Democratic Alliance (Cape Town)

21 February 2013

South Africa: Johannesburg's Service Delivery Is Being Crippled By Maladministration

press release

This week the Auditor-General (AG) provided a comprehensive report to Johannesburg's finance committee on the state of Johannesburg's finances.

The report details serious problems with the way that Johannesburg's finances are being managed, and it explains exactly why the City has received another qualified audit - its third in a row.

Qualified audits usually mean that a council or government department is not able to account for what it has done with the money it receives. And that is certainly the case on this occasion - there are large amounts of public money on the books of the Johannesburg City Council that simply cannot be traced, or debts that will never be repaid to the City.

This has a disproportionate impact on poor residents. It undermines the City's ability to deliver services and takes resources away from housing projects, electrification projects and other activities that are vital to making life better for the poor.

The AG's report has revealed serious mismanagement of Johannesburg's finances. The following issues are of particular concern:

Ghost assets:

Johannesburg's books include "ghost assets" worth R130 million. These are assets that are in Johannesburg's books, but do not exist in reality. This means the assets may have been lost or stolen. Or, most worryingly, it could mean that money meant to purchase these assets was spent on other unknown, and unaccounted for, expenses - or indeed that it found its way into the private bank accounts of corrupt officials.

Billing chaos:

The billing crisis has caused chaos in Johannesburg's finances. The City is, on average, taking 303 days to collect outstanding debts. Ideally, this period should be no longer than 30 days. The AG found that this delay was due to a massive number of unresolved billing queries, which inflates the value of outstanding debts, and greatly delays payment of the legitimate debts. This is making it almost impossible for the City to manage its income effectively.

Overcharging for basic services:

The City overcharged residents by R258 million for refuse removal services, since there was a breakdown in the system that monitors the number of bins used per household. Households using more bins must pay more. Unfortunately the City's monitoring system broke down, and a number of households were overcharged. That "income" has had to be scratched from the books, leaving a R258 million hole in the City's finances.

Systemic electricity distribution losses:

The City experiences massive systemic losses in its electricity distribution network. The total losses in the distribution network tally to R1.37 billion for the last financial year. It is uncertain what portion of this is due to ageing infrastructure, and what portion is due to electricity theft.

Systemic water distribution losses:

The City lost R805 million in water distribution losses. These losses are primarily due to ineffective metering and ageing infrastructure.

Massive provision for possible debt write-offs:

The billing crisis is also forcing the City to make provision for the possible write off of massive amounts of debt. The billing crisis overstated the size of these debts. In the last year, it has had to classify R12.9 billion in expected revenue from debtors as "unlikely to ever materialise". This constitutes 68% of all debt owed to the City by consumers. It is again unclear to what extent this is caused by the billing crisis overstating the City's income (and consumers' debt), and to what extent it is caused by a simple failure to collect income properly.

Fraud:

The City is being crippled by fraud. In the last year there were 88 internal forensic investigations into financial irregularities. Of these, 68 have been resolved, and 20 are still ongoing. Some of the investigations have found massive fraud:

• An investigation into the finance department found fraudulent activities relating to R100 million in cash and cheque management problems.

• The Department of Planning and Urban Management found that a R10 million in funds was fraudulently misappropriated.

• The Johannesburg Metro Police Department defrauded the City to the tune of R18 million in the last year.

On top of all this, the AG also found that another R10 million could not be accounted for due to fraud.

Pikitup is bankrupt:

The AG states that the continued viability of Pikitup, Johannesburg's refuse collection utility, is in serious question. It has raked up a R336 million deficit; and its liabilities already exceed its assets by R323 million.

Pikitup is essentially bankrupt. A significant bailout is likely going to necessary. Two years ago, a major auditing firm put together a turnaround plan for Pikitup. This plan has never been made public, and has never been implemented. What happened to this plan and why was it never implemented?

Failure to pay service providers on time:

The City currently repays its service providers, on average, in 159 days. That is more than five times the Municipal Finance Management Act's (MFMA) prescribed 30 day payment period. It also makes a completely mockery of President Zuma's commitment In this year's SONA that state entities are working towards repaying service providers within 30 days.

Breaches of the Municipal Financial Management Act:

The City has been found to breach 5 different aspects of the MFMA, and on 6 separate issues.

In general, there is significant failure to exert internal financial control over both incomes and expenditure.

Failure to achieve targets:

All of these financial and administrative problems are impacting negatively on the City's ability to achieve its targets. During the financial year of 2011/2012, the City set itself 579 service delivery targets. Of those, 517 were not met. This means that 89% of the service delivery targets the City set itself were not met.

The fact of the matter is that when a City cannot account for its money, cannot manage its revenue, cannot bill properly and cannot pay service providers on time, it cannot deliver services. That is why Johannesburg is not delivering proper services to its residents.

Nothing better illustrates this than the fact that the City could not achieve 89% of the service delivery targets it set itself. It is simply not good enough. Millions of South Africans are living in Johannesburg, in desperate need of basic services, yet those services will remain a dream until the City fixes its finances.

If the City is unable to properly develop, measure and meet its targets, it is unlikely to be able to implement its own 30 year growth and development strategy. Much like the NDP at the national level, this plan has excellent objectives, but it is doubtful whether the City can implement it given its failure to meet its own targets.

The DA will do whatever we can to fix this situation.

We will systematically approach each of these problems, to demand accountability, to demand that those responsible for fraud, theft and corruption are removed and we will place solutions on the table.

We will begin by demanding that the City provide information for each of the 88 internal investigations into fraudulent activities in the City administration. Each employee and public representative implicated must be removed.

We will request a follow-up meeting with the AG to request additional information on the R10 million in fraud he has identified, as well as the overstating of asset values. If the AG is not able to assist us sufficiently, a public protector investigation might be warranted.

We will also call on the chief accounting officer for the City to appear before the MPAC committee to explain the blatant breaches of the MFMA on a number of important procedural aspects.

As for the structural problems relating to distribution losses - we will again urge the Mayor, and the relevant officials in the City, to make the necessary investments in maintaining our infrastructure. The decay in water and electricity infrastructure is now reaching crisis levels, with annual distribution losses topping R2 billion for the first time.

We will also reiterate our call for the City's utilities to be privatised where possible. Due to the nature of Pikitup's operations it is unlikely that it would be feasible to privatise the whole entity. The DA would propose that those activities within Pikitup that are viable for commercialisation be privatised, and that the others be rolled into a City Cleansing Department.

Johannesburg is the heart of South Africa's economic engine. We have to get this city functioning right, delivering services, improving people's lives and creating jobs. If we fix the administrative problems in this city, and manage our finances well, it can be turned into a powerful centre of job creation and economic growth. We have to act now to stop the decay, and produce a better life for all of Johannesburg's residents.

Mmusi Maimane, DA National Spokesperson

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