National Treasury on release of the local government revenue and expenditure report for the second quarter of 2020/21

National Treasury has released the local government revenue and expenditure report for the second quarter of the 2020/21 financial year. This report covers the performance against the adopted budgets of local government for the second quarter of the municipal financial year ending on 31 December 2020 and includes spending against conditional grant allocations for the same period.

Noteworthy, is that the report is prepared by using figures from the Municipal Standard Chart of Accounts (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 problems in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is a concern. 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 or 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 2020/21, 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 six months of  the 2020/21 municipal financial year is included as a separate Annexure to this publication.

The Section 71 report facilitates transparency, better in-year management as well as the oversight of budgets. This makes these reports management tools and early warning mechanisms for councils, provincial legislatures and officials in order to monitor and improve municipal performance. The improvement of the credibility of the data strings is therefore a priority for National and provincial treasuries.

KEY TRENDS:

Aggregate trends

1. In aggregate, municipalities spent 43.9 per cent, or R215 billion, of the total adopted expenditure budget of R489.4 billion as at 31 December 2020 (second quarter results for the 2020/21). In respect of revenue, aggregate billing and other revenue amounted to 50.7 per cent, or R245.5 billion, of the total adopted revenue budget of R484.3 billion.
2. Of the adopted operating expenditure budget amounting to R419.3 billion, R192 billion or 45.8 per cent was spent by 31 December 2020.
3. Municipalities have adopted a budget of R126.5 billion in respect of salaries and wages, which represent a slight increase of R1.5 billion or 1 per cent from the adopted budget of R125.0 billion for the 2019/20 municipal financial year. This constitutes 30.2 per cent of the total adopted operational expenditure budget of R419.3 billion. As at 31 December 2020, R63.7 billion or 50.4 per cent of this budget was spent.
4. In the period under review, capital expenditure amounted to R23 billion, or 32.7 per cent, of the adopted capital budget of R70.1 billion.
5. Aggregated year-to-date operating expenditure for metros amounts to R117.9 billion or 47.5 per cent of their adopted expenditure budget of R248.1 billion. The aggregated adopted capital budget for metros in the 2020/21 financial year is R31.6 billion, of which spending was R8.9 billion or 28.3 per cent.
6. When billed revenue is measured against their adopted budgets, the performance of metros reflects a shortfall on water services for the second quarter of the 2020/21 financial year. This comparison excludes secondary costs incurred or actual revenues collected:
   • Billed water revenue totalled R12.8 billion against expenditure of R13.9 billion (deficit);
   • Billed energy sources revenue totalled R40.6 billion against expenditure of R37.6 billion (surplus);
   • Billed waste water management revenue totalled R3.6 billion against expenditure of R3.6 billion (breakeven), and
   • Billed  waste  management  revenue  totalled  R5.5  billion  against  expenditure  R4.5 billion (surplus).
7. As at 31 December 2020, aggregated revenue for secondary cities is 58.4 per cent or R39 billion for their total adopted revenue budget of R66.8 billion for the 2020/21 financial year. The year-to-date operating expenditure level of the secondary cities is 47.7 per cent or R32.5 billion of the total adopted operating budget of R68.2 billion for the 2020/21 financial year.
8. The performance against the adopted budget for the four core services for the secondary cities for the second quarter 2020/21 also shows surpluses against billed revenue without taking into account secondary costs incurred or actual revenues collected:

19. As at 31 December 2020, the total investments made by municipalities equates to R37.6 billion. This is R3.7 billion more than the R33.9 billion reported in the first quarter of 2020/21. Investments included bank deposits of R31.9 billion, guaranteed endowment policies (sinking policies) of R4.6 billion, listed corporate bonds of R1.0 billion and some small investments.

Conditional Grants

Conditional Grants Expenditure as at 31 December 2020

20. The DoRA allocated a total amount of R132.5 billion to local government for the 2020/21 financial year. This constitutes unconditional transfers of the Equitable Share  (R74.6 billion), direct conditional grants allocated for capacity grants (R1.9 billion), direct conditional grants for infrastructure projects (R41.8 billion) and Indirect conditional grants to the tune of R7.5 billion. Transfers to local government continue to grow above inflation over the medium term. These allocations exclude the General fuel levy sharing with metropolitan municipalities in the amount of R14 billion from the R13.2 billion allocated in the previous year.
21. As at the 31 December 2020, of the R29.8 billion was allocated to municipalities as direct conditional grants and a total of R18.9 billion was transferred to municipalities which represents 63.3 per cent of the 2020/21 direct allocations. From the total transferred amount of R18.9 billion a total amount spent as at end of second quarter is R10.7 billion which equates to 56.7 per cent expenditure of the transferred amount. The total expenditure of 35.9 per cent is reported against the total allocation of direct transfers.
22. A total amount of R5.2 billion has been allocated to metropolitan municipalities. From this allocation a total of R2.7 billion was transferred as at 31 December 2020. The expenditure reported by metropolitan municipalities amounts to R1.7 billion which is equivalent to an aggregate expenditure of 29.7 per cent against the total allocation reported as expenditure. The USDG as a supplementary grant is excluded from this amount. Expenditure on supplementary grants forms part of the total capital expenditure of cities and therefore any separate supplementary grant report would not reflect a true picture of its performance.
23. The highest performing metro was the Mangaung municipality, followed by the eThekwini municipality with reported overall expenditure of 48.8 per cent and 45.5 per cent respectively against the allocated amount of R220 million and R884.7 million respectively.
24. The lowest performing metropolitan municipalities are the Nelson Mandela  Bay municipality and the City of Johannesburg municipality with expenditure of 9.3 per cent and 14.2 per cent respectively.

Capacity Building and Other Conditional Grants Expenditure as at 31 December 2020

25. A total of R1.9 billion is allocated to capacity building and other conditional grants. These grants are intended to assist municipalities in the development of their management, planning, technical, budgeting and financial management capabilities in the 2020/21 financial  year.  Included  in  the  allocation  is  the  Municipal  Disaster  Grant  to  assist municipalities in alleviating the impact of a disaster such as the COVID-19 pandemic which has been declared a disaster.