- In the 2018/2019 financial year, fruitless and wasteful expenditure by municipalities again increased.
- Ongoing governance and financial failures have many ramifications – but at present, municipalities meant to fight Covid-19 on the frontlines cannot curb irregular spend or collect revenue. How will this impact service delivery?
- In the supplementary budget, additional funds were allocated to municipalities. But in light of the poor audit outcomes, this is a concern.
Auditor-General Kimi Makwetu delivered another bleak report on the state of South Africa's municipalities on Wednesday, with irregular spend increasing and a minority of municipalities reporting clean audits for 2018/2019.
Despite spending R1 billion on consultants, outcomes barely improved. Unauthorised expenditure remained high at R11 billion and irregular spend stood at R32 billion. Fruitless and wasteful expenditure increased by R2 billion.
Alongside this news, a second, darker picture emerged: the question of Covid-19. Finance Minister Tito Mboweni boosted municipalities' financial resources to help them respond to the pandemic in the supplementary budget.
Now, more than ever, the question arises of how municipalities will contain irregular spend.
Economists – and Makwetu himself – have suggested there is significant cause for concern.
Makwetu said on Wednesday that as municipalities prepare to service residents during the Covid-19 pandemic, continued governance and financial failures mean that too few municipalities are spending effectively enough for their provisions to see a positive impact on the ground.
"Local government, as it has been for many years, has not had much resources to carry out its duties due to economic constraints and many headwinds that have occurred.
"However, we have also not always had the right hands at the till," said Makwetu.
Municipal IQ economist Karen Heese said the latest audit outcome report has a "despairing theme", which was reflection of the high opportunity cost of poor financial management, an especially pertinent theme in the current recession and Covid-19 pandemic.
"It is especially concerning that municipal leaders were elected into office almost four years ago and that the results, which were several years into their term, can no longer be attributed to a lack of understanding but rather to a lack of political will to arrest poor financial governance," Heese said.
Municipal IQ managing director Kevin Allan said stakeholders need to urgently interrogate rising levels of irregular expenditure and slipping audit outcomes, especially in the six municipalities with outstanding audits, and the deteriorating financial health of many municipalities.
"Together these reflect a poor sense of accountability to communities in expending increasingly stretched financial coffers. Meaningful service delivery is especially important in the current context of the Covid-19 pandemic, with local government allocated specific resources to mitigate its impact," said Allan.
Councils cannot collect
Makwetu said the pandemic presented a stark financial reality at local government level, as municipalities still struggled to collected revenue raised from providing services to households and businesses.
"All of them raised a total revenue of R226 billion for the 2018/19 year. That was revenue generated from services that municipalities render.
"In the financial statements we audited, many municipalities have determined that the chances of recovering 60% of that is unlikely, which is R90 billion of revenue actually collected," Makwetu said.
The country's municipalities are owed R72 billion by various debtors in 2019, with R10 billion of that owed to municipalities by national and provincial government departments.
Last week, during a virtual session of oral replies, deputy president David Mabuza said the political task team into energy, which he leads, has committed to expediting the payment of outstanding debts owed to Eskom, while directing all national and provincial organs of state to settle all outstanding debts to municipalities.
Freedom Front Plus MP Tanya Breedt reminded Mabuza how grave the consequences of governance failure were, saying some hospitals found themselves in the dark because they fell under municipalities where those councils faced electricity cut-offs.
More money to lose?
Minister of Finance Tito Mboweni announced in his supplementary budget speech last week that national government's share of the division of revenue would increase by R32 billion, while the provincial share would decrease by R4 billion and the local share would also increase by R7 billion.
Mboweni's supplementary budget increased local government's total allocations from R133 billion to R140 billion. This is aimed at giving municipalities – who are at the coalface of government’s response to Covid-19 – capacity to continue servicing residents and assisting the vulnerable.
However, the Auditor General's report shows that it is not that clear-cut, as 60% of the revenue shown in the books of councils is not finding its way into the bank accounts of the municipalities. Municipalities need the allocations, but continue to struggle with collecting revenue due to them.
Bad for business
Efficient Group economist Dawie Roodt said the current local government standard is bad for business, as the quality of local government, for better or worse, will always have an impact on businesses in the country.
"You must remember that local government is the first port of call for most businesses. Whatever they decide to do or not to do has a huge impact on business. The SA economy is going through its hugest recession. We need to pull together to solve this and those guys are not up to it," Roodt said.
Roodt said while the pandemic will have "a huge impact on everyone", the real economic threat of Covid-19 took aim at municipalities in the Western Cape and Gauteng. The irony is that these two provinces have the most councils with clean or unqualified audit opinions.
"There is talk of cities facing strict lockdowns, while restrictions small towns relax. It's going to have a huge impact on businesses in cities. But local government has learned that there is no consequence for bad management and that if you run out of money, you can always go and ask for more," Roodt said.
Roodt was referring to President Cyril Ramaphosa's announcement that government was considering introducing a multi-tiered formula to its "risk adjusted approach" in the national lockdown, which would allow economic activity in areas where the virus is spreading more slowly to continue.
Economic epicentres have also been overlapping with Covid-19 epicentres.
More powers for the AG
In 2018, President Cyril Ramaphosa received the Public Audit Amendment Bill, a legislative amendment which could strengthen the office of the Auditor General.
Parliament has for years worked on amending the current Public Audit Act, with a view to giving the Auditor General powers to compel accounting officers at government departments and entities to adhere to the office's recommendations.
Makwetu said the office of the Auditor General introduced preventative measures, including the measure of a "material irregularity instrument", which will allow detailed investigation of specific transactions or financial statements, as opposed to a mere audit opinion of the entire council.
Deputy Auditor General Tsakane Maluleke said 57 auditees will be audited in the coming financial year according to the newly introduced instrument, up from the six audited through this instrument in the 2018/19 financial year.
President of the South African Local Government Association, Thembi Nkadimeng, said the amendments to public audit law could impose sanctions including withdrawing equitable share allocations to municipalities that are repeat offenders.
But whether these remedies will bring relief quickly enough for municipalities battling Covid-19 is a different matter altogether.