The impact of the COVID-19 on conditional grants performance continues, and this is evident in the first quarter performance and shows some municipalities are still grappling with procurement processes. The nationwide lockdown that came into effect in the last quarter of the 2019/20 municipal financial year disrupted progress on projects that were being implemented and hampered municipal procurement processes. Municipalities are also continuing with previous years’ projects where milestones could not be achieved due to effects of the COVID-19 pandemic and lockdown restrictions.
Capacity Building and Other Conditional Grants Expenditure as at 30 September 2021
29. A total of R2.3 billion was allocated to capacity building and other grants (including the unallocated Municipal Disaster Grant and the Municipal Emergency Housing Grant). These grants are intended to assist municipalities in the development of their management, planning, technical, budgeting and financial management capabilities in the 2021/22 financial year. This included the Municipal Disaster Grant which assists municipalities in alleviating the impact of a disaster, such as the COVID-19 pandemic which was declared a disaster in 2020 and for which funding was allocated to alleviate its impact.
30. The highest performing conditional grant under this category during the first quarter was the Expanded Public Works Programme (EPWP) with reported performance of 32.7 per cent, followed by the Infrastructure Skills Development Grant (ISDG) at 17.9 per cent and the Financial Management Grant (FMG) at 16.3 per cent.
31. The lowest performing grant in the first quarter ended 30 September 2021 is the new grant, namely the Programme and Project Preparation Support Grant (PPPSG) with reported expenditure performance of 0.4 per cent. The low expenditure reported on the grant may be as a result of the grant being new and performance is expected to improve in the second quarter. A concerted effort is required from the Transferring Officer (TO) to support
municipalities that receive this grant.
Infrastructure Conditional Grants Expenditure as at 30 September 2021
32. National transfers for infrastructure, excluding indirect or in-kind allocations to Transferring Officers executing specific projects on behalf of municipalities in the municipal area, amounts to R35.5 billion in the 2021/22 financial year.
33. The highest performing direct infrastructure grant to municipalities during the first quarter was the Municipal Infrastructure Grant (MIG) which reported performance of 20 per cent, followed by the Integrated Urban Development Grant (IUDG) which reported performance of
18.8 per cent, and the Water Services Infrastructure Grant (WSIG) grant with reported performance of 11.2 per cent.
34. The lowest spending grant under the infrastructure grants during the first quarter was the Informal Settlements Upgrading Partnership Grant (ISUPG) with expenditure of 6.6 per cent which is equivalent to R259.6 million against the allocation of R3.9 billion. The second lowest performing grant is the Rural Roads Asset Management Systems (RRAMS) grant. The low levels of expenditure on the infrastructure grants are a concern, especially on the ISUPG that is meant for the provision of basic services in informal settlements.
35. Indirect grants (Infrastructure and capacity) allocated to municipalities increased from R5.8 billion in the 2020/21 financial year to R7 billion in the 2021/22 financial year. Indirect grants are allocations whereby the National Transferring Officers are responsible for the implementation and administration of the grants. Performance monitoring for these grants is not included as part of the Section 71 publications because municipalities do not receive these allocations directly (allocations in-kind). Reporting on these transfers should be included in the Section 40 reporting requirements for National Department as articulated in the Public Finance Management Act, 1999 (Act No. 1 of 1999). These reports are submitted monthly to the National Treasury’s Public Finance Division.
Further details on this report can be accessed on the National Treasury’s website: www.treasury.gov.za.
