Municipal audit reports slightly better, but ratings agency raises red flags {writer: Leon Alberts}

South African municipalities did slightly better this year in the reports by the auditor-general; but at the same time, a report in May by the governance ratings agency, Ratings Afrika, has found that the financial sustainability of at least 15 municipalities has worsened severely over the past four years.

It has come to light that less than half of the 123 municipalities assisted through central government’s Project Consolidate initiative, which was launched in 2004 to boost their performance, achieved unqualified reports from the auditor-general after the programme ended.

Sustainability index

The municipal financial sustainability index released in May by Ratings Afrika gave a damning report by the Treasury on the state of affairs of local governments.

The index analyses and ranks 50 municipalities according to a range of operational and financial factors, awarding an index value to the financial sustainability of each municipality and assessing whether it has improved or declined.

The average index point for the 50 municipalities dropped from 62 in 2007 to 48 in 2010. The number of municipalities scoring more than 80 declined from nine to only five over the past four years, and those scoring 35 or less increased from three to 15.

Only three municipalities showed a major or drastic improvement in their financial sustainability: King Sabata Dalindyebo Municipality in Mthatha, Metsimaholo Municipality in Sasolburg and Mogale City (Krugersdorp).

Charl Kocks, head of Ratings Afrika, said financial sustainability was defined as the ability to deliver services and develop infrastructure required by residents without sudden, unplanned increases in rates and tariffs or disruptive reduction of services, and the capacity to absorb financial shocks without external funding.

An index point of 100 is the ideal, but a score of above 75 shows a municipality is doing reasonably well. “When a municipality scores less than 75 for two or three years in a row, it starts to become a reason for worry,” Kocks warned.

“For us, the most worrying aspect is the increase in municipalities scoring 35 and less.”

The worst-scoring municipality in 2010 was Madibeng (Brits) in the North West, with an index point of only 16. Saldanha Bay in the Western Cape performed the best with 87 index points, the same level as four years ago.

Importance of strong administration

Kocks said the index shows that the financial sustainability of a municipality does not necessarily depend on the political party in charge, underlying the importance of available skill and the level of professionalism in local administrative bureaucratic and structures. Continuity seems to play an important role as well.

“The important thing is management,” noted Kocks. “The Western Cape (municipalities) mostly do better than the other provinces, but that is because the people working in the municipalities have been in those jobs for many years – some even before 1994 – and know how the jobs should be done. They have been working together as a solid team, and the net result is stable municipal management.”

Two of the top five performers in 2010 were university towns.

The Stellenbosch Municipality scored 80, and Tlokwe Local Municipality in Potchefstroom scored 82.

The City of Cape Town was the metro with the highest score, but showed a decline of 10 index points to 54 over the last four years.

Johannesburg scored the worst among the metros. Its index declined from 35 to only 25 over the past four years, making it one of the five worst performers in 2010.

Ekurhuleni plummeted 40 points to 38 over the last four years, and the score for Nelson Mandela Bay Municipality in Port Elizabeth showed a severe decline of 33 points to 42.

Project Consolidate

In the interim, it has transpired from a reply on a parliamentary question that fewer than half the municipalities assisted through the government’s Project Consolidate initiative to boost their performance achieved unqualified reports from the auditor-general after the programme ended.

Acting Co-operative Governance and Traditional Affairs Minister Nathi Mthethwa said in a parliamentary response on 14 July that the government had spent more than R43.5 million on the project, with provinces contributing.

But most of the municipalities involved continued to receive qualified – or worse – audit reports after the project ended.

Among the metros, Cape Town, Joburg and Nelson Mandela Bay were included in the project and all three afterward received unqualified audits.

Mthethwa’s response to the Democratic Alliance Shadow Deputy Minister of Co-operative Governance and Traditional Affairs Marti Wenger, who wanted details on the municipalities that benefited and the costs of the project, shows that 123 municipalities were included in the project, but a mere 47 of them received unqualified audit reports in 2006 after it ended.

Project Consolidate was introduced after the 2004 national elections to support struggling municipalities. It was intended to be a hands-on programme of support and engagement.

In 2005, then Minister of Provincial and Local Government Sydney Mufamadi said that among the goals of the project was to deal with financial viability issues including financial management, fiscal discipline and billing systems.

“Skilled people in the area of municipal finance have been made available to serve in interim management capacities where it has been difficult for municipalities to recruit or retain such capacity,” he had noted.

Mufamadi said at the time that in other instances, training programmes were being designed to help municipal employees use recently acquired service delivery equipment.

The project was further meant to accelerate the provision of free basic services such as sanitation, water, electricity and refuse removal.

Some distance to go

In June, Deputy Minister of Co-operative Governance and Traditional Affairs Yunus Carrim acknowledged there was some distance to go in improving the financial performance of municipalities.

He said “strong political leadership” was required to put local government on a sound footing.

Carrim was speaking after Auditor-General Terence Nombembe’s findings in the 2009/10 municipal audit showed there had been little progress.

Seven municipalities had clean audits, up from four the previous year and two in 2004/05. Six of the seven had been part of Project Consolidate.

Four years after the government implemented Project Consolidate to rescue 139 municipalities from financial ruin, 92 of them continued to get qualified audits.

Mthethwa revealed that despite the government spending R43m on the project, the municipalities failed to turn around their finances between the 2006 and 2008-09 financial years.

Former president Thabo Mbeki launched the project in 2004, in an attempt to uproot corruption, improve communication and job creation, reduce municipal debt and fight poverty at local government level.

It was designed to address the underperformance of some of the country’s ailing councils by targeting those who had failed to deliver services to their communities.

The project would ultimately see the transfer of skills to municipal staff and address poor record-keeping and deal with fraud and corruption in the awarding of tenders.

The intervention included, among others, the government deploying teams with technical, administrative and management skills in finance, the billing system and legal disputes, including lawyers and accountants.

Despite this, many municipalities continued to receive damning audit findings by Nombembe for their dreary financial standings.

In 2007, the government stopped R500m in municipal infrastructure grant allocations because of the municipalities’ noncompliance with the Division of Revenue Act, 2006.

In a reply to a parliamentary question, Mthethwa revealed that the City of Cape Town, City of Johannesburg and the Nelson Mandela Metro were among only 47 councils that received unqualified audits, which meant their financial status and spending had improved.

The acting minister said that R43 546 000 had been spent on the project since its inception.

The DA said this meant that Project Consolidate, which was replaced by turnaround strategies in 2009, had failed to meet its mandate, although there were some improvements.

Nombembe has constantly decried the financial malaise at local government level. In the auditor-general’s consolidated report on the local government audit outcomes for the 2008/09 financial year, he identified “failure by the leadership to adequately deal with the level of vacancies and instability at senior leadership level, including municipal managers, chief financial officers and acting positions” as one of the reasons councils were failing to get clean audits. This included ineffective recruitment, training and supervision of finance staff.

Wenger said Mthethwa’s reply showed that the intervention of Project Consolidate to intervene at municipalities had failed. This was the main reason the project was replaced with turnaround strategies.

“The latest audits also show a very damning picture because the municipalities are not listening to what the auditor-general is recommending to improve finances and general performance,” she added.

Wenger warned that the department’s new turnaround strategy would fail because “this shows that government is throwing good money after bad money”.