South Africa: National Treasury On Local Government Revenue and Expenditure Report for the Third Quarter of the 2020/21 Financial Year

press release

National Treasury has released the local government revenue and expenditure report for the third quarter of the 2020/21 financial year. This report covers the performance against the adjusted budgets of local government for the third quarter of the municipal financial year ending on 31 March 2021 and includes spending against conditional grant allocations for the same period.

Noteworthy, is that the report is prepared by using figures from the Municipal Standard Chart of Accounts (mSCOA) data strings. The mSCOA Regulations were promulgated on 22 April 2014 and prescribes the uniform recording and classification of municipal budget and financial information at a transaction level. All municipalities and municipal entities had to comply with the Regulations by 01 July 2017. The mSCOA Regulations require that municipalities upload their budget and financial information in a data string format to the Local Government portal across the six mSCOA regulated segments.

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.

The credibility of the information contained in the mSCOA data strings is a concern. At the core of the problem is:

The incorrect use of the mSCOA and municipal accounting practices by municipalities;

A large number of municipalities are not budgeting, transacting and reporting directly in or from their core financial systems. Instead they prepare their budgets and reports on excel spreadsheet and then import the excel spreadsheets into the system. Often this manipulation of data lead to unauthorised, irregular, fruitful and wasteful (UIFW) expenditure and fraud and corruption as the controls that are built into the core financial systems are not triggered and transactions go through that should not; and

Municipalities are not locking their adopted budgets or their financial systems at month-end to ensure prudent financial management. To enforce municipalities to lock their budgets and close their financial system at month-end in 2020/21, the Local Government Portal will be locked at the end of each quarter. System vendors were also requested to build this functionality into their municipal financial systems.

The actual COVID-19 expenditure reported by municipalities for the first nine months of the 2020/21 municipal financial year is included as a separate Annexure to this publication.

The Section 71 report facilitates transparency, better in-year management as well as the oversight of budgets. This makes these reports management tools and early warning mechanisms for councils, provincial legislatures and officials in order to monitor and improve municipal performance. The improvement of the credibility of the data strings is therefore a priority for national and provincial treasuries.

KEY TRENDS:

Aggregate trends

In aggregate, municipalities spent 65.3 per cent or R322.9 billion of the total adjusted expenditure budget of R494.5 billion. In respect of revenue, aggregated billing and other revenue amounted to 73.5 per cent or R358.6 billion of the total adjusted revenue budget of R488 billion.

Capital expenditure amounts to R34.6 billion or 48.9 per cent of the adjusted capital budget of R70.8 billion.

Municipalities have adjusted the budget for salaries and wages expenditure to R127 billion. This constitutes 30 per cent of their total adjusted operational expenditure budget of R423.7 billion. At 31 March 2020 the total spending is R95.3 billion or 75.0 per cent.

Aggregated year-to-date total expenditure for metros amounts to R185.1 billion or 66.5 per cent of their adjusted expenditure budget of R278.4 billion. The lowest spending is reported by eThekwini at 58.8 per cent.

When billed revenue is measured against their adjusted budgets, the performance of metros reflects a shortfall on water services for the third quarter of the 2020/21 financial year. This comparison excludes secondary costs incurred or actual revenues collected:

Billed water revenue totalled R18.7 billion against expenditure of R20.3 billion (deficit);

Billed energy sources revenue totalled R58.3 billion against expenditure of R52.3 billion (surplus);

Billed waste water management revenue totalled R5.4 billion against expenditure of R5.2 billion (surplus), and

Billed waste management revenue totalled R8 billion against expenditure R6.6 billion (surplus).

As at 31 March 2021, aggregated revenue billed for secondary cities is 88.8 per cent or R60.6 billion of their total adjusted revenue budget of R68.2 billion for the 2020/21 financial year.

The performance against the adopted budget for the four core services for the secondary cities for the third quarter 2020/21 also shows surpluses against billed revenue without taking into account secondary costs incurred or actual revenues collected:

Billed water revenue totalled R9.1 billion against expenditure of R7.9 billion;

Billed electricity revenue totalled R20.9 billion against expenditure of R19.1 billion;

Billed waste water management revenue totalled R3.1 billion against expenditure of R2.3 billion; and

Billed waste management revenue totalled R2.7 billion against expenditure of R1.9 billion.

Capital spending levels are at an average of 62.5 per cent or R4.9 billion of the adjusted capital budget of R7.8 billion. It must be noted that sustained low capital spending has potentially serious implications for the government's ability to meet the targets for expanded access to water, sanitation, electricity and housing, as well as job creation.

As at 31 March 2021, aggregate municipal consumer debts amounted to R230.7 billion (compared to R230.5 billion reported in the second quarter of 2020/21). A total amount of R73.7 billion has been written off as bad debt. The government accounts for 6.7 per cent or R15.5 billion (R20.7 billion reported in the 2020/21 second quarter) of the total outstanding debtors. Similar as in previous financial years, households still represent the largest component of debt owed to municipalities at 72.5 per cent or R167.3 billion (72.2 per cent or R166.5 billion in the second quarter of the current financial year).

It needs to be acknowledged that not all the outstanding debt of R230.7 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. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.

If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R36.5 billion.

Metropolitan municipalities are owed R115.4 billion (R111.2 billion reported in the second quarter of 20/21) as at 31 March 2021.

Households in metropolitan areas are reported to account for R84.2 billion or 73.0 per cent of outstanding debt, followed by businesses which account for R25.6 billion or 22.2 per cent and debt owed by organs of state at R5.0 billion or 4.4 per cent of the total outstanding debt owed to metros.

For the secondary cities, R46.8.4 billion reported as in outstanding consumer debt. The majority of debt is owed by households amounting to R35.9 billion or 76.7 per cent of the total outstanding debt. An amount of R41.7 billion or 89.0 per cent has been outstanding for more than 90 days.

Municipalities owed their creditors R65.5 billion as at 31 March 2021, a decrease of R1.7 billion when compared to the R67.3 billion reported in the second quarter of 2020/21. Of concern is outstanding creditors in excess of 30 days relating to bulk electricity and water, trade creditors and loan repayments.

Municipalities in the Free State have the most outstanding creditors greater than 90 days at R15.4 billion, followed by Mpumalanga at R12.3 billion and Gauteng at R6.6 billion.

The total balance on borrowing for all municipalities equates to R68.3 billion as at 31 March 2021. This includes long term loans of R48.6 billion, long term marketable bonds of R10.7 billion, and long term non-marketable bonds of R5.9 billion. The balance represents other short and long term financing instruments.

As at 31 March 2021 the closing balance for investments made by municipalities equates to R43.4 billion. Compared to the second quarter report, this is R5.7 billion more than the R37.6 billion reported. Investments include bank deposits of R38.2 billion, guaranteed endowment policies (sinking funds) of R3.9 billion, listed corporate bonds of R1.1 billion and some smaller investments.

Conditional Grants

Conditional Grants Expenditure as at 31 March 2021

The third quarter publication in terms of section 71 of MFMA provides for various adjustments to the baseline allocations approved during the beginning of the financial year. National Treasury published two national gazettes namely Government Gazette No. 44178 and Government Gazette No. 44349 dated 22 February 2021 and 29 March 2021 respectively during 2020/21 financial year.

These gazettes were done in line with sections 19, 20 and 21 of DoRA that stipulate that National Treasury may in its discretion or at the request of a transferring national officer or receiving officer stop the transfer for schedule 4 and 5 allocations pertaining to anticipated underspending on programmes or allocations by the municipalities.

Note that only the following capital grants were affected by the stopping and re-allocation process: Water Services Infrastructure Grant (WSIG), Regional Bulk Infrastructure Grant (RBIG), Urban Settlements Development Grant, Integrated National Electrification Programme, Energy Efficiency Demand Side Management Grant, Public Transport Network Grant (PTNG), Neighbourhood Development Partnership Grant and Municipal Infrastructure Grant (MIG).

The stopping has affected 106 municipalities across all provinces, while 152 municipalities reflected underspending as at the end of the second quarter of the financial year. The reasons for underspending included the non-appointment or late appointment of service providers, delays in housing projects that resulted in no houses to electrify, technical capacity to implement the projects and legal objections against appointed contractors.

The stopped funds were re-allocated to municipalities that have fast tracked the implementation of their projects and have accelerated expenditure against their original allocations and that had the capacity to fully spend by 30 June 2020.

In addition, the portion of the amount stopped against the WSIG, RBIG and MIG allocation was reprioritised and re-allocated to municipalities the were affected by the storm Eloise disaster that occurred late in January 2021 and this was done in terms of section 20(6) of DoRA.

Further to the stopping and reallocation process in terms of the DoRA, the stopping of the PTNG funds was re-allocated to the Msunduzi and Mbombela municipalities respectively. The reallocation was as a result of these two municipalities being excluded from the PTNG programme in the 2020/21 MTEF and the re-allocation enabled the conclusion of PTNG projects that were not completed in the 2019/20 financial year.

The Government Gazette No. 44349 of 29 March 2021 also included an amount of R100 million that was converted from the Provincial Emergency Housing Grant into Municipal Emergency Housing Grant (MEHG) in terms of section 21 of the DoRA and this was published as part of Government Gazette No. 44183 dated 24 February 2021. This conversion increased the total 2020 MEHG allocation from R158.8 million to R258 million.

Prior to the latest adjustment gazette dated 29 March 2020, National Treasury had published an adjustments gazette No. 44178 dated 22 February 2021 which reflected the re-allocation of funds between municipalities, the rollover of funds from the previous financial year 2019/20, additional allocations, the reductions of indirect allocations and changes to allocations as amended by the Division of Revenue Second Amendment Act, 2020, (Act No.20 of 2020).

Total Conditional Grants Expenditure as at 31 March 2021

Total amount of R29.1 billion or 98.9 per cent has been transferred to municipalities against the adjusted direct conditional grant allocation of R29.4 billion. This amount excluded the Equitable Share allocation, Urban Settlement Development Grant (supplementary capital allocation to metropolitan municipalities) and performance against roll-overs.

The Transferring Officers reported expenditure of 57.9 per cent against the total allocation for the period under review, while municipalities reported expenditure of 60 per cent against the R29.1 billion transferred to municipalities in the third quarter.

Municipalities across the various categories continue to under report against their conditional grant rollovers. From the approved total roll over of R4 billion, only R111.7 million was reported as expenditure during the third quarter performance.

The impact of the Covid-19 pandemic on municipalities in the 2020/21 financial year affected the performance against the conditional grants and resulted in the reduction to the baseline. The national lockdown from the end of March 2020 delayed most of the project implementation processes in the local government space. Some of the challenges included the delays in supply chain processes, late submissions of business plans and implementation plans.

Capacity Building and Other Conditional Grants Expenditure as at 31 March 2021

At the end of the third quarter, a total adjustment amount of R1.8 billion was transferred for capacity grants and expenditure of 61.9 per cent against the total allocation was reported. These grants are intended to assist municipalities in the development of their management, planning, technical, budgeting and financial management capabilities in the 2020/21 financial year.

The highest performing conditional grant during the third quarter is the Integrated Skills Development Grant (ISDG) at 78.5 per cent, followed by the Expanded Public Works Programme (EPWP) at 74.2 per cent (as reported by municipalities).

The Energy Efficiency and Demand Side Management, Municipal Disaster Grant and Local Government Financial Management Grant reflects an expenditure of less than 50 per cent against the allocation of R196.1 million, R150.9 million and R544.9 million respectively. The low expenditure reported on these grants is as a result of most projects being in the procurement stage and the late appointment of service providers.

Infrastructure Conditional Grants Expenditure as at 31 March 2021

Direct conditional grants allocated for 202/21 financial year against the infrastructure grants amounts to the adjusted allocation of R27.6 billion and this allocation factors in the reductions of R2.7 billion from the original allocation of R30.4 billion allocated during the national budget. This amount excludes indirect or in-kind allocations to transferring officers executing specific projects on behalf of municipalities in the municipal area.

From the amount of R27.6 billion allocated, R27.3 billion or 98.9 per cent has been transferred to municipalities.

The highest performing direct conditional grant to municipalities during the third quarter is the PTNG with reported performance of 71 per cent, followed by MIG and WSIG with expenditure of 67 and 60 per cent respectively (as reported by the municipalities).

The remaining infrastructure grants (INEP, Neighbourhood Development Partnership Grant, Rural Road Assets Management Systems Grant, Integrated City Development Grant, RBIG), Municipal Emergency Housing Grant and Integrated Urban Development Grant) reported expenditures that were below 60 per cent. This underperformance has resulted in the initiation of the stopping and reallocation process in terms of sections 19 and 20 of DoRA to minimize the risk of underspending and potential use of conditional grants for unintended purposes.

Indirect infrastructure grants to the amount of R6.8 billion have been allocated to municipalities in the 2020/21 financial year. It should be noted that projects funded through indirect grants are implemented by the respective Transferring Officers on behalf of municipalities. Performance monitoring of these grants are therefore not included as part of the Section 71 publications because municipalities do not receive these allocations directly (allocations in-kind). Reporting on these transfers should be included in the Section 40 reporting requirements for National Department as articulated in the Public Finance Management Act, 1999 (Act No. 1 of 1999).

2019/20 expenditure on rollover of conditional grants

The third quarter publication includes the 2019/20 rollover approvals for municipalities. During the 2019/20 financial year, only R4 billion was approved against an amount of R6.4 billion in rollover request.

The Covid-19 pandemic also had an enormous impact on grant performance and municipalities reflected significant under-performance. Municipalities continue to incorrectly include rollover spending as part of the current year's performance on conditional grants. This distorts the reported performance against rollovers. At the end of the third quarter, only 1.4 per cent expenditure has been reported on rollovers, while municipalities indicated that most of the roll-over projects have already been implemented and expenditure will occur once the rollover application has been approved. Therefore, the analysis of rollover requests must be tightened to ensure that rollover requests are a true reflection of the project status.

The general observation is that conditional grant spending is poor. The fact that the pandemic also affected the performance against the approved rollovers suggests that conditional grant performance must be closely monitored as the constrains that were imposed on local government as a result thereof increase the risk factors related to the unauthorized use of grant funding.

A summary of key aggregated information is included in the tables in Annexur

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

Speech Document:

Media Statement - Q3 S71 Publication - 15 June 2021.pdf

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