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Progress on Portfolio Committee Recommendations on Cooperative Governance and Traditional Affairs

This presentation provides an update on the progress made in response to the Budgetary Review and Recommendations Report (BRRR) 2014. It covers topics such as the local government equitable share, withholding/late transfer of equitable share, monitoring of MIG expenditure, and the application of the 'SMART' Principle.

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Progress on Portfolio Committee Recommendations on Cooperative Governance and Traditional Affairs

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  1. Presentation to the Portfolio Committee on Cooperative Governance and Traditional Affairs Response to the Budgetary Review and Recommendations Report (BRRR) 2014 and Related Matters 28 October 2015

  2. PRESENTATION OUTLINE • Introduction • Progress report on the Committees 2014 BRRR recommendations 2.1 Update to the Local Government Equitable Share 2.2 Withholding/late transfer of equitable share 2.3 Monitoring expenditure of MIG 2.4 Application of the ‘SMART’ Principle • Demarcation Transitional Grant • Report on Municipal Forensic Reports • Recommendations

  3. INTRODUCTION Significant progress has been made in relation to the recommendation made by the Portfolio Committee on Cooperative Governance and Traditional Affairs in the BRRR 2014. This response provides progress on the following committees recommendations: • To review the Equitable share formula; • To outline the support that the department provides to municipalities to prevent the withholding or late transfer of equitable share; • To develop an instrument to monitor expenditure on the MIG; • To implement initiatives to apply the SMART Principle on targets and indicators; • To outline the cost of transitioning of municipalities related to amalgamation; and • Response on municipal forensic reports.

  4. 2. Progress report on Committees 2014 BRRR recommendations

  5. 2.1 Update on the Local Government Equitable Share • Local government is entitled to an equitable share of revenue raised nationally in terms of sections 214 and 227 of the Constitution. This local government share of national revenue is divided among the 278 municipalities through a formula. • The formula used to allocate the Local Government Equitable Share (LGES) was reviewed in 2012 through a collaborative and consultative process that included National Treasury, the Department of Cooperative Governance (DCoG), the South African Local Government Association (SALGA), the Financial and Fiscal Commission (FFC), Statistics South Africa (StatsSA) and extensive consultation with municipalities, and other local government stakeholders. • The Budget Forum approved a new and improved formula in February 2013 for use in the 2013 Budget. • The new LGES formula is being phased in over a five year period from 2013/14. The full phase-in of the new formula will be completed in 2017/18, the second year of the 2016 MTEF period. However, with some municipal boundaries changing at the time of the 2016 elections allocations will also be affected by this change. • Each year the formula needs to be updated to account for the following: • Growth in household numbers – the long period between censuses causes huge changes in allocations when new data is released. Changes in household numbers can have a particularly large impact as the largest component in the formula funds the provision of free basic services to all households with an income of less than two old age grants per month. The new formula is therefore designed to be updated annually for estimated growth in the number of households per municipality. • Updating the cost of providing basic services – incorporating forecasted CPI inflation and annual tariff increases in the bulk costs of water and electricity.

  6. 2.2 Withholding/late transfer of equitable share • The withholding of local government equitable share (LGES) allocations was an extraordinary step taken by National Treasury after persistent failures by municipalities to honour debts owed to Eskom, the Water Boards and other creditors delivering services to municipalities. It has become a common practice in certain municipalities that current invoices and outstanding debt to Eskom and the Water Boards are not prioritised for payment. Four broad objectives of implementing the process of withholding the equitable share allocations are summarised below: a. To address the growing culture of non–payment by municipalities and understand why municipalities are not able to pay creditors on time and conform to the 30 day MFMA requirement; b. To understand the root causes of municipality’s failure to pay its creditors and why municipalities find themselves in an unfavourable financial positions; c. To address managerial failure of Eskom and non-implementation of its credit control policy. Financial distress in Eskom and the Water Boards leads to poor credit ratings, which in turn will results in the increase of cost of borrowing for the national government; and d. To institutionalise the above-mentioned measures across all spheres of government. Section 65(2)(e) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003) states that “that all money owing by the municipality be paid within 30 days of receiving the relevant invoice or statement, unless prescribed otherwise for certain categories of expenditure”.

  7. 2.2 Withholding/late transfer of equitable share (Conti..) • On 6 March 2015 National Treasury issued correspondence encouraging municipalities to: • Settle their current accounts with Eskom and Water Boards; or • Conclude debt repayment arrangements with Eskom and Water Boards; and • Ensure that their political leadership is made aware of their Eskom debt obligation by requesting a Council resolution supporting the repayment arrangement. • Municipalities were advised to respond by the 13th of March 2015 or risk having the March 2015 tranche of their equitable share withheld. In addition, municipalities were advised to request assistance with the development of a financial recovery plan from the Municipal Financial Management Act (MFMA) Implementation unit of National Treasury. •  The number of municipalities affected by this process was 59; 49 of which owed Eskom the largest amounts and 10 municipalities owing the largest amounts to the various Water Boards.

  8. 2.2 Withholding/late transfer of equitable share (Conti..) • A total of 58 municipalities have received their full equitable share tranche for March 2015; • The one municipality did not receive any funds is Renosterburg local municipality. In the case of Renosterburg Municipality, the agreement with Eskom is still waiting to be signed. • Of the R2.08 billion total equitable share withheld, R2.04 billion has been released; • NT and SALGA have assisted municipalities in negotiating and signing repayment agreements as follows: • Of the 59 municipalities affected, 51 municipalities required signed Eskom agreements and to date 48 municipalities have signed, and • Of the 59 municipalities affected, 14 municipalities required signed Water Board agreements and to date 12 municipalities have signed The BF in September agreed in principle that Section 216(2) of the Constitution should be invoked for those municipalities that have not adhered to and honoured the repayment arrangements as facilitated by National Treasury as they have persistently breached the law.

  9. 2.3 Monitoring expenditure on MIG The Department has, since 2014, strengthened the capacity of the MIG Unit to monitor expenditure -The CoGTA MIG Unit, together with the Provincial MIG Teams, are able to compare MIG expenditure with non-financial performance (through coordinated site visits) -The Department is able to provide the MIG expenditure reports on a quarterly basis -The Department is currently updating the MIG-MIS to strengthen the monitoring and as a means of reporting in future

  10. MIG EXPENDITURE AS AT END SEPTEMBER 2015

  11. 2.4 Application of the ‘SMART’ Principle The Budgetary Review and Recommendations Report (BRRR) of the Committee for the 2013/14 and 2014/15 financial years highlighted key recommendations related to performance information of the Department of Cooperative Governance (DCoG). • More effort should be put on ensuring that the performance indicators implemented by the Department and its entities are Specific, Measurable, Achievable, Reliable and Time-bound; and • The Department should meet with Auditor-General to ensure that they share the same understanding with respect to the expected standards of compliance with reporting requirements.

  12. 2.4 Application of the ‘SMART’ Principle • In 2014, DCoG had engagements with the office of the Auditor-General to discuss and find common ground with reference to the DCoG performance targets. Consensus was reached that project managers must detail the nature of support in the related technical indicator description. • The Internal Audit Steering Committee was established in 2014 to improve the management of financial and non-financial information. Internal Audit, Risk Management, Corporate Planning, ICT, and Finance units and the Office of the Auditor-General are members of the steering committee where the Post Audit Action Plan is the main agenda item.

  13. 2.4 Application of the ‘SMART’ Principle (Conti..) Subsequent to the engagement with the Committee held on 14 October 2015 the following has been done: • The Minister held a debriefing session with all Management and instructed that the Committee resolutions must be implemented and that a team of strategic planners be established to follow through on all matters related to the management of performance information including meeting with the Office of the Auditor-General. • Following this meeting, the DCoG 2nd Quarterly Performance Review Senior Management Meeting held on 20 October 2015 resolved that that a Monitoring and Evaluation forum be established to work with the strategic planning team.

  14. 2.4 Application of the ‘SMART’ Principle (Conti..) • A team comprising of planning, monitoring and evaluation technical expects from across CoGTA (Department of Cooperative Governance, Department of Traditional Affairs and the Municipal Infrastructure Support Agent) was tasked with the mandate of attending to performance information related matters with the intention to improve the departmental audit outcomes. • The forum held two working session on between 22 and 27 October 2015 to analyse the current 2015/16 Annual Performance Plan and the 2nd draft Annual Performance plan FY 2016/17 using a set of criteria including the Specific, Measurable, Attainable, Realistic and Time Bound (SMART) principle. • Upon finalization of the work, the M&E forum will submit a report to DCOG Top Management which will be used to engage the Auditor-General. • The forum will continuously do the work and provide management with reports highlighting gaps and possible interventions up until are noticeable improvement on the management of performance information.

  15. 3. Demarcation Transitional Grant

  16. MUNICIPAL TRANSITIONAL GRANT 2014/15 • A working group consisting of officials from the Department of Cooperative Governance, the KwaZulu-Natal Department of Cooperative Governance and Traditional Affairs, the South African Local Government Association, the Financial and Fiscal Commission and the National Treasury prepared estimates of the costs involved for the redetermination of municipal boundaries. • The total costs, in respect of the section 22(2) request is estimated at R431,4 million for: • Restructuring costs • Human resources costs • Project management costs :

  17. MUNICIPAL TRANSITIONAL GRANT 2014/15 • An amount of R139 million has been provided over the MTEF(2015/18). • There is a shortfall of R292.4 million. • Engagements are ongoing with National Treasury and the Provinces to address the shortfall. Additional funding has been requested from the National Treasury, during the 2015 Adjusted Estimates of National Expenditure (AENE) process, to assist the rest of the municipalities to cover the costs of amalgamation as permitted in terms of Section 30 (2) of the Public Finance Management Act. This request for funding is viewed as unforeseeable and unavoidable expenditure.

  18. 4. Report on Municipal Forensic Reports

  19. OUTCOME OF THE ASSESSMENT The failure by municipalities to implement recommendations emanating from forensic reports still remains a matter of concern. Forensic reports were commissioned to investigate various irregularities including but not limited to contravention of legislation, regulations, municipal policies and other prescripts ranging from procurement and human resource management and any related municipal functions. • Most of the forensic reports made recommendation that certain remedial or other corrective measures should be taken. However, the outcome of the assessment in some of the reports pointed to the need for further investigations. • In instances where fraud, corruption and related offences have been identified, the matters were referred to relevant law enforcement agencies for further processing. • Nine forensic reports were referred to the SIU for further assessment to determine if the cases meet the requirements to be investigated under the Presidential proclamation. • The AFU has identified that there is potential for Asset Forfeiture in 18 forensic reports. In some instances, the AFU is still tracing criminal dockets in order to make final decision regarding the forfeiture of assets. • Some of the cases are already being investigated by the DPCI. There is a planned meeting with the DPCI in November 2015 to discuss forensic reports.

  20. FORENSIC REPORTS ASSESSED PER PROVINCE

  21. POST ASSESSMENT PROCESSES Following the assessment, letters and annexures of recommendations have been sent to 8 MECs requesting them to provide progress report in respect of the recommendations set out in the forensic reports. The Department is in consultation with the National Prosecuting Authority (NPA) with a view to request the NPA to assign a dedicated team of prosecutors to focus specifically on cases of corruption and related offences in municipalities.

  22. 5. RECOMMENDATION It is Recommended that the Committee note the COGTA Progress Report and Narrative on recommendation made by the Portfolio Committee as reported under items 2 to 4 above

  23. THANK YOU!

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