Compliance Report on Madibeng Local Municipality by Ms. M. Rosho
Presentation to the Portfolio Committee on Cooperative Governance and Traditional Affairs detailing compliance matters, budget management, financial health, and support received by Madibeng Local Municipality from Provincial Treasury. The report highlights challenges in adopting funded budgets, financial distress due to unfunded budgets, and adherence to MFMA regulations. Background information emphasizes constitutional responsibilities of national and provincial governments in supporting municipal capacities. Ms. M. Rosho, MEC for Finance, presents the report.
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2 PRESENTATION TO THE PORTFOLIO COMMITEE ON COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS REPORT ON COMPLIANCE BY MADIBENG LOCAL MUNICIPALITY AND SUPPORT PROVIDED BY PROVINCIAL TREASURY Presented by: Ms M Rosho MEC for Finance
TABLE OF CONTENTS 3 1. Purpose 2. Background 3. Compliance Matters 3.1 Budget Management 3.2 Budget Implementation and Performance 3.3 Reporting 4. Financial Health 5. Support 6. Conclusion
PURPOSE 4 To provide the Portfolio Committee with a report on compliance by Madibeng Local Municipality and support provided by Provincial Treasury
BACKGROUND 5 In terms of the Constitution of the Republic of South Africa, National and Provincial governments are required to support and strengthen the capacity of municipalities to manage their own affairs (S154), have the executive and legislative authority to see to the effective performance of municipalities (S155) and can regulate the exercise of a municipality s executive authority (S155). The Provincial Treasury has a responsibility to provide technical support in building financial management capacity, resolution of municipal financial problems through the development of financial recovery plans, transparent reporting and support municipalities to strengthen fiscal discipline. The primary focus of the support and capacity building initiatives is on improving budget compliance which requires adoption of a funded budgets, management of the revenue value chain.
COMPLIANCE BUDGET MANAGEMENT 6 Section 18 of the MFMA promotes adoption of funded budgets by municipalities Adopting a funded budget by a municipal council is the first and critical step in a chain of events that must be achieved The budget sets the financial plan aligned to the IDP of the municipality for implementation. Madibeng Local Municipalities have annually for the past three (3), consecutively adopted an unfunded budget This subsequently resulted in Madibeng finding itself in financial distress, meaning that even before the start of the financial year, expenditure needs will exceed available revenues.
COMPLIANCE - MFMA CHAPTER 4 BUDGET 7 Section 16(2) of the MFMA prescribes that the Mayor of the Municipality must table the annual budget in Council meeting at least 90 days before the start of the budget year. Section 24 (2) (a) requires Municipal Council to approve annual budget before the start of the financial year. As reflected on the table below, Madibeng LM tabled and adopted both 2019/20 and 2020/21 budget in accordance with the legislation requirements. Municipality 2019/20 MTREF 2020/21 MTREF Date of tabling the main 2019/20 MTREF Budget? Date of adopting the main 2019/20 MTREF Budget? Date of tabling the Special Adjustments Budget during November 2019? Date of tabling the Special Adjustments Covid-19 Budget during June 2020? Did the Date of tabling the main 2020/21 MTREF Budget on 31 May 2020 Date of adopting the main 2020/21 MTREF Budget during June 2020 municipality tabled the main 2020/21 MTREF budget on 31 May 2020? Madibeng YYYY/MM/DD YYYY/MM/DD YYYY/MM/DD YYYY/MM/DD YES/NO YYYY/MM/DD YYYY/MM/DD 2019/03/26 2019/05/28 2019/11/08 2020/06/15 Yes 2020/05/29 30 June 2020
MFMA CHAPTER 4 BUDGET COMPLIANCE 8 NW372 Madibeng - Table A4 Budgeted Financial Performance (revenue and expenditure) 2020/21 Medium Term Revenue & Expenditure Framework Current Year 2019/20 Description Ref 2016/17 2017/18 2018/19 Audited Outcome Audited Outcome Audited Outcome Adjusted Budget Full Year Forecast Pre-audit outcome Budget Year 2020/21 Budget Year +1 2021/22 Budget Year +2 2022/23 R thousand 1 Original Budget Revenue By Source Total Revenue (excluding capital transfers and contributions) 1 644 870 1 802 220 1 866 291 1 829 055 1 909 055 1 909 055 1 416 491 2 061 212 2 201 617 2 357 100 Expenditure By Type Total Expenditure 2 268 996 2 114 770 3 171 212 2 423 738 2 375 819 2 375 819 988 073 2 465 285 2 577 235 2 666 688 Transfers and subsidies - capital (monetary allocations) (National / Provincial and District) 260 211 5 537 281 797 294 198 294 198 281 482 327 000 335 000 The table above reflects the 2020/21 budget as approved by the municipal Council The budgeted operating expenditure exceeds the operating revenue This is also evident from the audited figures from 2016/17 The Municipality contravened Section 18 of the MFMA by adopting unfunded budget for 2020/21 financial year. Municipality s budget is not funded due to the following, Inability to meet its financial obligations, i.e. Municipality s liabilities exceeds the available cash. The Municipality do not have a financial plan to address the shortfall on the budget.
MFMA CHAPTER 4 REPORTING COMPLIANCE 9 Section 71 (1) of the Municipal Finance Management Act (MFMA) prescribes that the Accounting Officer of the Municipality must by no later than 10 working days after the end of each month submit to the Mayor of the Municipality and the relevant Treasury a statement in a prescribed format on the state of the municipality s budget. As reflected on the table below, the municipality complied with the above mentioned section of the MFMA, wherein the municipality was able to timeously submit sec 71 reports. Madibeng 2019/20 Section 71 Submission Status Date of Submission 2019/08/14 2019/09/10 2019/10/09 2019/11/14 2019/12/10 2020/01/14 2020/02/12 2020/03/13 2020/04/16 2020/05/12 2020/06/08 2020/07/22 Due Date 2019/08/14 2019/09/14 2019/10/14 2019/11/14 2019/12/14 2020/01/15 2020/02/14 2020/03/14 2020/04/14 2020/05/14 2020/06/14 2020/07/14 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Compliant Madibeng LM Permission Granted
10 MFMA CHAPTER 4 REPORTING COMPLIANCE NW372 Madibeng - Table C4 Monthly Budget Statement - Financial Performance (revenue and expenditure) - M12 June 2018/19 Audited Outcome Budget Year 2019/20 Description Ref Original Budget Adjusted Budget Monthly actual YearTD budget YTD variance YTD variance % Full Year Forecast YearTD actual . R thousands Revenue By Source 1 866 291 1 829 055 1 920 625 106 472 1 712 125 1 920 625 (208 501) -11% 1 920 625 Total Revenue (excluding capital transfers and contributions) Expenditure By Type Total Expenditure 3 171 212 2 423 738 2 397 440 277 943 1 468 677 2 397 440 (928 763) -39% 2 397 440 NW372 Madibeng - Table C5 Monthly Budget Statement - Capital Expenditure (municipal vote, functional classification and funding) - M12 June 2018/19 Audited Outcome Budget Year 2019/20 Vote Description Ref Original Budget Adjusted Budget Monthly actual YearTD budget YTD variance YTD variance % Full Year Forecast YearTD actual R thousands 1 Total Capital Expenditure 210 410 281 797 304 516 29 056 136 871 304 516 (167 645) -55% 304 516 Funded by: National Government 186 761 281 797 291 917 28 947 131 137 291 917 (160 780) -55% 291 917 Transfers recognised - capital 186 761 281 797 291 917 28 947 131 137 291 917 (160 780) -55% 291 917
11 MFMA CHAPTER 4 REPORTING COMPLIANCE The actual Operating Revenue amounts (excluding Capital Transfers and Contributions) R1.7 billion, during the 19/20 financial year. The Operating Expenditure amounts to R1.4 billion, reflecting an under expenditure of 39% against the 2019/20 Budget. The Municipality spent 45% of capital budget as at 30 June 2020 reflecting under expenditure variance of 55%.
12 MFMA CHAPTER 4 REPORTING COMPLIANCE Budget Year 2019/20 Prior year totals for chart (same period) Description NT Code 0 - 31 - 61 - 91 - 121 - 150 Days 151 - 180 Days 181 Days - 1 Year Over 1 Year Total 30 Days 60 Days 90 Days 120 Days R thousands Creditors Age Analysis By Customer Type Bulk Electricity Bulk Water Trade Creditors Auditor General Other Total By Customer Type 0100 0200 0700 0800 0900 1000 66 651 33 494 8 681 40 428 31 927 17 577 135 145 26 294 5 482 59 303 11 489 136 130 885 12 050 59 257 5 971 314 463 223 248 55 274 5 935 114 557 193 374 56 634 3 773 10 901 1 758 145 10 791 2 903 5 016 39 096 12 765 47 71 527 108 873 90 003 167 448 71 058 13 688 18 710 51 861 77 279 598 921 368 338 NW372 Madibeng - Supporting Table SC3 Monthly Budget Statement - aged debtors - M12 June Description Budget Year 2019/20 NT Code Total over 90 days 0-30 Days 31-60 Days 61-90 Days 91-120 Days 121-150 Dys 151-180 Dys 181 Dys-1 Yr Over 1Yr Total R thousands Debtors Age Analysis By Customer Group Organs of State 2200 8 341 7 059 5 299 117 674 138 373 117 674 Commercial Households 2300 2400 37 115 60 765 18 247 41 652 15 991 36 963 377 675 1 719 683 449 028 1 859 063 377 675 1 719 683 Other 2500 2600 2 168 108 390 1 715 68 674 1 661 59 914 (8 932) (3 387) (8 932) Total By Customer Group 2 206 100 2 443 077 2 206 100
MFMA CHAPTER 4 REPORTING COMPLIANCE 13 The total Creditors owed at the end of June 2020 amounts to R599 Million. Municipality has been consistently failing to pay its creditors with-in stipulated 30 days period The debtors balance as at 30 June 2020 is R2.4 billion.
SCM COMPLIANCE 14 LEGISLATIVE REQUIREMENTS STATUS QUO COMMENTS SCM policy Approved Municipal SCM policy in line with MFM SCM Regulations SCM Regulation 7 SCM unit Established Procurement decentralised Capacity of SCM unit Established All critical SCM positions are filled. Position of the MM and CFO currently vacant which may delay finalization of procurements SCM Regulation 27 and 28 Bid committees Established Bid committees not sitting regularly as required which results in delays in appointments MFMA Circular 62 and 94 Annual 2020/21 Procurement Plans Non-Compliance The municipality did not prepare Procurement plan for 2020/21 results in challenges in controlling/ managing expenditure SCM Regulation 6 (3) Quarterly SCM reporting to council for oversight Non-Compliance Quarterly report on the implementation of SCM policy were not prepared and tabled to council for oversight SCM Regulation 6 (2) Annual SCM reporting to council for oversight Non-Compliance Annual report on the implementation of SCM policy were not prepared and tabled to council for oversight. MFMA Section 32(4) UIF&W Register Non-Compliance The municipality does not update register of UIF&W timeously as required
15 SCM COMPLIANCE LEGISLATIVE REQUIREMENTS STATUS QUO COMMENTS SCM regulation 22 Publication (Tender bulleting/ MFMA Circular 83 E Tender Publication) Non-Compliance The municipality does not public all tender on the e portal as required by Circular MFMA Circular 81 CSD Compliant The municipality utilises the central supplier data base SCM Regulation 32 Contract during the year under review? None No SCM reg 32 contract procured during the 19/20 financial year MFMA Section 116 Contract Management Non-Compliance The municipality does not have contract management function in place which results in consistent increase in irregular
16 FINANCIAL GOVERNANCE Financial Governance Capacity (Y/N) Structure Legislation Status Comments Functional but not effective MFMA s165 Internal Audit Established Y Audit Committee Functional but not effective MFMA S166 Established Y Functional but not effective Section 79 nof MSA MPAC Established Y (MFMA 171 & Financial Misconduct Regulations Disciplinary Board (DB) Functional but not effective Established Y
17 FINANCIAL HEALTH The COVID-19 pandemic has placed huge burden on an already strained budget of Madibeng Local Municipality Prior to COVID-19, the municipalities was already having challenges with the following: deliver services and maintaining their revenue generating assets prudently manage fiscal resources, bill and collect revenue their administrative functions to provide accountability over the budget process and financial management their financial governance functions And hence failing in meeting the agenda for a developmental local government This challenges manifested due to the following: An unprecedented growth in municipal debtors An unprecedented growth in outstanding creditors Dismal year-on-year audit outcomes
FINANCIAL HEALTH 18 Criteria for determining whether a municipality is experiencing a financialcrisis are established in MFMA Section 140, which provides a list of factors, singly or in combination, which may indicate that a municipality is in serious material breach of its obligations to meet its financial commitments. Section 140 of the MFMA also provides that any recurring or continuous failure by a municipality to meet its financial commitments which substantially impairs the municipality s ability to procure goods, services or credit on usual commercial terms, may indicate that the municipality is in persistent material breach of its obligations to meet its financial commitments. When there is a financial crisis, MFMA Section 139 requires that specific steps must be followed. These include: requesting the Municipal Financial Recovery Service (MFRS) to determine the reasons, assess the municipality s financial state, and prepare a financial recovery plan (which will include any needed changes to the budget and revenue measures); and Consulting the mayor to obtain the municipality s co-operation. Further, when there is a financial crisis, Constitution subsection 139(5) requires that the provincial executive must impose the recovery plan and must dissolve the council if it does not take the legislative measures necessary to give effect to the plan. If the council is not dissolved, then the province becomes directly responsible for implementing the recovery plan. When a municipality, as a result of a crisis in its financial affairs, is in serious or persistent material breach of its obligations to provide basic services or to meet its financial commitments or admits that it is unable to meet its obligations or financial commitments, the provincial executive must initiate a mandatory intervention
19 FINANCIAL HEALTH RATIOS FINANCIAL POSITION Ratio Analysis Report Audited Audited Audited Debtors Management Norm 95% 30 days 2016 2017 2018 1 Collection Rate 3 Net Debtors Days 56% 53% 81% -92 days 786 days 351 days Liquidity Management 1 Cash / Cost Coverage Ratio (Excl. Unspent Conditional Grants) 2 Current Ratio 1 - 3 Months 0 Month 0 Month 0 Month 1.5 - 2:1 0,11 0,42 0,84 FINANCIAL PERFORMANCE Expenditure Management 1 Creditors Payment Period (Trade Creditors) 2 Irregular, Fruitless and Wasteful and Unauthorised Expenditure / Total Operating Expenditure 30 days 628 days 567 days 174 days 0% 57% 69% 60%
FINANCIAL HEALTH RATIOS 20 The table above reflects that the municipality is in financial crisis The current liabilities exceed current assets. The municipality is unable to meet its obligations when they are due The collection rate is way below the norm The cash coverage is way below one (1) month, which means that the municipality will not be able to have reserves to service its obligations including salaries if no cash inflow The above financial ratios fit the criteria of financial crisis as outlined in section 140 of the MFMA
21 PT SUPPORT FUNDED BUDGETS PT assessed the 2020/21 tabled budget, to assess the level of compliance with Chapter 4 of the MFMA, non compliance was identified which resulted in the budget been unfunded PT provided technical support to the municipality to reworked on the budget until a funded position is realized for the current year to ensure: Realistic anticipated revenue collection rate must be conservative considering negative effects of COVID-19 Reduce expenditure in line with revenue Remove internal contributions to capital programme The Medium Term 2020/21 budget remainsunfunded, PT provided support Ensure cash flow presents a surplus for the current year includes fixed cost obligations (bulk suppliers current account) Request a plan from the municipality that will turn around their situation, PT to assessed the credibility of plans and make decision to accept unfunded position The plan included a gradual improvement of operating surpluses that will be used to repayment arrear obligations
PT SUPPORT TRAINING & CAPACITY BUILDING 22 MADIBENG LOCAL MUNICIPALITY Functional Area Training Number of officials Budget Management municipal budget and treasury officials in 2019 3 non accredited SCM training in 2019 and SCM learnership training in 2019/20 Supply Chain 9 officials and 10 learners MPAC MPAC members 10 GRAP GRAP training in 2020 financial year 4 Asset Management Conducted training in 2019 8 Training was conducted in 2018 for officials and councilors (no councilors attended) mSCOA 51 mSCOA Budgeting Training was conducted for budget and treasury officials 2 Mentoring and Couching NT conducted training in 2019 1
FINANCIAL MANAGEMENT SUPPORT LONG TERM 23 FOCUS AREA OUTPUT Funded Budgets Net Operating Surplus on the 2023 MTREF Budget Funded 2021 cash flow Funded 2021 operating budget Cash Containment Debtor Management Creditor Management Ring-fencing of Conditional Grants Cash coverage of at least 1 month Improve the collection rate Reduce the creditors payment period Conditional grants transferred and unspent at year end are cash backed Internal Controls Put in place internal control systems to ensure municipal operations are implemented effectively and efficiently, reliable accounting and financial reporting, and compliance with laws, regulations and policies. Supply Chain Management and Contract Management Monitoring of current contracts Update the 19/20 and 2021 Contract Register Perform financial and Legal Review on the existing contracts Update the UIF&W Register and provide support to address prior year UIF in line with sec 32 of the MFMA and MFMA Circular 68 On Job Training/ Hand holding of BTO staff to implement the 18/19 Audit Action Plan On job training/Hand hold BTO officials responsible for accounting and reporting through the 19/20 year end process, including financial statements and audit process Provide on job training/ technical and hand holding support to all BTO staff with transacting against the 2020/21 mSCOA Budget, 2020/21 financial year. On job support (hand holding) on the implementation of mSCOA GRAP aligned financial accounting framework and reporting
CONCLUSION 24 COVID-19 pandemic is impacting on municipal budget through increased spending and reduced revenue collection. Sound financial management is critical at this stage as municipalities are required to do more with little ,to respond to the COVID-19 and manage the cash flow to: - Ensure timely availability of funds (cash backed) towards provision of basic services, environmental health, occupational health and safety and disaster management; - Monitor, accounting for, and reporting in a transparent manner the resources deployed for emergency COVID-19 response; - Ensure business continuity and strengthen administrative capacity when faced with absences of staff due to COVID-19 sickness
RECOMMENDATIONS 25 That the Portfolio Committee note the report: - Note the state of financial management in Madibeng and the compliance matters. Note the support provided by Provincial Treasury to improve financial management and capacity building.
26 THANK YOU! BAIE DANKIE!
