16 August 2017

South Africa: Treasury On Local Government Revenue and Expenditure, 1 July 2016 to 30 June 2017

press release

Local Government Revenue and Expenditure: Fourth Quarter Local Government Section 71 Report (Preliminary results) For the period: 1 July 2016 - 30 June 2017

National Treasury has today released local government's revenue and expenditure for the fourth quarter of the 2016/17 financial year, as well as spending on conditional grants for the same period. This report covers the fourth quarter of the municipal financial year ending on 30 June 2017.

The report is part of the In-year Management, Monitoring and Reporting System for Local Government (IYM), which enables provincial and national government to exercise oversight over municipalities, and identify possible problems in implementing municipal budgets and conditional grants.

In-year reporting is now well institutionalised, with most municipalities consistently producing quarterly financial reports. The reporting facilitates transparency, better in-year management, as well as the oversight of budgets, making these reports management tools and early warning mechanisms for councils and officials to monitor and improve municipal performance.

Key trendsS:

Aggregate trends

As at 30 June 2017, municipalities on aggregate spent 87.2 per cent, or R348.6 billion, of the total adjusted budget of R400 billion. In respect of revenue, aggregated billing and other revenue amounts to 91.2 per cent, or R359.4 billion, of the total adjusted revenue budget of R394.1 billion.

In the period under review, capital expenditure amounted to R54.4 billion, or 79 per cent, of the adjusted capital budget of R68.8 billion.

Of the adjusted operating expenditure budget, amounting to R331.1 billion; R294.2 billion (88.9 per cent) was spent by 30 June 2017.

Municipalities have adjusted the budget for salaries and wages expenditure to R92.5 billion for the 2016/17 municipal financial year. This represents 27.9 per cent of their total operational expenditure budget of R331.1 billion. At 30 June 2017, spending is R87.6 billion, or 94.7 per cent.

Aggregated year-to-date expenditure reported by metropolitan municipalities amounts to R212.8 billion, or 91.9 per cent of the adjusted expenditure budget of R233 billion. The aggregated adjusted capital budget for metros in the 2016/17 financial year was R36.1 billion of which they have spent 83.9 per cent or R30.3 billion.

When billed revenue is measured against their adjusted budgets, the performance of Metros shows surpluses across two of the four core services for the fourth quarter of 2016/17. This does not take into account the collection rate:

Water revenue billed was R24.471 billion, against expenditure of R24.514 billion;

Electricity revenue billed was R71.425 billion, against expenditure of R65.166 billion;

The revenue billed for waste water management was R10.207 billion, against expenditure of R6.881 billion, and

Levies for waste management billed were R7.814 billion, against expenditure of R8.953 billion.

As at 30 June 2017, aggregated revenue for secondary cities is 89.7 per cent, or R49.3 billion, of their total adjusted expenditure budget of R54.9 billion for the 2016/17 financial year. Year-to-date the spending level for the secondary cities is on average 84.4 per cent or R47.4 billion. Capital spending levels are on average of 74.1 per cent of the adjusted capital budget.

The performance against the adjusted budget for the four core services for the secondary cities, for the fourth quarter of 2016/17, also shows surpluses against billed revenue, without taking into account the collection rate:

Water revenue billed was R6 billion against expenditure of R5.1 billion;

Electricity revenue billed was R17.9 billion against expenditure of R15.1 billion;

The revenue billed for waste water management was R2.7 billion against expenditure of R1.9 billion; and

Levies for waste management billed were R1.9 billion against expenditure of R1.5 billion.

Waste management continues to perform lower for both metros and secondary cities when compared to other core services.

Aggregate municipal consumer debts amounted to R128.4 billion (compared to R128.3 billion reported in the third quarter) as at 30 June 2017. A total amount of R1.7 billion has been written off as bad debt. Government accounts for 5.8 per cent or R7.4 billion. The largest component relates to households which accounts for 64.8 per cent or R83.1 billion (67.1 per cent or R86 billion in the third quarter).

It needs to be acknowledged that not all the outstanding debt of R128.4 billion is realistically collectable as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.

If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R24.9 billion.

Metropolitan municipalities are owed R64.9 billion (R65.7 billion reported in the third quarter) in outstanding debt as at 30 June 2017. The biggest contributors are the City of Johannesburg (26.3 per cent) and Ekurhuleni Metro (20.5 per cent).

Households in metropolitan areas are reported to account for R40.6 billion or 62.5 per cent of outstanding debt to metros, followed by businesses which account for R18.3 billion or 28.2 per cent. Debt owed by government agencies is approximately R2.1 billion or 3.3 per cent of the total outstanding debt owed to metros.

Secondary cities are owed R27.2 billion (R26.4 billion reported in the third quarter of 2016/17) in outstanding consumer debt. The majority of debt is owed by households and amounts to R20.6 billion or 75.7 per cent. Out of the total debt of R27.2 billion, R22.5 billion or 83 per cent has been outstanding for more than 90 days. An amount of R20.4 million has been written off by George, R13.9 million at uMhlathuze and R15.9 million at Newcastle during the fourth quarter.

Municipalities owed their creditors R43.8 billion as at 30 June 2017, an overall increase of R9.8 billion when compared to the R34 billion reported in the third quarter of 2016/17.

Free State has the highest percentage of outstanding creditors greater than 90 days at 84.9 per cent, followed by North West at 76.4 per cent, Limpopo at 68.7 per cent, and Mpumalanga at 68.6 per cent. The year-on-year increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges, and are consequently delaying the settlement of outstanding debt owed.

The aggregated year-to-date actual collection rate is 90.8 per cent compared to an adjusted budgeted collection rate of 91.8 per cent. This represents an aggregated underperformance of 1 per

cent. It is suspected that the reported collection rate is distorted owing to reporting inconsistencies on cash flow movements of municipalities and the incorrect classification of service charges. The national budgeted and actual collection rate is below the 95 per cent norm.

The big metros tend to hide the true collection rate of the smaller municipalities in the national average. The break down below gives a better indication of where revenue problems are experienced.

Collection Rate indicators as at 30 June 2017

< 50

Count

50 - 59

60 - 69

70 - 79

80 - 94

>= 95

Unknown

Eastern Cape

7

2

3

2

9

14

2

Free State

9

5

1

1

2

2

3

Gauteng

1

3

1

5

1

Kw aZulu-Natal

7

4

8

11

14

9

1

Limpopo

6

3

3

1

5

8

1

Mpumalanga

4

1

3

3

8

1

North West

3

3

4

2

2

5

3

Northern Cape

7

1

4

4

8

4

3

Western Cape

1

1

4

23

1

Total

44

19

24

28

48

78

16

Source: National Treasury Local Gov ernment database

Metros adjusted their collection rate upward to 95.2 per cent and achieved an actual collection of

94.8 per cent, which is 0.4 per cent below the target and below the 95 per cent norm.

The secondary cities reported 83.7 per cent collection against an adjusted collection rate of 84.4 per cent, which is 0.7 per cent above the expected performance, but well below the 95 per cent norm.

The total balance on borrowing for all municipalities equates to R42.3 billion as at 30 June 2017. This includes long term loans of R31.4 billion, long term marketable bonds of R6.3 billion, and non- marketable bonds of R4.2 billion. The balance represents other short and long term financing instruments.

As at 30 June 2017, the total investments made by municipalities equates to R28.6 billion. On year- to-year comparison, this is R1.1 billion more than the R27.5 billion reported in the fourth quarter of the previous financial year. Investments include bank deposits of R21.5 billion, guaranteed endowment policies (sinking funds) of R4.4 billion, negotiable certificates of deposits at banks of R1.4 billion, listed corporate bonds of R1.1 billion and some smaller investments.

Over and under spending

The over- and under expenditure can be summarised as follows:

Summarised over and under spending of expenditure as at 30 June 2017 (Preliminary results)

R thousands

Adjusted Budget

Year to date: 30 June 2017

Total Total

expenditure expenditure as % of m ain as % of appropriation adjusted

budget

(Over)

Under

(Over) as % Under as % of adjusted of adjusted budget budget

Operational ex penditure

331 091 016

294 202 425

90.2%

88.9%

(1 482 741)

38 371 331

(0.4%)

11.6%

Capital ex penditure

68 849 006

54 410 678

78.3%

79.0%

(1 389 980)

15 828 308

(2.0%)

23.0%

Total expenditure

399 940 022

348 613 103

88.1%

87.2%

(1 766 257)

53 093 175

(0.4%)

13.3%

of which

Conditional grant spending

29 769 943

26 073 153

86.7%

87.6%

(582 330)

4 279 120

(2.0%)

14.4%

Source: National Treasury Local Government database

Under spending of R53.1 billion or 13.3 per cent of municipalities' total adjusted budgets was reported. When compared to last year's performance, there has been an increase of R7 billion. In 2015/16 the aggregate under spending was R46.1 billion or 12.2 per cent of the total municipal budget.

Analysis of over and under spending of expenditure for 2013/14 to 2016/17

R thousands

(Over)

2013/14

Under

Nett

(Over)

2014/15

Under

Nett

(Over)

2015/16

Under

Nett

(Over)

2016/17

Under

Nett

Total

(4 335 702)

38 126 933

33 791 231

(1 914 574)

43 483 621

41 569 047

(3 379 156)

46 117 380

42 738 224

(1 766 257)

53 093 175

51 326 919

Capital

(873 683)

14 808 133

13 934 450

(1 233 022)

13 709 253

12 476 230

(1 094 303)

14 357 868

13 263 565

(1 389 980)

15 828 308

14 438 328

Operating

(4 532 544)

24 389 325

19 856 781

(1 993 402)

31 086 219

29 092 817

(3 368 993)

32 843 653

29 474 659

(1 482 741)

38 371 331

36 888 591

Conditinal grants

(822 953)

3 294 776

2 471 823

(927 913)

3 591 465

2 663 552

(594 471)

3 544 825

2 950 354

(582 330)

4 279 120

3 696 790

26. Source: National Treasury Local Government database

Aggregate overspending of the adjusted operating budget - R1.5 billion or 0.4 per cent;

Aggregate underspending of the adjusted operating budget - R38.4 billion or 11.6 per cent;

Aggregate overspending of the adjusted capital budget - R1.4 billion or 2 per cent;

Aggregate underspending of the adjusted capital budget - R15.8 billion or 23 per cent;

Aggregate underspending of the revised conditional grants allocation - R4.3 billion or 14.4 per cent; and

Aggregate overspending of the conditional grants allocation - R582 million or 2 per cent.

Note that the aggregation of the capital and operating budgets will result in a different outcome to that of analysing them separately.

On aggregate municipalities overspent conditional grants by R582 million or 2.0 per cent. The biggest contributor to over spending on the conditional grant framework is informed by the City of Johannesburg, which reported a spending performance of R115 million against a revised budget allocation of R1.2 billion.

Municipalities in aggregate under spent conditional grants with R4.3 billion or 14.4 per cent. This represents a net under spend of R3.7 billion for the financial year. This underspent increased by R734 million from the previous financial year.

Conditional Grants

Conditional Grants Expenditure as at 30 June 2017

Conditional grants expenditure indicated 86.7 per cent or R26 billion was spent by municipalities against the allocation of R30 billion as at 30 June 2017. The fourth quarter performance, as in previous quarters excludes indirect grants as these are spent by national departments administering the grants on behalf of municipalities.

The overall expenditure reported by municipalities as at the end of the 2016/17 financial year is 87.5 per cent against the R29.8 billion transferred to municipalities. This is a slight regression from the previous financial year where expenditure stood at 87.3 per cent of the total allocation of R27.7 billion. Despite the lesser expenditure in 2016/17 compared to 2015/16 (in percentage terms), municipalities performed relatively well, given they had R2.3 billion more to spend in 2016/17 than in 2015/16.

Non-Infrastructure Conditional Grants Expenditure as at 30 June 2017

Under the capacity building conditional grants, the best performing grants were the Expanded Public Works Programme (EPWP) integrated grant for municipalities, the local government Financial Management Grant (FMG), and the Municipal Demarcation Transition Grant (MDTG), as they all reported expenditure of over 90 per cent of total transferred amounts, with EPWP reporting 100 per cent expenditure.

The Infrastructure Skills Development Grant (ISDG) and the Rural Roads Assets Management Systems (RRAMS) grant have also performed fairly well, despite both having regressed to 76.5 and 71.8 per cent expenditure of their total transferred amounts of R130.5 million and R95.4 million respectively, after having achieved 88.8 and 75.9 per cent expenditure against transferred amounts in 2015/16.

The Municipal Systems Improvement Grant (MSIG) has since in 2016/17 been shifted from Schedule 5B to 6B (direct to indirect), for it to have more impact as opposed to making smaller equal allocations to the majority of municipalities.

The Energy Efficiency Demand Side Management (EEDSM) grant also performed well as the aggregated expenditures, as reported by municipalities, was R130.9 million or 70.6 per cent of the transferred amount of R185.6 million, a notable improvement from the 65.3 per cent achieved in the same period last year.

Infrastructure Conditional Grants Expenditure as at 30 June 2017

From an infrastructure conditional grants perspective, the best performing grants were the Integrated National Electrification Programme (INEP) municipal grant (99.2 per cent), Municipal Disaster Recovery Grant (MDRG) (94.6 per cent), and the MIG, despite a slight regression from

93.1 per cent in 2015/16, to 92.4 per cent in 2016/17.

The above conditional grants all reported expenditure of over 90 per cent of total transferred amounts, which is a notable achievement, especially the MIG based on the intensive nature and complexity of infrastructure rolled out using the grant. This is despite the fact that some municipalities received additional MIG allocations in March this year i.e. in their third quarter of 2016/17, as a result of sections 19 and 20 DoRA process (stopping and re-allocation).

The Public Transport Network Grant (PTNG) also performed well, as the aggregated expenditure reported by municipalities was at R4.9 billion, or 87.7 per cent of the allocated and transferred amount of R5.6 billion. This is a notable improvement from the same period last year, where expenditure was at 83.9 per cent of the transferred R5.9 billion, and also given the intensity and complexity of the Public Transport Networks rolled out using the grant, as it is the first of its kind in the country.

The poorest performing infrastructure grants were the Neighbourhood Development Partnership Grant (NDPG), Regional Bulk Infrastructure Grant (RBIG) and the Water Services Infrastructure Grant (WSIG). These grants reported expenditures of less than 70 per cent of their respective allocations. The underperformance on the RBIG and WSIG is of particular concern, given these grants are aimed at addressing access to water and sanitation services, which will bring relief and dignity to underserved communities which have never had access to basic water supply, let alone basic sanitation services.

In 2016/17, the TOs were responsible for managing indirect grants, which include the Regional Bulk Infrastructure Grant, Water Services Infrastructure Grant, Eskom's Integrated National Electrification Programme grant, Neighbourhood Development Partnership Grant, Municipal Systems Improvement Grant, Municipal Demarcation Transition Grant and the Bucket Eradication Programme Grant. Performance monitoring for these grants are not included as part of the section 71 publications, because municipalities are not the recipients of the allocated funds (allocations in- kind).

Roll-Overs from 2015/16 to 2016/17 Conditional Grants Expenditure as at 30 June 2017

National Treasury approved a roll-over amount of R853.6 million from the 2015/16 to the 2016/17 financial year. This is a notable reduction in the amount approved for roll-over from previous years, owing to the stringent roll-over criteria introduced over the past few years. The roll-over amount is mainly made up of infrastructure grants in the form of MIG (R406.4 million), PTNG (R192 million) and the erstwhile Municipal Water Infrastructure Grant (MWIG (R129 million)).

The aggregated reported expenditure on the rolled over by municipalities in the fourth quarter of 2016/17, was reported at meagre R271.8 million or 31.8 per cent of the roll-over amount of R853.6 million. Chances are this is merely poor reporting on municipalities' part, and the expenditure should be very different to that which will be reported in the 2016 pre-audited Annual Financial Statement to be submitted to the Auditor General by 31 August 2017.

This is a vast regression from the same period last year, where of the approved roll-over of R1.6 billion from 2014/15 to 2015/16, 48.8 per cent or R758 million of the rolled over amount was reported as spent. The expenditure of rolled over unspent conditional grants (especially infrastructure) continues to be a going concern, as municipalities continue to struggle to spend their roll-overs from previous financial years together with their current year allocations, and continue to struggle to report expenditure on roll-overs annually.

Further details on this report can be accessed on the National Treasury's website: www.treasury.gov.za.

Notes to Editors:

This information is published in terms of Sections 71 of the Municipal Finance Management Act, 2003 (Act No. 56 of 2003)(MFMA) and 30(3) of the 2016 Division of Revenue Act. The budgeted figures shown are based on the 2016/17 adjusted budgets approved by municipal councils.

In terms of the process, Municipal Managers and Chief Financial Officers are required to sign and submit data to the National Treasury by 28 July 2017; therefore, any queries on the figures in these statements should be referred to the relevant Municipal Manager or Chief Financial Officer. Queries on conditional grants may be referred to the National Department responsible for administering the grant.

A municipal budget must be funded in terms of Section 18 of the MFMA before a Municipal Council can adopt that budget for implementation. A funded budget is essentially a budget that is funded by a combination of cash derived either from realistically anticipated revenues to be collected in that year and cash backed surpluses of previous years. It is a common practice amongst most municipalities when preparing their annual budgets to overstate or inflate revenue projections, either to reflect a surplus or on the surface to show that excess expenditure requirements are adequately covered by revenues to be collected. Hence, the revenue estimates are seldom underpinned by realistic or realisable revenue assumptions resulting in municipalities not being able to collect this revenue and therefore finding themselves in cash flow difficulties. Should such situations arise, municipalities must adjust expenditure downwards to ensure that there is sufficient cash to meet these commitments.

This fourth quarter publication covers 257 municipalities on financial information and 257 municipalities on conditional grant information.

Issued by: National Treasury

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