Table Of Content

‘Over an underependa of runic ies 38st 20 June 2017 REPORT TO PARLIAMENT. ‘over. and underspencing of municipalities a6 at 30 June 2017 OCTOBER 2017 PURPOSE: 1 ‘To infor Perliament of trunicipatias’ fnancsal performance relating to over- and under spenting of their caunci’s édopted adjustment budgets for the 2046/17 financial year endad 39 June 2017; ‘To highight the trends in reverua with respect to over- and under collection for the 2016/17 financial year; and ‘To provide an update on the rafarms and ongoing suppor intiatives seirg imnsleme tied a address the challenges In local government. BACKGROUND: 4 ‘The Municipal Budget Reperting Regulations (MBRR) is an integrel part of the Municipal Finance Management At, 2003 with the purpose of aligning municipal budgets to the requirements of the Constitution of the Republic of South Afca. Post the promulgation of the MBRR. in 2008. municipaltas has made signficant progress in the plementation of the MRR, This is evidenced with all Frunicipalties tabling and adopting multi-year budgets that are infonmed by theit Iniegrated Development Plans «|DP) and Spatial Developmen Framework (SDF). flowever, akhough all municipalities tenor or thelr monthly financial performance agelnet their approved budgets, the accuracy and realty of the Infomation submitted and quarterly reporing on the service delivery performance stil remains a challange. “The Notional Treasury and respactive provincial treasuriet re required te condvet oversight over municipal budgets, financial performance (ie. actval revenues and expenditure), comelianca wit the conditions of the Division of Revenue Act (DORA), the financial oosition and casn flows of rwunicipaites. The oversight and support responsibilty of 240 munlelpalties have been dalagated to the Provincial Treasuries, while National Treasury is responsible for {7 nen-delegated municipalities, which include the eight melropoltan councils eight secondary cties and ona distnct council ‘on 2 monthly basis, all municipalities are submitting their monthly Rranciat reports to tha Local Govemment Da:abase. This reporting serves ag an sarly wwaming mechanism for council and municipal officials :o identify potential cash ‘ow challenges and pro-aclvely implement corrective measures, ‘On quertesty basia, the Nations! Treasury prepares and publshes on it is ‘website, 2 conseldated report on financial performance of all municipaitles. ‘This is part of compliance fo the requirements of Sections 71 of the Municipal Page 1 of 29 vr. and undarspending of munis iss 8 2 0 June 21 Finanea Management Act, 200% (Act No. 58 af 2003) and 30(3) af the Diviaion of Revenue Act, 2016 (Act No. 9 of 2018). The preliminary (unaudted) financial results of the fourth quarter endee 30 June 2917 were published on the Nation! Treasurys website on 18 August 2017. 8, The preliminary financial resus for the fourth quarter ended 90 June 2017 is presented on National Treasury website ~ waw.jreasurv.govza. The financial Information allows stakeholders ad users ofthis data to further analyse an he { nancial performance of municipaltias. 8. This report nludes the analysis for the 267 municipalites that was established post the 2018 Municipal Elections. DISCUSSION: 10. The financial performance of municinafes as at 30 June 2017, relating to the ver- and under expenditure is consolidated aa” provinee below, It should be nictad thatthe information presented inthis repart fg based cn preliminary reeute as the suiting process conducted by the Auditor General was sill underway at the time of reporting Expenditure Performance: Total Budget 411, Table 1 below shows the over- and under expenditure, aggregated per province, 28 al 20.June 2017. 12, The yearto-date totel aggregated expenditure uncer spending was RS3.1 billion: wharaas tha total aggregated overepanding reported for the same period last year was R18 billon. constitutrg a net under spending of RSt 3 bilion “This Is @n increase of 20.8 per cent wen compared to the net under Spending F427 bilion repartad on previous yours corresponding pariod 13. An increase in the adjustment budget was reported by six out o* nine provincas, Eastern Cape, Free State and Nodhers Cane have reduced their adapted budgets by 0.51 per cent, 7.6 per cent, and 1.85 per cent respectively during the aduustment budgel procass. The total budgetary increas for al provinces. § 1.1 par cant, This is marginally lower than the 1.4 parcantaga inerease reported the previous year. Page 2 of 28 4 18 16. 7. 18, ‘ovur-and unssaspending of municaltes 2a af 30 une 2017 Muricipalties in North West increasad their adjusted budgets by 17.2 per cent, ‘whereas those in the Western Cape reported an increase of 0.25 per cant. Municipaiiies in KwaZulu-Natal and Gaufeng continued to perform better than those in other provinces when it comes to spending against their adjusted budgets with underspanding of 8.1 par cant and 8.1 ser cent, respectively. “Municipalities in Linpope reported the highest levels of underspencing at 23.1 par cent against their adjusted budgets, fol omed by Mpumalanga al 22.8 per ant, This is @ cause fer concem ‘considering that bath provinoes are predorninantly rural with signiicart backlogs in basic services, Table 2 below shows the number of municipalities that have over- or under spent against their total adjustments budgets as at 39 June 2017. 2. Twenty five municipalities performed within a § par cent margin against their adjustments budget compared to tne 29 municipalties in the previous year's corresponding period; b Thetzen municipalities overspent their budget allocations by move than & por cent, of which & municipalities overepent their adjusted budgets by mmcre than 18 per cent: and © Tha total number of municipalities thal underspert their total adjustment budgets by mare than S per cent has decreased 10 219, when rampared to 295. mun cipalties reported for 218/16 financial year. OF these ‘unicipalties, 26 underspent their adjustment budgets betwesn 5 and “0 per cenl, 37 Underspent their adjusimant budgets by between 19 and 15 er sont, and 158 undsrepent by more than 18 per cent. It should be noted that the underspencing of budgets does not tansiale into an ‘equivalent ammount of cash in the bank of the effected municipalities. Therefore, Uunderspending should not be construed as indicative of an accumulation of cash in the bank. Underspending can be attibuled to liquidity challenges tist emanates. from the adoption of unrealistic pudgete (overstated revenue Understated expenses and inadequate planning}, poor expenditure management and delays in the payrnent of editors, Page 3 of 28 (Over and anceasooning. of iia saat 3 sune 2097 Exponditure Performance: Operating Budget 18, Table 3 below shows che over. and undarspending of operating expenditure as at 30 June 2017 per province, The net underspending agelvet their 2016/17 adjusted operating budgets was R36.9 bilicn. 20. Compared to the previous financial year, an increase in underepending is reported in North West (50.5 per cent), Western Cave (36.3 ner cent), Gauteng (828 por cent) and Eaetam Capa (27-4 par cent). However, the fellowing provnces reported a reduction n underspending: Limpope (12.9 per cert), Northern Cape (9.5 per cen!) end Mpumalanga (1.6 per cen}. 21. Itis clear that the risk ofa cash flow crisis is imminent on munivialities ieuting perational expenciture that exceeds reverue colectad. Furhemore verspanding of budget allocations is reflective of weakness in intemal controls ‘and “egarded as unauthorised expenditure. A stronger emphasie on generating ‘eperating surpluses is required 19 enable ededlonel allocation to capital budget by way of increasing the own contrisutions te fund tha capital budgets. This vall ‘only be achieved with the implementation of austeriy measures, minimising ‘operational.nafficiencies and ensuting value for money with every Rand spent. 22. Table below shows the number of municipalities that hava over- or underapent Ureir 2016/17 adjusted operating budgel, It should be noted that over or Underspending within § par cent of budget is ragarded am nn-target in respact of ‘operating budgets, Wet ph fom seg Apgar Page 4 of 29 Expenditure Performane: 23 24, 28. ‘Over and undercenag of munitoniis ast. 30 ne 2617 a. The mumbar of municipalities that are on-target is 28, having overs or Underspent within a 8 per er: range of the adjusted opersting budge, ‘which is an increaes from the 21 municipalities reported for the Crancial year endad 30 lure 2018 A tolal of 212 municipalities underspent on their aolusted operating budgets by more than § per cent, with 136 municipalities underspencing by more thar 15 per cent; and ¢ Seven municipaltias overspent their adjusted operating oudgels by mere ‘han 15 per cent, and this is a significant reduction in number of ‘municipalities when compared ta 23 reported for the finarcial yoar 2015/1 apital Budget ‘Table 5 betow shows that -municipalies spent a total of RS4.4 billon 9° 78.3 per cent of the total adjusted capital budget of R688 blllon. The nel undarspanding against the 2076/17 adjusted capital budget was R144 illon, which is an increase when compared to net underspending o* R13.2 billion reperted for 2018/16 financial yaar The main contributors ta the underspending on the capital budgels as at 30 June 2017 were reported by municipalities in Gauteng (RS.1 billion), Kweculu- Natal (R2.2 billion), Eastern Cape (R20 bilion) and Limpozo {R1. billion) Despite efforie by National Treasury and the respective provincial treasuries in siting municipaliics ta improve their parfornanee, though the intiativas that are discussed later in this repo; underspending of capital Budgels persists and is atlibuted to the folowing factors. among other. 2 Adoption of unrealistic budgots ~ Municipalitas cont rued to adopt budgets thet are either not funded inedequatly fundad ‘rom a cash flow postion, resuting in the adoption of capital budgets that are nat realist, This has resulted in funding shostfa's during tho implementation of projects weich is placing preeeure on the finances of these municipalities: b. Increasos in adjustments budgets - Desp te advising rmunicipalties that ‘they should ‘ot inevease their capital budgets at mid-year to avoid tundorsperding, municinaltias. in Gauteng, KwaZulu-Natal, Limpopo, Page $ of 23 Ey ‘over ane unsrseondi ef manips’ a at 30 June 2017 Mpumalanga. North West and Western Cape increased their acjustments budgets and stil underspent on their capital budgets at year end: ©. MMuti:year budgeting = Although progress has been made in adopting multi-year budgets, municipalities continued to focus on single year budgeting instead of the medium term, This is despite a legal requirement {or munic paliies to do se. Also, the budge! allocations by National and Provincial governments to municipalies are mut-year allocetion in order to provide cerlainty with regard ta future allocations; 1. Waaknasses in supply chain management — ORen delays are caused by poor plarning of capital projects, appointment of incompetent service providers resuking in poor workmanship and failure to maat project rilestones, high occurrence of variation orders, costs cveruns. and ligation by aggrieved and unsuccessful applicants ewing to the allogarions of imegu erties fn the appointment of service providers and ortractors: 2. Sovial unrest ~ Stopping the construction of infrastructure projects due to local cornmunities demanding the hiring of locals in the implementation of projects. The high level of unemployment in the country has created a despe'ale situetion in such a way that the unemployed are demanding jobs from on-site conlraclurs and in other cases they even threaten the Contactors with volenca, hanes the projacis are stopped unl the situation is returned to normality. Que to such incidents occurring unexpectedly, thera is no cortainty with respect of the tmieline it takes la resolve such situations, hence the project implementation is being delayed; 1 Por project enc! contract management — There is poor oversight over project implemertation, especially multiyear infrastructure projects. In situations where the project implemertation is behind the echeduled Project timeline, municipalities are not taking corrective action timeously In most casas there is insufficient contract management, as evidenced by ‘the inabilty fo implement punitive ieasures againat reourent underperformers and no termination of non-performing contracts ae a last resort 9 Interference in governance ~ Poltical principals interfering in administrative duties of senior management and Council uecisions to abruplly suspend serior managers (heads of divisions) infemunis tha implementation of key infrastructure projects leading to delays. in ‘completion of peajects: and fh. Foiture fo rol ovar unspent funds - Poor eash flow management and submission of insuficent supperiing documents for rol-over applications to tha National Treanuy (unspent conditional grants by end of the financial year) results in rejection of applications. and this further delays. the ‘completion of infrastructure project, Table 6 below shows the numbar of municipalities per p-ovinee that hava over-, ‘or underspent on their adjusted caota budgets. ft shoud be noted thai spending within 10 per cent of the budget is regarded as acceptable in respect ‘af capital budge's, considering ha various faetore impacting an the parfornancs of he easital budget Page 6 of 28 (vor and underpending of muniobattes ax sf 0 ne 2017 27. The folfowing can te observed on tabla 6 above’ a. A total of 22 municipalities are considered to he or-larget, having spent ‘within 10 per cent oftheir adjusted capital budgeta. This is a regress whan ‘compared to the 45 municipalities in the 2015/16 nancial yesr; b. The number of municipalities that underspent their adjusted capital budgets between 10 per cent and 15 per cent, is the same (26) és in tie pravious reporting petted: and Twenty municipalities overepent and 174 (2015/16: 181] underspent their adjusted budgets by mors than 15 per cert Expanditure Performance: Conditional Grants 28. Table 7 below shows the total spending on conditional grants al 87.8 per cant of the Vansferred amount which is sightly less than spending lavel (89.3 per cent} veporiad in the previous financial year. The net underapencing on conditional ‘rants transferred to municipalities in 2076(17 was R3.7 billion, compared to the Ride bilion underspencing on capital budgets i the same period in the previous financial year. “a gest gates lJ aye 29. A major proportion of unspent conditional grants are earmarked for the onstruction of municipal infrastructure naceseary for the provision of bas o services to communities, The inability of municipalties to spend their conditional ‘rants ig hindering the reduction of infrastructure backlogs. Page 7 of 29 30 4 (wee and underspsnding of unalone 2047 Inrelation to Table 8 above, the following observations can 9¢ made: 4A total of 11 munisipaites have over or underspent thelr canultianal ‘grants by 10 par can b. The number of municipatties that underspant an their conditional grarta allocations by mora than 10 per cent is 109 companed to 138 in the previous reporting period, wih 87 municipalities underspending by more than 48 per cent: and © Atotal of 24 municipalives overspent on their concitional grant allecations, ‘of which 19 municipalities over spend by more than 15 per cent, Table 2 below shows the over or under pending on adjusted candiional grant allocations for 2016717 per grant Page 8 of 28 32, 33 4 36. (ovdt_and underspend of suniciolios as at 99 fe 2017 For the financial year ended 30 June 2017, actual epanding by municipalities ‘was R26.1 billion oF 82.4 per cont of the total transferred coneitioral grants allocations of R22 8 billon.-Municipaliies reparted a net underspending at 13.4 per cant, amounting to R4 bilion 26 at $0 June 2017. ‘The following grants were averspent ae st 20 June 2017: Muniepal Water Infrastructure Grant (R28 milion). Municipal Systems Improvement Grant (R401 thousand), Expanded Public Warks Programme grant (21.2 milion) and Water ‘Service Operating Subsidy Grant (R290 thousand). Overspending of conditions grants can be attributes to inaccurate reporting of finanesal results insuffesertallacations of budgale and poor project planning, Table 10 below provides a summary of over- arc underspending by all muricipalties as at 30 June 2017. Page 9 of 29 (vee and undersenting 1 munca aeninee “Sie Mucime mews sana an | feneay sieom ose Operating Budgets The total net underspending aga nst tre adlusted cperating budget was RI6.9 billion which represents 11.1 per cent of she total adjusted budget. When broken down futher: + Aggregated oversgending against the operating adjusted budget by ‘municipalities was R.4 billion or 0.45 per cent: and + Aggregated underspending against the adjusted operating budget was R384 bilion or 11.6 per cart. Capitsl buds ‘The total aggregated net underspending against the adjusted capital budget was R14.4 billion of 21.1 per cent of total adjusted budget. When broken down further ' Agaregated overspending was R14 ailion or 2 per cent of the total dusted budget; and + Total underspending on against the adjusted busyat was R15. billion, representing 23 par cont ofthe total adjueted budget. Conditional Grants Aggregated totel net unde "performance was R37 billion which is 12.4 par cent ff tha adjusted budget. Whan broken down further: ‘+ Total averepending on coneltional grant allocations was RSA2 villion oF 4.66 par cent; and’ ‘+ Municigalitise underepant their conditional grants allocations by R42 billion of 14-4 per eent “Hockay ailek’ phenomenan (the Juna Splka) 36 Figue 1 helow ilustztes. the year-on-year comparison of merthly cesitel ‘expends far focal govamment aver the past four financial years, iz, 2013/14, 2014/15, 2015/16 and 2016/17 Page 10 of 28