National Treasury releases local government’s revenue and expenditure

Publication of the Local Government Section 71 information for the Fourth Quarter ended 30 June 2019.

National Treasury has today released local government’s revenue and expenditure as well as spending on conditional grants for the fourth quarter of the 2018/19 financial year. The data presented in this report covers the fourth quarter of the municipal financial year ending on 30 June 2019.

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 problems in implementing municipal budgets and conditional grants.

In-year reporting is institutionalised with most municipalities that consistently produce quarterly financial reports. The reporting facilitates transparency, better in-year management as well as the oversight of municipal budgets. This makes these reports management tools and early warning mechanisms for councils, provincial legislatures and officials in order to monitor and improve municipal financial performance.

Key trends:

Aggregate trends
1. As at 30 June 2019, municipalities spent 87.9 per cent or R391.8 billion of the total adjusted budget of R445.7 billion. In respect of revenue, aggregated billing and other revenue amounts to 92.1 per cent or R404.7 billion of the total adjusted revenue budget of R439.5 billion.
2. Capital expenditure amounts to R55.4 billion or 75.3 per cent of the adjusted capital budget of R73.6 billion.
3. The adjusted operating expenditure budget amounts to R372.2 billion, of which R336.4 billion or 90.4 per cent was spent by 30 June 2019.
4. In terms of the budgeted monthly statements in support of the adjusted budgets, municipalities reported the following performance:

• Revenue collection – 3.7 per cent or R13.5 billion under performance against budgeted forecasts;
• Operational expenditure – 8.6 per cent or R31.7 billion under performance against budgeted forecasts; and
• Capital expenditure – 24.3 per cent or R17.8 billion under performance against budgeted forecasts.

5. Municipalities have adjusted the budget for salaries and wages expenditure to R113 billion, R0.6 billion less than the adopted budget of R113.6 billion for the 2018/19 municipal financial year. There is a 6.9 per cent growth on expenditure of salaries and wages from quarter 4 in 2017/18 to the same period in the current year.
6. Metropolitan municipalities achieved 94.8 per cent or R245.5 billion of billed and other revenue of the total adjusted revenue budget of R259 billion.
7. Aggregated year-to-date total expenditure for metros amounts to R235.5 billion or 92 per cent of their adjusted budget expenditure of R256.1 billion. On average, this represents an annual improvement of 16.6 per cent when compared to the fourth quarter of 2017/18.
8. Aggregated year-to-date total operating expenditure for metros amounts to R206 billion or 94.5 per cent of their adjusted budgeted operational expenditure of R218 billion.
9. The adjusted capital budget for metros in the 2018/19 financial year is R38.1 billion of which 77.5 per cent or R29.6 billion has been spent as at 30 June 2019.
10. In aggregate, metropolitan municipalities recorded an under performance of 1.2 per cent or R2.6 billion on revenue collection, an under performance of 5 per cent or R10.9 billion on operational expenditure and 24.1 per cent under performance or R9.4 billion on capital expenditure.
11. As shown below, when billed revenue is measured against their actual expenditure, the performance of metros shows surpluses for all trading services for the fourth quarter 2018/19. This does not take into account actual collections:

• Billed water revenue totaled R30.1 billion against expenditure of R28.5 billion;
• Billed electricity revenue totaled R74.6 billion against expenditure of R68.3 billion;
• Billed waste water management revenue totaled R12.1 billion against expenditure of R7.6 billion, and
• Billed waste management revenue totaled R9.3 billion against expenditure R6.9 billion.

12. The performance of secondary cities against the adjusted budget for the four core services also shows surpluses for the fourth quarter of 2018/19. This excludes actual collections:

• Billed water revenue totaled R6.9 billion against expenditure of R5.9 billion;
• Billed electricity revenue totaled R18.8 billion against expenditure of R14.5 billion;
• Billed waste water management revenue totaled R2.7 billion against expenditure of R1.7 billion; and
• Billed waste management revenue totaled R2.3 billion against expenditure of R1.8 billion.

13. As at 30 June 2019, the aggregated revenue for secondary cities is 90.1 per cent or R54.6 billion of their total adjusted revenue budget of R60.6 billion. A year-on-year comparison shows that total billed revenue on average has increased by 2.1 per cent despite high fluctuations in the reporting.
14. The year-to-date operating expenditure level of the secondary cities is 85.7 per cent or R46.6 billion of the total adjusted operating expenditure budget of R54.3 billion for the 2018/19 financial year.
15. Capital spending levels are low at an average of 72.1 per cent or R6.5 billion of the adjusted capital budget of R9 billion. Low capital spending has potentially serious implications for the government’s ability to meet the targets for expanded access to service delivery and job creation.
16. Secondary cities reported an under performance of 7.7 per cent or R4 billion when measured against monthly budgeted billed revenue, while there is an under performance of 13.7 per cent or R7.4 billion on operational expenditure and R2.1 billion or 24.5 per cent on capital expenditure.
17. Aggregate municipal consumer debts amounted to R165.5 billion (compared to R143.2 billion reported in the fourth quarter of 2017/18) as at 30 June 2019. A total amount of R4.2 billion has been written off as bad debt. Government accounts for 6.2 per cent or R10.3 billion. Similar as in the previous financial years the households still represent the largest component of debt owed to municipalities at 71.7 per cent or R118.6 billion.
18. It needs to be acknowledged that not all the outstanding debt of R165.5 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.
19. The actual debt owed to municipalities for less than 90 days amounts to R29.6 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.
20. Metropolitan municipalities are owed R82.2 billion (R76.9 billion reported in the fourth quarter of 2017/18) in outstanding debt as at 30 June 2019.
21. Households in the metropolitan areas s are reported to account for R63.5 billion or 77.3 per cent of outstanding debt, followed by businesses which account for R14.1 billion or 17.1 per cent. Debt owed by government agencies is approximately R2.7 billion or 3.3 per cent of the total outstanding debt owed to metropolitan municipalities.
22. As at 30 June 2019 secondary cities are owed R35.4 billion. This represents an increase of 38.3 per cent from the R25.6 billion reported in the fourth quarter of 2017/18.
23. The creditors’ age analysis shows that R60.2 billion is owed by municipalities as at 30 June 2019; an increase of R9.1 billion when compared to the R51.1 billion reported in the fourth quarter of 2017/18.
24. Municipalities in the Free State have the highest percentage of outstanding creditors greater than 90 days at 89.3 per cent, followed by Northern Cape at 76.7 per cent and Mpumalanga at 75.5 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 their outstanding accounts.
25. The aggregated year-to-date actual collection rate is 88.9 per cent compared to an adjusted budgeted collection rate of 88.9 per cent. This indicates that the collection rate was on target. However, the budgeted and actual collection rate is below the 95 per cent norm.
26. The metros budgeted for an adopted collection rate of 92.7 per cent which was adjusted to 91.4 per cent and achieved an actual collection of 96.3 per cent which is 1.3 per cent above the 95 per cent norm and 4.9 per cent above the adjusted budgeted collection rate.
27. The secondary cities reported 73.7 per cent collection against an adjusted collection rate of 81.9 per cent which is 8.2 per cent below the adjusted collection rate. This is far below the norm of 95 per cent and is a significant risk to the liquidity and operations of these municipalities.
28. The total balance on borrowing for all municipalities equates to R67.5 billion as at 30 June 2019. This includes long-term loans of R49 billion and long-term marketable bonds of R18.3 billion. The balance represents other short and long-term financing
instruments.
29. A total of 186 municipalities reported on 346 borrowing instruments. 103 municipalities reported that they have no loans.
30. A total of 178 municipalities reported on 2 559 investment instruments.
31. As at 30 June 2019 the closing balance for investments made by municipalities equates to R35.6 billion. Investments include bank deposits of R27.3 billion, guaranteed endowment policies (sinking funds) of R4.7 billion, negotiable certificates of deposits at
banks of R2.2 billion, listed corporate bonds of R1.4 billion and some smaller investments.

Over- and underspending

32. Underspending of R57.8 billion or 13 per cent of municipalities’ total adjusted expenditure budgets was reported. Compared to the R66.8 billion recorded, as under spending in 2017/18, there has been a decrease of R9 billion year-on-year. The over-and underspending can be summarised as follows:

Analysis of Over and Under spending of expenditure for 2015/16 - 2018/19                                                                                                                                                                                                                                         

Source: National Treasury Local Government database

• Aggregate overspending of the adjusted operating budget – R4.9 billion or 1.3 per cent;
• Aggregate underspending of the adjusted operating budget – R40.7 billion or 10.9 per cent;
• Aggregate overspending of the adjusted capital budget – R836 million or 1.1 per cent;
• Aggregate underspending of the adjusted capital budget – R19 billion or 25.8 per cent;
• Aggregate  underspending  of the revised  conditional  grants  allocation  –  R7.1 billion or 20.8 per cent; and
• Aggregate overspending of the conditional grants allocation – R264 million or 0.8 per cent.

33. Note that the aggregation of the capital and operating budgets will result in a different outcome to that of analysing them separately.
34. The biggest contributor to overspending on the conditional grant framework is informed by the Mpumalanga and Northern Cape provinces with 4 and 1.2 per cent respectively. This represents a net underspend of R6.8 billion for the financial year.

Conditional Grant performance

35. Expenditure on conditional grants for the fourth quarter of the 2018/19 financial year indicated R27.2 billion or 80.1 per cent of the transferred R33.6 billion was spent by municipalities as at 30 June 2019 (a 6.5 per cent and 6.1 per cent decrease from the 86.7 per cent achieved in 2016/17 and 86.2 per cent achieved in 2017/18 respectively). As a norm, the fourth quarter performance, similarly to all quarterly performance reports, excludes indirect grants because performance of these type of grants recorded in the books of national departments administering the grants on behalf of municipalities.
36. The best performing province was Mpumalanga, which reported overall expenditure of R2.9 billion or 94.4 per of the R3 billion transferred to Mpumalanga municipalities, followed by Limpopo, KwaZulu-Natal, Northern and Eastern Cape provinces with all attaining expenditure above 80 per cent, a regression from 2017/18 wherein the three provinces’ expenditure was above 90 per cent of total transfers.
37. The municipalities in Western Cape and Free State provinces did not perform so well, with respective expenditures at 73.5 per cent and 73 per cent of transferred funds respectively. The two provinces have somewhat regressed from previous years, given in the past municipalities in these provinces were able to spend on average more than 80 per cent of their allocated and transferred conditional grants.
38. The poorest performing province in 2018/19 was Gauteng, which recorded expenditure of 61.5 per cent of the R3.7 billion transferred to municipalities in the province. North West municipalities are the second worst performing municipalities (previously poorest performing province in 2016/17 and 2017/18). From the R3.2 billion transferred to North West municipalities, they only managed to spend just over R2 billion or 64.1 per cent of it. A similar trend was observed in the 2017/18 financial year.
Non-Infrastructure Conditional Grants Expenditure as at 30 June 2019
39. Under the capacity building conditional grants, the best performing grant was the Expanded Public Works Programme (EPWP) integrated grant for municipalities, which had 100 per cent expenditure for the third consecutive year. The local government Financial Management Grant (FMG) and Infrastructure Skills Development Grant (ISDG) also performed very well as they all reported expenditure of above 90 per cent (96.8 per cent and 94.2 per cent respectively) of total transferred amounts.
40. The Energy Efficiency Demand Side Management (EEDSM) grant and Rural Roads Asset Management Systems (RRAMS) grant also performed relatively well, with reported expenditures of 83.2 per cent and 82.6 per cent respectively.
41. The poorest performing grant was the Municipal Systems Improvement Grant (MSIG), which reported expenditure of a paltry 17 per cent or R3.9 million from the allocated amount of R23.2 million to assist municipalities to perform their functions and stabilize institutional and governance systems as required in the Municipal Systems Act and related local government legislation.
42. The poor performance can be attributed to the fact that the MSIG is an indirect allocation, and only R23.2 million against the total allocation of R115 million was converted from Schedule 6, Part B (indirect) to Schedule 5, Part B in February 2019 and transferred to recipient municipalities in March 2019.

Infrastructure Conditional Grants Expenditure as at 30 June 2019

43. From an infrastructure conditional grants perspective, the best performing grants were again in 2018/19 the MIG and INEP municipal grant with expenditure at 92.7 per cent and 87.2 per cent respectively. However, both MIG and INEP regressed, given expenditure against total transferred funds was at 94.2 per cent and 90.2 per cent in 2017/18 respectively. The RBIG also performed well with expenditure of 82.7 per cent, a notable improvement from the 66.3 per cent achieved in the same period last year. The MIG is the biggest and best performing local government conditional grant for a second year running.
44. The RBIG and Rural Roads Asset Management Systems (RRAMS) grants also performed relatively well, with reported expenditures of 83.3 per cent and 82.6 per cent respectively on the intensive nature and complexity of infrastructure rolled out using these grants.
45. The NDPG and WSIG also performed relatively well as the aggregated expenditure as reported by municipalities was at R445.4 million or 76.5 per cent and R3.1 billion or 66.7 per cent of the transferred amounts of R569.1 million and R4.7 billion respectively. This is a regression from the same period last year, where expenditure for NDPG and WSIG was at 78 per cent and 78.7 per cent of the transferred funds in 2017/18.
46. The Public Transport Network Grant (PTNG) performed unsatisfactory as only 61.7 per cent or R3.8 billion of the transferred R6.2 billion was spent by municipalities, leaving a staggering R2.4 billion remaining unspent as at the end of the 2018/19 financial year. This is a regression from the R4.4 billion or 72.4 per cent spent of the R6.1 billion transferred to municipalities in 2017/18.
47. A variety of factors may be a huge contributing factor to the underspending on conditional grants, given the number of municipalities that are considered to be either in distress or dysfunctional by both DCoG and National Treasury.
48. In 2018/19, the TOs were responsible for managing indirect grants which include the Regional Bulk Infrastructure Grant, Water Services Infrastructure Grant, Eskom’s Integrated National Electrification Programme grant, National Treasury’s Neighbourhood Development Partnership Grant, and Municipal Systems Improvement Grant. Performance monitoring for these grants are not included as part of the section 71 publications because municipalities are not the recipients of the allocated funds (allocations in-kind).
Roll-Overs from 2017/18 to 2018/19 Conditional Grants Expenditure as at 30 June 2019
49. National Treasury from municipalities’ requested roll-over of R3.2 billion only approved a roll-over amount of R828.3 million from the 2017/18 to the 2018/19 financial year. This is a further notable reduction in the amount approved for roll-over from previous years owing to the stringent roll-over criteria National Treasury is employing to encourage municipalities to spend their grant allocations in the allocated timeframe.
50. The roll-over amount is mainly made up of infrastructure grants in the form of MIG (R248.4 million), WSIG (R139.9 million), PTNG (R106.4 million), Urban Settlements Development Grant (R79.7 million), INEP (R59.3 million) and RBIG (R60.8 million).
51. The aggregated reported expenditure on the rolled over funds by municipalities in the fourth quarter of 2018/19 was an improved 52.7 per cent or R436.9 million from the approved roll-over of R828.3 million, when compared to the meagre R236.1 million or 29 per cent of the roll-over amount of R814.1 million in 2017/18. The low expenditure on approved roll-overs can be attributed to poor monitoring by Transferring Officers and non-reporting on municipalities’ part, to that end municipalities are encouraged to report on approved roll-overs and Transferring Officers are implored to monitor such approved roll-overs. The expenditure figures are likely to improve in their 2018 pre-audited Annual Financial Statements to be submitted to the Auditor General by 31 August 2019.
52. This is a notable improvement from the same period last year, but still of much concern given these were funds allocated in 2017/18 and approved for roll-over into the 2018/19 financial year. The expenditure or reporting of expenditure on rolled over unspent conditional grants (especially infrastructure) continues to be a going concern as this paints a picture of municipalities struggling to spend their roll-overs from previous financial years, together with their current year allocations.

Enquiries: Communications Unit
Email: media@treasury.gov.za
Tel: (012) 315 5944

A summary of key aggregated information is included in the tables in Annexure A.

Further details on this report can be accessed on the National Treasury’s website: www.treasury.gov.za.