‘No improvement’ in municipal management in 2021: Auditor-General

Barely a week after Ratings Afrika released its annual study of the 100 largest municipalities in the country, warning that the local government sector was on the verge of collapse, Auditor-General (AG) Tsakani Maluleke says there is no evidence of improvement in municipal management, as she presented the 2020/21 Audit Outcomes on Local Government Report on Wednesday.

Read: SA’s municipal sector is about to collapse – Ratings Afrika

The deteriorating financial health of municipalities reveals increasing indicators “of a collapse in local government finances and continued deterioration over the term of the administration,” says a statement issued by the AG.

Five years ago there were 33 clean audits out of 257 municipalities. By 2021, and despite repeated warnings and recommendations, just 41 municipalities boasted clean audits, and most of these are district municipalities. “There’s not much movement in the right direction,” said Maluleke at a presentation on Wednesday. “There’s one metro (with a clean audit), very few local municipalities, very few municipal entities and very few intermediate cities.”

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

“The downgrades put pressure on some of the metros to raise funding for capital expenditure, and they had to use internal savings from operational budgets to fund shortfalls. Most of the metros were put on review for further downgrades by the credit-rating agencies, meaning that they could plunge deeper into sub-investment territory if economic conditions worsen. Although some of these metros have cash reserves, further use to make up revenue shortfalls will reduce the metros’ capacity to meet future debt obligations as they fall due,” said the AG.

Non-compliance and ‘no reports’ are common

The system of local government is not making any meaningful improvement in the journey of strengthening institutions, performance and transparency, said the AG. “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 financial reports for audit on time. Now the figure is 82%, with the worst offenders being in the Free State, North West and Northern Cape.

The state of financial management at provincial level has gone backwards: The Eastern Cape had just four clean audits, both its metros (Nelson Mandela Bay and Buffalo City) received qualified audit opinions, and the AG issued four disclaimers – the worst level of audit opinion – of which three are repeats.

“The Free State continues to deteriorate in the face of inaction by the political and admin leadership. There is a culture of late and non-submission, and the metro (Mangaung) is unqualified but has major management and governance problems, which lead to service delivery collapse and that metro is under administration,” she said. “Our team laments that there is no clean audit in the Free State and hasn’t been for a long time.”

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

Western Cape remains best run local government in the country

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

“Mpumalanga has also gone backwards over the last five years and our message to them has gone unheeded,” said the AG. The Northern Cape had a number of late submissions, though Maluleke says she is encouraged by the number of districts in the province that ended up with clean audits. North West ended the year without a clean audit.


Source: Auditor-General SA 2020-21 Audit Outcomes on Local Government Report

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

The AG praised Limpopo for making the greatest improvement over the last five years, which was due to the tone set by the provincial administration. However, these improvements had been on the back of expensive consultants. “Unless they focus on capacitating the institutions of local government, this improvement will diminish,” she added.

AG does a deep dive on municipal misspending

In an effort to find out how money was being misspent, the AG’s teams selected 10 municipalities with repeated disclaimers and pored through the bank account statements. In four of these municipalities, it found a combined R1.7 billion paid to service providers, and then referred this spending to the finance accountability structures, from the mayor to the council, the MECs for finance and treasury, and the provincial Department of Cooperative Governance and Traditional Affairs (CoGTA).

In the remaining six municipalities, the AG says after an examination of the bank statements, her audit teams are none the wiser as to where the money went.  “Our teams went through the bank accounts and could not find the unique identifiers (like the counter-foil in the old cheque books) to say where the money went. Either there was no stub, or the stub was empty. We referred this to the Financial Intelligence Centre for them to investigate where this money went,” she said.

Another new development was the decision to conduct on-site inspections of physical infrastructure, such as landfill sites and waste water management systems. What the inspectors found was effluent running into roads and into water systems, causing major health problems. Landfill sites are poorly managed, posing an environmental and health hazard.

As to the state of financial management, only 62 municipalities (25%) gave the AG credible financial management practices in place, despite the fact that they have CFOs and teams employed specifically for this task.

“R10.41 billion is paid to these finance units in payroll and yet we don’t get credible financial statements,” said the AG. “(in the 2021 financial year) they spent R1.26 billion on consultants.”

Other highlights form the report:

  • National government financed municipalities through ‘equitable share’ distributions of R80.26 billion and conditional grants of R46.21 billion. Own revenue from municipalities amounted to R304.56 billion.
  • 64% of municipal debt is not recoverable. At 80 municipalities, more than 80% cannot be recovered. The debt collection period of 124 municipalities was more than 90 days overdue.
  • Salaries and wages paid to municipal staff, including councillors, was R113.7 billion, which is 60% of recoverable revenue and equity share allocation from national government.
  • Creditors were greater than available cash at yearend in 47% of municipalities. The average creditor payment period is 240 days.
  • 166 municipalities (64%) incurred unauthorised expenditure totalling R20.45 billion.

Many municipalities sign off on unfunded budgets, and end up running out of money before yearend and so cannot pay Eskom and bulk water bills. “They don’t plan or even budget for maintenance, because they don’t have the money for it – and that results in a deterioration in the quality of that infrastructure and the services delivered,” said the AG.

It’s time for a change in culture

It’s now time to change the culture within municipalities, starting with the municipal manager, the mayor, and the council. They are given a responsibility in law to make sure that they watch over performance planning and management. At provincial level CoGTAs are supposed to review the annual performance plan of the municipalities.

Three years ago, the Public Audit Act was amended to furnish the AG with enhanced powers to eliminate, track down and recover losses.  The amendments introduced the concept of a material irregularity (Mis), which is broadly defined as non-compliance or contravention of legislation, as well as fraud, theft or breach of fiduciary duty.

These enhanced powers to chase down Mis were exercised at 94 municipalities in pursuit of 185 Mis, including procurement problems, infrastructure maintenance, inappropriate billings, and cash flow management.

When municipalities do not respond to these Mis notices, a more serious remedial action is taken. Three remedial action steps were initiated at Ngaka Modiri Molema in the Free State. “If that goes unattended, then we go to issuing a certificate of debt, and we have done so in certain instances, where matters are referred to law enforcement,” said the AG.

“In Tshwane we raised an Mis when infrastructure was vandalised, and was not being safeguarded.”

Source: moneyweb.co.za