From bad to worse

One does not need to work through thousands of pages of financial reports or hundreds of spreadsheets to come to the conclusion that the management of local and district municipalities is a total mess. Auditor-General (AG) Kimi Makwetu alerts us to this fact in the very first paragraph of a press release pertaining to his report on the financial management of municipalities for the year to June 2018.

And Makwetu is not shy to name the culprits in the report: “Local government leadership [political and municipal leaders, as well as provincial leadership] should take responsibility for the accountability failures of municipalities. It is their duty to turn the situation around.”

His report shows that the situation is indeed bad, and he comes to the conclusion that it is getting worse.

Only 8% of all municipalities in SA received clean audit reports, representing just 3% of the total budgeted expenditure of R376.5 billion during the year.

Read: Municipal sector faces collapse – Ratings Afrika

Only 18 of a total of 225 municipalities could achieve the minimum standards to receive a clean audit report from the AG’s office.

In the previous year, 14% of municipalities received clean audit opinions. While the AG states that 22 municipalities did indeed improve with regards to financial and administrative management, 63 municipalities did worse.

This is despite the disclosure in the AG’s report that municipalities spent nearly R1 billion last year on consultants to assist them in preparing their financial statements.

Makwetu highlighted a few examples of bad financial and operational management. One of the worst is the construction of a new sport centre in Oranjeville in the Free State – R21.7 million from a total budget of R27.9 million was spent, but a site visit showed that no construction work has been done.

The report discloses that none of the municipalities or district municipalities in the Free State received clean audit reports. Only 15% (down from 71% in the previous year) received financially unqualified opinions, meaning that the financial statements were quite accurate, but the AG found some other serious shortcomings in reporting standards, such as problems with supply chain management.

Irregular expenditure by municipalities in the Free State increased to nearly R1 billion during the year under review, prompting a stern rebuke from the AG. “The Free State local government environment displayed a total breakdown in internal controls as the province’s political and administrative leadership, yet again, exhibited no response to improve its accountability for financial and performance management,” says Makwetu.

“The leadership did not implement our recommendation to ensure stability. This resulted in the significant deterioration of municipal audit outcomes, service delivery and financial health.”

Situation critical (in three provinces)

He says the financial crisis in the province is critical. He says the same about North West Province (zero clean audits) and Limpopo (also zero clean audits).

The overall financial health of municipalities in the Eastern Cape also deteriorate: 76% had concerning financial health indicators or required intervention, compared to 66% in the previous year.

Only 2% of municipalities in KwaZulu-Natal achieved clean audits and they chalked up nearly R3 billion in irregular expenditure. Mpumalanga’s municipalities also fared worse with regards to financial management and service delivery.

The Western Cape is home to the best-managed municipalities, but financial management also slipped in this province. Only 40% of municipalities can boast clean audit reports, down from 70% in the previous year. Financial statements without financial qualifications were still high, at 89% (previously 93%).

Late submission of statements

Makwetu says that credible financial statements and performance reports are crucial to enable accountability, transparency and, ultimately, service delivery. “But municipalities are failing in these areas. Countrywide, 21 municipalities submitted their financial statements late and the financial statements of eight were still outstanding by January 31.

“The quality of the financial statements provided to the AG’s office for auditing was even worse than in the previous year,” says Makwetu.

Only 19% of the municipalities could present financial statements without material misstatements. The AG says the performance reports of 65% of the municipalities that produced these operational reports had such material flaws that they were not credible enough for any city council or the public to use.

Lack of consequences ‘a serious problem’

Another serious problem is the lack of any consequences for transgressions and irregularities within municipalities, says Makwetu.

“Our consistent and insistent calls for consequences for transgressions and irregularities were not heeded.

“We found that 74% of the municipalities did not adequately follow up on allegations of financial and supply chain management misconduct and fraud,” states the report. It also found that nearly half of all municipalities did not even have the required mechanisms for reporting and investigating transgressions or possible fraud.

Inadequate financial reporting hides ineffective service delivery that can lead to the total collapse of services.

Astral Foods recently warned shareholders that profit will decline by R85 million due to the lack of water supply from the Lekwa municipality in Mpumalanga, despite the fact that the Vaal River runs right through the middle of town.

Read: Dysfunctional municipality chokes Astral

The AG says that accountability failures in local government result in municipalities not achieving their objectives, which has a negative impact on the lives of citizens.

The report notes that there are increasing indicators of a collapse in local government finances. The AG concluded that 76% of the municipalities audited have concerns with regards to their finances, with many requiring urgent intervention. Almost a third of all municipalities are in a particularly vulnerable financial position.

Other problems include the collection of payments for services. “The inability to collect debt from municipal consumers was widespread,” says Makwetu. “In these circumstances, it is inevitable that municipalities will struggle to balance the books.”

Overall, 34% of municipalities disclosed that expenditure exceeded income, to the tune of R5.8 billion.

Impact on suppliers

The financial problems of local government also affected suppliers of goods and services to municipalities. Figures in the AG’s report show that creditors had to wait on average nearly six months for payment.

At the end of June 2018, municipalities owed suppliers a total of R48.5 billion – but had only R37.3 billion in cash on hand.

The creditors included an amount of more than R9.1 billion due to Eskom, which has cash flow problems of its own. Independent water utilities are in the payment queue for R5.9 billion.

Makwetu alludes to the fact that a lot of the problems are caused by the municipalities themselves, as they “are just not managing their finances as well as they should”.

Fruitless and wasteful means ‘lost’

A case in point is the fruitless and wasteful expenditure which amounted to R1.3 billion in the year to June 2018. This is money that is effectively lost (not to be confused with irregular expenditure where services were delivered with the only problem being that certain supply chain provisions were not adhered to).

The office of the AG also mentions the “potential” loss of R1.6 billion of municipality money that was invested with VBS Mutual Bank. “It significantly weakened the financial position of the 16 affected municipalities and had an impact on the delivery of infrastructure and maintenance,” says Makwetu.

The report lists a lot of consequences of negligent and ineffective financial reporting, from problems maintaining roads and water pipes to the development of new infrastructure and service delivery to all residents within a municipal area.

At the heart of the matter is the quality of public representatives.

City councillors who earn high salaries should have the right qualifications and enough experience to work effectively – and ensure that cities and towns appoint experienced officials and not only friends and family into lucrative posts.