VBS scandal leaves municipalities unable to recover billions – Makwetu

Auditor-General Kimi Makwetu. Picture: Gallo Images / Beeld / Lisa Hnatowicz
Auditor-General Kimi Makwetu. Picture: Gallo Images / Beeld / Lisa Hnatowicz

It is likely that billions of rands invested by municipalities into the now defunct Venda Mutual Bank (VBS) won’t be recovered.

This was revealed by Auditor-General Kimi Makwetu at a media briefing at the Government Communication and Information System (GCIS) offices in Pretoria on Wednesday morning.

Makwetu was tabling the consolidated general report on local government audit outcomes for the 2017/18 financial years.

Municipalities in Limpopo, Gauteng and North West invested into the controversial VBS, which saw billions being looted according to a damning report, The Great Bank Heist, released by Advocate Terry Motau SC last year.

Motau’s report detailed how 50 individuals and companies, including many of the bank’s executives, received “gratuitous payments” amounting to R1.8 billion from the bank.

In his report, Makwetu said the potential R1.6 billion loss of investment made with VBS also significantly weakened the financial position of the 16 affected municipalities and had an impact on the delivery of infrastructure and maintenance projects.

In Limpopo, he said, eight municipalities had investments with VBS in contravention of municipal investment regulations.

“Due to the pending liquidation process, the recoverability of the R1.2 billion invested is unlikely. The resultant lack of funds affected the ability of these municipalities to deliver on infrastructure and maintenance projects in the current year, and could have a negative impact on the achievement of service delivery objectives in the coming years. This also further contributed to the poor financial state of municipalities within the province, with more than half of them reporting a deficit, as their expenses exceeded their income. In addition, there were high levels of unauthorised expenditure and two municipalities were placed under administration.”

In Gauteng, Makwetu said two municipalities had investments with a combined value of R126 million at VBS in contravention of the municipal investment regulations, of which the recoverability was unlikely.

“The financial losses arising from these investments did not have an impact on service delivery for the current period as the funds were used earmarked for long-term capital projects. However, this may have an impact on the multi-year projects in the next financial period of these funds are not catered for in the upcoming budget adjustment.”

While in the North West, Makwetu said five municipalities investments with a combined value of R551.2 million at VBS were also in contravention of the municipal investment regulations.

“Due to the pending liquidation process, the recoverability of R316.7 million is unlikely. The financial losses arising from these investments gave rise to difficulties in paying for operational expenses and affected the municipalities’ ability to start or complete projects, thus affecting service delivery,” Makwetu said.

In general, he said his latest report on the performance of South African municipalities paints an undesirable state of deteriorating audit outcomes.

This, he said, shows that various local government role players – mayors, councils and municipal managers – have been slow in implementing, and in many instances even disregarded his recommendations.

The report deals with the audit outcomes of local government for the financial year, ended on 30 June 2018.

Makwetu said the expenditure budget for the municipal sphere in 2017/18 was R376.49 billion.

Municipalities with clean audit opinions represented R9.51 billion (3%) of this amount, while those with unqualified opinions with findings represented R237.44 billion (62%).

Those with qualified audit opinions make up R77.48 billion (21%) of the total budget, while those with adverse and disclaimed opinions represented R23.62 billion (6%).

Municipalities with outstanding audits constitute R28.44 billion (8%) of the total expenditure budget.

His report precedes the amendment of the Public Audit Act, which became effective on April 1 – meaning it will only be applicable for the first time to audit reports issued for the financial years that ended on or after March 31.

The Act gives Makwetu powers to refer material irregularities – as defined as irregularities including any non-compliance with legislation, fraud or theft, or a breach of fiduciary duty that caused or is likely to cause a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public – to investigative agencies for prosecution, as a last resort.

Read: AG battles the looting machine, warns officials to change their ways

Explaining the process, Makwetu said once a material irregularity has been identified by his office, this may result in a number of possible actions including referring it to investigative bodies where there are complex and intricate matters that are not capable being concluded directly by the audit.

“Once a recommendation is made through an audit such will be required to be effected with a period prescribed by the auditors, failing which, a binding remedial action will be issued by the audits to the accounting officer to correct the identified material irregularity, also within a prescribed period. The last resort, after all the above steps are exhausted, will be for the AG to consider initiating a process that would trigger a certificate of debt in the name of an accounting officer or accounting authority associated with such material irregularity, once all the relevant, appropriate evidence has been secured,” he said.

Makwetu said his office audited 257 municipalities and 22 municipal entities for the 2017/18 financial year.

They found:

  • Only 8% received clean audits in 2017/18, compared with 14% in 2016/17;
  • 51% received unqualified financial statements in 2017/18 compared with 61% in 2016/17,
  • 35% had no findings on performance reports in 2017/18 compared with 38% in 2016/17,
  • 8% had no findings in compliance in 2017/18 compared with 15% in 2016/17; and
  • There was R25.2 billion of irregular expenditure in 2017/18 compared with R29.7 billion of irregular expenditure in the 2016/17 financial year.

North West, Eastern Cape, Limpopo, Western Cape and Free State had municipalities that had not tabled their annual reports by May 31.

He said that the Municipal Finance Management Act (PFMA) prescribes that municipalities should submit their annual reports to their respective councils.

Only municipalities in Gauteng, KwaZulu-Natal, Mpumalanga and Northern Cape had done so by the deadline.

Makwetu said the year under review had the highest level of non-compliance with key governance laws since the 2011-12 financial year.

Only six of the nine provinces had municipalities with clean audits.

These were:

  • 12 municipalities in the Western Cape;
  • Two municipalities in the Eastern Cape;
  • One in KwaZulu-Natal, Gauteng, Mpumalanga and Northern Cape; and
  • None in North West, Free State and Limpopo.

Makwetu said accountability continued to decline in local government and that some of his 3000 staff faced threats when doing their work at certain municipalities.

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