“No improvement” in municipal management in 2021: Auditor General

Barely a week after Ratings Afrika published its annual survey of the country’s 100 largest municipalities, warning that the local government sector was on the verge of collapse, Auditor General (AG) Tsakani Maluleke says he does not there is no evidence of improvement in municipal management, while she presented Results of the 2020/21 audit on the local government report Wednesday.

Read: SA’s municipal sector is on the verge of collapse – Afrika Ratings

The deteriorating financial health of municipalities reveals growing indicators “of a collapse in local government finances and continued deterioration over the administration’s tenure,” said a statement released by the AG.

Five years ago, there were 33 flawless audits out of 257 municipalities. In 2021, and despite repeated warnings and recommendations, only 41 municipalities boasted of clean audits, and most of them are district municipalities. “There’s not a lot of movement in the right direction,” Maluleke said during a presentation on Wednesday.

“There is a metro (with its own audit), very few local municipalities, very few municipal entities and very few intermediary cities.”

The situation of the metros is particularly worrying. Tshwane (Gauteng), Johannesburg (Gauteng), Ekurhuleni (Gauteng), Cape Town (Western Cape) and Nelson Mandela Bay (Eastern Cape) were all downgraded below investment grade as of June 30, 2021.

“The downgrades put pressure on some of the metros to raise funds for capital expenditures, and they had to use internal savings from operating budgets to fund shortfalls. Most metros have been under review for further downgrades by credit rating agencies, meaning they could dive deeper into underinvestment territory if economic conditions deteriorate. Although some of these metros have cash reserves, additional use to fill shortfalls will reduce the ability of metros to meet future debt obligations as they come due,” the AG said.

Non-compliance and failure to report are common

The local government system does not bring any significant improvement in the process of institution building, performance and transparency, the AG said. “The financial health (of municipalities) remains a real concern. Years and years of ignoring audit findings have weakened these institutions.

Five years ago, 90% submitted their financial reports for verification on time. Now the figure is at 82%, with the worst offenders in the Free State, North West and North Cape.

The state of financial management at the provincial level has declined.

The Eastern Cape has had just four no-fault audits, its two metros (Nelson Mandela Bay and Buffalo City) have received qualified audit notices, and the GA has issued four disclaimers – the worst level audit opinion – three of which are repetitions.

Read: Let Eskom take over, tired Nelson Mandela Bay chamber asks Nersa

“The Free State continues to deteriorate in the face of political and administrative leadership inaction. There is a culture of delay and non-submission, and the metro (Mangaung) is unqualified but has major management and governance issues, which lead to the collapse of service delivery and the metro is under administration,” she said.

“Our team regrets that there is no clean audit in the Free State and this has not been the case for a long time.”

Some 43% of spending in the North West resulted in erratic spending, “which tells you there is a high tolerance for non-compliance in local government institutions,” the AG said.

Western Cape remains the best run local government in SA

The Western Cape once again emerges as the best managed province in the country, accounting for 22 out of 41 clean audits across the country.

“Mpumalanga has also gone backwards over the past five years and our message has gone unheeded,” the AG said.

The North Cape had a number of late submissions, although Maluleke said he was encouraged by the number of districts in the province that ended up with clean audits.

North West ended the year without a proper audit.

Verification results – municipalities

Source: General hearing SA 2020-21 Results of the audit on the report of local administrations

Gauteng had two clean audits, as did Ekurhuleni Metro and Midvaal.

The GA praised Limpopo for achieving the biggest improvement in the last five years, which was due to the tone set by the provincial administration.

However, these improvements had been on the backs of expensive consultants. “Unless they focus on the capacity of local government institutions, this improvement will diminish,” she added.

AG takes a deep dive on municipal spending

In order to find out how the money was being mis-spent, GA teams selected ten municipalities with repeated warnings and rummaged through their bank account statements. In four of these municipalities, he found a combined amount of R1.7 billion paid to service providers and then referred that expenditure to the financial accountability structures, from mayor to council, to MECs for finance and treasury and to the Provincial Department of Cooperatives. Governance and Traditional Affairs (CoGTA).

In the remaining six municipalities, according to the AG after a review of bank statements, its audit teams do not know where the money went.

“Our teams went through bank accounts and couldn’t find the unique identifiers (like the stub on old checkbooks) to tell where the money was going. Either there was no stub or the stub was blank. We passed this on to the Financial Intelligence Center to investigate where this money went,” she said.

Also new was the decision to carry out on-site inspections of physical infrastructure, such as landfills and wastewater management systems.

Inspectors discovered that effluent was flowing into roads and water systems, causing serious health problems.

Landfills are poorly managed, which poses an environmental and health hazard.

As for the state of financial management, only 62 municipalities (25%) gave the GA credible financial management practices in place, despite having financial directors and staff employed specifically for this task.

“R10.41 billion is paid to these financial units in the payroll and yet we are not getting credible financial statements,” the AG said. “(in FY 2021) they spent R1.26 billion on consultants.”

Other report highlights:

  • The national government funded municipalities through “equitable” distributions of R80.26 billion and conditional grants of R46.21 billion. Municipalities’ own revenue amounted to R304.56 billion.
  • 64% of the municipal debt is not recoverable. Out of 80 municipalities, more than 80% cannot be recovered. The debt collection period for 124 municipalities was over 90 days late.
  • Salaries and wages paid to municipal staff, including councillors, amounted to R113.7 billion, or 60% of recoupable revenue and national government equity allocation.
  • Creditors exceeded available cash at the end of the year in 47% of municipalities. The average payment term for creditors is 240 days.
  • 166 municipalities (64%) incurred unauthorized expenditures totaling R20.45 billion.

Many municipalities approve unfunded budgets and end up running out of money before the end of the year and therefore cannot pay Eskom and bulk water bills. “They don’t even plan or budget for maintenance, because they don’t have the money for it – and that translates into a deterioration in the quality of this infrastructure and the services provided,” the AG said.

It’s time to change culture

Now is the time to change the culture within municipalities, starting with the city manager, mayor and council. They have a legal responsibility to ensure that they oversee planning and performance management. At the provincial level, the CoGTAs are supposed to review the municipalities’ annual performance plan.

Three years ago, the Public Audit Act was amended to give the AG increased powers to eliminate, search and recover losses. The amendments introduced the concept of material irregularity (MA), which is broadly defined as failure to comply with or breach of law, as well as fraud, theft or breach of fiduciary duty.

These enhanced powers to hunt IMs were exercised in 94 municipalities in pursuit of 185 IMs, including issues with procurement, infrastructure maintenance, improper billing and cash flow management.

When municipalities do not respond to these MI notices, more serious corrective action is taken. Three corrective measures have been launched at Ngaka Modiri Molema in the Free State.

“If it remains unsupervised, then we will issue a certificate of debt, and we have done so in some cases, where cases are referred to law enforcement,” the AG said.

“In Tshwane, we created an MI when the infrastructure was vandalized and unprotected.”

Melissa C. Keyes