Municipal Infrastructure Grant rollovers for the past 5 financial years: hearings with National Treasury

Meeting report

Briefing by National Treasury                                               

Mr Sello Mashaba, Director: National Treasury, said that Section 216 of the Constitution of South Africa required National Treasury (NT) to prescribe measures to establish both transparency and control in each sphere by introducing generally recognised accounting practice (GRAP), uniform expenditure classifications and uniform Treasury norms and standards. Section 30 of Public Finance Management Act (PFMA) provided for an adjustment to be passed following an approval of a rollover of a national allocation. Section 30 of Municipal Finance Management Act (MFMA) provided that an appropriation of an annual or adjustment budget lapsed to the extent that those funds were unspent, except an appropriation for that expenditure was made for a period of more than a year. Section 28 of the MFMA authorised the spending of unspent funds from the previous financial year, while Section 22 of the Division of Revenue Act (DoRA) provided for all unspent conditional grants to revert to the National Revenue Fund, unless permission was granted by National Treasury to rollover the unspent funds into the next financial year. 

The National Treasury regulation provided for further guidelines on how rollovers should be conducted, and that these included the following conditions:

• Payment for capital assets may be approved only to finalise assets in progress;
• Savings on transfers and subsidies may not be rolled over for purposes other than originally voted for;
• Savings on compensation may not be rolled over;
• National Treasury issues annual circulars to guide municipalities on how rollovers should be submitted to National Treasury and how unapproved rollovers should revert to the National Revenue Fund;
• DoRA provides that should municipalities fail to repay unapproved or unspent conditional grants, they should be offset against their respective conditional or unconditional grants; and
• To avoid funds being offset, a periodical repayment of unspent funds can be arranged on behalf of municipalities.

Mr Mashaba said that all unspent conditional grants reverted to the National Revenue Fund, unless they were approved as a rollover. The unspent funds were informed by monthly reports submitted to the Treasury by both municipalities and national departments and formed part of the quarterly publications by National Treasury (NT) in terms of section 71 of MFMA.  NT in consultation with Transferring Officers (TOs) and provincial departments, considered rollover requests and TOs were responsible for monitoring expenditure on roll-overs against projects on a monthly and quarterly basis (financial and non-financial). The TOs must monitor registered projects and verify delivery of projects. The NT required that municipalities must report separately on the spending of conditional grant funds that were rolled over. The NT was also responsible for monitoring expenditure on roll-overs in terms of section 71 of the MFMA and DoRA -- that is, monthly reports by both municipalities and the TOs. The Annual Financial Statement (AFS) was used to verify expenditure on roll-overs -- to prevent the approval of a roll-over of a roll-over.

In the 2010/11 to 2014/15 financial years, the total Municipal Infrastructure Grant (MIG) unspent funds showed that the Eastern Cape, KwaZulu-Natal and Limpopo received the highest MIG allocations. Gauteng, the Northern Cape and the Western Cape received the lowest MIG allocations. The MIG was often linked to backlogs in basic services -- mainly water and sanitation backlogs -- and therefore MIG allocations were biased towards provinces without access to basic services. In the period of 2010/11 to 2014/15, the unspent conditional grants increased over the period. North West province led the pack with an average unspent MIG of 13% annually, followed closely by Limpopo province showing an average unspent MIG of 9% over the five year period. The MIG rollovers over the period of 2010/11 to 2014/15 had increased over time, but had shown a decline in 2014/15. On average, 16% of the MIG total allocation of Limpopo and North West had been rolled over in five years. The Mbombela municipality had contributed to the high rollover due to the 2010 construction of the stadium.

Mr Mashaba pointed out that there had been a significant link between the submissions of the Annual Financial Statements (AFSs) to the Auditor-General (AG) and the rollover approval process. The National Treasury had noted an increased number of AFSs submitted to AG for audit in time, an improvement in the quality of AFSs submitted to the AG for audit and an improvement in the general audit outcomes of municipalities. This process had achieved the following:

• Instituted compliance in municipalities in terms of the DoRA;
• Promoted accountability in municipalities;
• Improved overall performance in MIG spending, i.e 95%;
• Overall improvement in the compilation of the financial statements.

There were a number of challenges that were still being encountered, and these included:

• Non-submission of the AFS;
• Insufficient motivation as required by the circular;
• Restating of the AFS by municipalities;
• Grants not properly disclosed in the AFS;
• Unspent funds not cash backed;
• Interest, VAT and retention included in the unspent amount;
• Reporting on approved rollovers, non-reporting or rollover expenditure incorporated in the current allocation;
• Late submission of rollover applications and multiple applications for the same grant;
• Unable to verify expenditure against approved projects on the ground;
• Rollover of a rollover.

Mr Mashaba concluded by identifying remedial actions that had been put in place to offset these challenges. These comprised of stopping and reallocating to fast-spending municipalities within the same province, re-channelling the money via their district municipalities (DMs), and conversion of the allocation from a direct to an indirect allocation to address capacity and Supply Chain Management (SCM) constraints. MFMA budget circulars provided guidance for rollover applications. Other plans focused mainly on providing provincial DoRA workshops for both departments and provinces, encouraging provincial Treasuries to provide support to delegated municipalities, and providing support through Municipal Finance Management Internship Programme (MFMIP) deployment. The National Treasury was now allowing for repayment arrangements if unable to repay immediately. There was also a plan in place to have one-on-one sessions with affected municipalities in order to find a way forward.

Discussion

The Chairperson appreciated the presentation that had just been made and commended the fact that National Treasury had been able to highlight all the challenges and remedial actions in the MIG rollovers for the past five years. Was the National Treasury playing any authoritative role in ensuring that institutions were able to comply with Treasury regulations? There should be consequences for those institutions that had failed to comply with the existing Treasury regulations.  

Mr F Essack (DA, Mpumalanga) asked about the seriousness of National Treasury in ensuring that there would be no rollovers for municipalities which had vacant or acting Chief Financial Officer (CFO) and Municipal Manager positions, for the period exceeding four months. It would be important to hear how the National Treasury handled MIG rollovers, where a particular municipality had spent only 40% of the allocated budget. He wanted to know what would happen to those municipalities that had signed the proof of a contract for delivery of a project before the stipulated deadline of 30 June in an attempt not to lose out on the MIG. It was well-known that most municipalities still had cash-flow issues and this was a matter that the National Treasury would need to deal with moving forward. It was unclear as to whether municipalities were currently reporting separately on the spending of conditional grant funds that were rolled over. How was the National Treasury handling late submission of Annual Financial Statements by municipalities? What this practice likely to be condoned, as it had been done on many occasions in the past?

Mr Essack commented that it was unclear as to whether re-channelling the MIG money through the district municipalities was the best solution for the perennial problem of under-expenditure. The majority of district municipalities in the country were also not performing optimally and effectively in the distribution and handling of resources.  It was confusing as to how the National Treasury could allow municipalities to make a repayment arrangement if they were unable to repay immediately, especially when one considered that most municipalities were defaulting in their payment of Eskom tariffs and other various payments. What was the reason for the exclusion of the retention in the amount that had been unspent at a particular municipality?                                           

Mr O Terblanche (DA, Western Cape) wanted to know if the regulation that the municipalities must submit a proof that a contract for delivery of the project was signed before 30 June also applied to capital works. It was impressive to see that the Western Cape had the lowest rollovers (1.25%) over the past five years, as this was once again indicated that the province was spending the allocated Municipal Infrastructure Grant. The National Treasury should brief the Committee on the serious perennial problems that were resulting in under-expenditure in most municipalities. What was being done by National Treasury in order to rectify this problem of under-expenditure? It was unfortunate to see that most people in the country were still without basic resources while municipalities were under- spending.

Mr C De Beer (ANC, Northern Cape) appreciated the thorough presentation of the National Treasury and wanted to make it clear that there was a lot that had already been done in assisting a number of municipalities. The Committee should be briefed on the list of municipalities that were battling to comply with Treasury regulations. It would be important for National Treasury to focus on the measurable deliverables, to deal with the challenge of the inability to verify expenditure against approved projects on the ground. Members should take note of what was being presented today in order to carry the information into the meeting with provincial treasuries, as it was expensive to bring all that team to appear in Parliament. There should be a coordinated approach between National Treasury, provincial treasuries and municipalities in order to address the problem of under-expenditure and the inability to verify expenditure against approved projects on the ground. The Committee programme should be able to accommodate an oversight visit to the metropolitan municipalities.

Mr L Nzimande (ANC, KwaZulu-Natal) said that the instability in most municipalities was impacting negatively on their financial management and service delivery. It was unclear if the figures on unspent conditional grants and rollovers for 2010/11-2014/15 included only the district municipalities. It was concerning that there had been a growing number of municipalities that had been put under administration in accordance with Section 139. It was pleasing to hear that the National Treasury was now taking the pre-audited annual financial statements as final, and they were not to be changed.

Mr T Motlashuping (ANC, North West) said he was taking note of the fact that the North West province had not been doing very well in terms of expenditure on the allocated Municipal Infrastructure Grant. It was pleasing to hear that the provincial treasuries would be invited to a meeting where Members could engage on topical issues and verification of the information that had been presented at the meeting.

The Chairperson clarified that the Municipal Infrastructure Grant was focused mainly on those municipalities where there was a huge backlog in terms of basic services, and this was largely in district municipalities.

Mr Mashaba responded that consequence management was something that should be linked with performance agreements. It was clear that the most efficient municipalities were those where the CFO and Municipal Manager were able to work together to achieve the same objective, especially if the Mayor was very close to the Municipal Manager. The National Treasury was still looking at other avenues that could potentially unlock the challenges that were faced by municipalities. There was a need to understand the dynamics of local government and how resources should be equally distributed. The National Treasury had firstly issued a signal that rollovers would not be approved for municipalities that were without CFOs, as this was a risk exercise that involved management of finances. There were exceptions in cases where a CFO had been suspended, but this suspension should not exceed four months. The Division of Revenue Act (DoRA) provided that municipalities should be able to line-up all the projects to be undertaken eight months before the commencement of the financial year.  It should also be highlighted that the Municipal Infrastructure Grant also allowed municipalities to use the current year’s budget allocation in order to plan for the following year.

He said that the National Treasury had received cases where municipalities would sign the proof of a contract for delivery of the project before the stipulated deadline of 30 June in an attempt not to lose out on the MIG, and this was often rejected outright. Section 6 of the MFMA provided that municipalities had to identify a primary bank account to be used for the transferral of funds. The law required the National Treasury to transfer funds to municipalities in accordance with the payment schedule -- this was a cash-flow plan and was one of the areas where the National Treasury was battling to comply with this law. There were instances where the National Treasury would disperse funds to municipalities that were not ready for the management of those funds. There was a need to do an in-depth analysis of what was required by municipalities, based on the available resources.

Municipalities were currently reporting separately on the spending of conditional grant funds that were rolled over, although this was happening about 60% of the time. National Treasury issued a reporting template after the approval of a rollover. This was to inform the municipality to report to the Department of Cooperative Governance and Traditional Affairs, and municipalities were beginning to adhere to this regulation. National Treasury felt that retention funds should not be included in the rollover process, as these could possibly be funds that had nothing to do with non-performance -- for example, delays in the verification of payments. The National Treasury was not considering any late submission of the annual financial statement. Re-channelling the MIG money through the district municipalities was the best solution for the perennial problem of under-expenditure, and National Treasury would firstly assess the district municipality to which the funds would be re-channelled. 

Mr Mashaba said that National Treasury was still allowing municipalities to make a repayment arrangement if they were unable to repay immediately. National Treasury was able to assist municipalities to spend their allocated budget effectively and efficiently, and this was particularly the case in Mopani Municipality in Limpopo. National Treasury was working hand-in-hand with COGTA at the provincial and national level to identify municipalities that were still struggling to comply with Treasury regulations. It was unfortunate that the entire Supply Chain Management (SCM) of Mopani Municipality had been suspended, and this was basically making it impossible to do any procurement. This was a disaster when one considered that Mopani Municipality was the fifth largest Municipal Infrastructure Grant recipient, and explained why there was a significant backlog in service delivery. North West was one of the provinces with the most municipalities struggling to comply with Treasury regulations, and this was a matter that would need to be addressed. The Eastern Cape was one of the provinces which were efficient in processing rollovers.

National Treasury relied on COGTA as a coordinating department in tackling the challenge of the inability to verify expenditure against approved projects on the ground. All eight Metropolitan Municipalities were included in the figures on unspent MIG funds, and rollovers for 2010/11 to 2014/15 included only the district municipalities. The fact that there had been a growing number of municipalities that had been put under administration spoke to the fact that government had not been able to support municipalities in a way that it would leave a legacy behind. There was a need to ensure that the performance agreements could be linked to the succession plan, and not how one delivered at a particular moment.

The Chairperson indicated that the Committee should use the report that had been produced by the National Treasury as part of its oversight work. Some of the issues that had been flagged by the Treasury were what the Members were confronted with during oversight visits to provinces like KZN. There was still a chronic problem of poor planning at most municipalities and mismanagement of funds. Members should ensure that municipalities were able to spend the Municipal Infrastructure Grant appropriately and address the backlog that existed in most municipalities.

There was a need for the Department to interact with the Department of Planning, Monitoring and Evaluation (DPME) and also to have a thorough conversation with Chief Procurement Officer (CPO).  Monitoring and evaluation would provide assistance with coordination within the three spheres of government in terms of the execution of the legislative mandate of municipalities. The Committee would perhaps need to invite the Municipal Infrastructure Support Agency to hear ways of dealing with the recurring problem of under-expenditure and rollovers. There should be stronger institutional capacity for the municipalities to be able to deliver all of their projects.

The meeting was adjourned.