Local Government Initiatives & Financial System: briefing

Meeting report

PROVINCIAL AFFAIRS & LOCAL GOVERNMENT PORTFOLIO COMMITTEE
13 October 1999
LOCAL GOVERNMENT INITIATIVES AND FINANCIAL SYSTEM: BRIEFING

Documents handed out :
National Intervention Framework on Local Government Finances presentation by the Department (Appendix 1 at end of minutes)
Municipal Finance: Presentation by The Banking Council (Appendix 2 at end of minutes)

SUMMARY
The focus of the meeting was on the crisis in local government and the need for major restructuring and reform in municipalities. It is vital that provinces step in where necessary to curb mismanagement.

HEARINGS
The Banking Council
Mr Cas Coovadia gave a brief background on the Banking Council which represents about 95% of banks in South Africa including foreign banks. Most of their work is done in terms of lobbying. For the submission by Mr Mali of the Banking Council see document "The Banking Council - Municipal Finance".

Mr Lincoln Mali suggested a workshop on local government be held with a wide range of stakeholders. Mr Carrim, the committee chairperson, said that the committee was in fact holding a workshop on the 12 November though the workshop would be different to the one proposed by the Banking Council. Mr Carrim agreed that other workshops should be held, one at the beginning of next year and another after the local government elections.

Mr P Smith (IFP ) asked to what extent the perception of local government inefficiency reflected reality.

Mr Mali responded that the available data was unreliable and therefore he could not say.

Mr M Nonkonyana (ANC) commented that the research of the Banking Council exhibited an urban bias.

Mr Mali agreed and welcomed input that would help to rectify this.

Ms Borman (DP) asked how municipalities could get around the issue of civil disobedience and vandalism where measures have been taken against defaulters.

Mr Mali suggested that councillors explain the repercussion of non-payment to the community.

Mr M Bhabha (ANC) said that there was legislation designed to combat some of the problems Mr Mali highlighted. Mr Bhabha wanted to know if Mr Mali had any comments on the legislation.

Mr Mali said that the Banking Council had been involved with various pieces of legislation, for instance the Treasury Control Bill. However, even where such legislation is in place it is ineffective because of a lack of sanction for non-compliance.

Medium Term Expenditure Framework: The Department of Finance
Mr Momoniate of the Department of Finance indicated that the budgetary process at local level was below par. There are pilot projects underway to address this and hopefully local government budgets and accounting will be of an acceptable level within the next three years. To a large extent the crisis in local government can be attributed to local treasurers. Mr Momoniate felt strongly that national and provincial government should intervene if there is mismanagement at the local government level. MTEF budgeting could increase political prioritisation in terms of the budget and should be implemented at all levels of government.

Mr Bhabha (ANC ) asked about the role of monitors of local government.

Mr Momoniate was of the opinion that the role of monitors would develop and that national and provincial government should monitor the outputs of local government.

Ms Verwoed (ANC) inquired about capacity-building in municipalities.

Mr Momoniate responded that the private sector had been enlisted to mentor municipal treasurers.

Mr Carrim indicated that in his opinion the equitable share of local government was insufficient even if other forms of national government grants were factored in.

Mr Momoniate answered that this may need to be revised but there is no justification to increasing local government finance if they are mismanaging their current resources.

Financing Local Government
Dr Olver, Deputy Director-General : Local Government, and Mr Pakade ,
Director :Municipal Finance Management, presented on the challenges at local level. (See Appendix 1)

Ms Vewoed (ANC) queried the figure given relating to cost of restructuring.

The response was that the cost depended largely on exactly what was considered to be restructuring. However, the figure that had been mentioned was R500 million to restructure one municipality.

Mr M Waters (DP) asked whether the provinces or local government had budgeted for such restructuring.

Dr Olver responded that this was not the case and that only national government had budgeted for it.

Mr Carrim interjected that one also needs to take into account the money that would be saved and not only the costs.

Mr Smith (IFP) asked what measures had been taken to censure non-compliance.

Dr Olver responded that steps were been taken to suspend the equitable share of municipalities that failed to comply.

Appendix 1:
National Intervention Framework on Local Government Finances

National Intervention Framework
CONSTITUTIONAL MANDATES
Section 154(1)
National & Provinces must support and strengthen capacity of municipalities
Section 155(6)(a)
Provinces must provide for the monitoring and support of local government
Section 155(7)
National & Provinces have legislative & executive authority to see to the effective performance by municipalities of their functions.
Section 139(1)(a)
Provincial executive may issue a directive to the Municipal Council when it fails to fulfil an executive obligation in terms of legislation

LOCAL GOVT. TRANSITION ACT
Section 10G2(m)(i)
MEC may after consultation with MEC for Finance, whenever he or she is of the opinion that the finances of a municipality are unsound or may become unsound, instruct the council concerned to take such steps as he or she may specify in writing.

ELEMENTS OF NATIONAL INTERVENTION FRAMEWORK
Monitoring of municipal finances
Conducting management audits
Management support programmes
Mentoring, Training & Capacity Building

Monitoring Municipal Finances
Quarterly surveys conducted nationally
To date 19 questionnaires sent out since 1995
Latest results available- 31 March 1999
Current response rate : 53%
Average response rate for 1998: 88%

MAIN REASONS FOR POOR CASH FLOW
INSTITUTIONAL
non-existence of standing orders
lack of adequate information systems
lack of proper working procedures
overstaffing
lack of staff training
lack of management reporting

FINANCIAL
poor accounting systems
serious breakdown in internal controls
poor budgeting system & formats
Lack of financial reporting
Lack of financial skills
Poor asset management
Poor cash flow management

CREDIT CONTROL
Non-payment may be attributed to:
rising unemployment level
lack of political will
lack of credit control policy
lack of support to indigent
poor metering & billing systems
civil disobedience
poor customer care management

REVENUE MANAGEMENT
Use of non-economic tariffs
Incomplete or inaccurate consumer data bases
Outdated property valuation rolls
Insufficient tax base

INFRASTRUCTURE
poor maintenance resulting in huge losses
capital backlogs

CURRENT SHORTCOMINGS
Non- response by some municipalities
Integrity of information submitted by some questionable
Inability to furnish vital information e.g. age analyses, irrecoverable debts & cash flow forecasts
Incompleteness of data

Action Taken
Building of capacity at local government level through Municipal Service Partnerships & training
Revision of questionnaires
Development of early warnings signals
Linking provinces on-line to the national data base
Build capacity at national & provincial level
Strong measures for non-respondents

Management Audits
Provincial Task Teams set-up between March 1997 & March 1999
394 management audits completed nationally
303 instructions issued by MECs

Management Support Programme
OBJECTIVES
To introduce a multi-level management support programme to assist municipalities in financial distress to become viable again.
To stabilise the cash flow of those municipalities facing imminent financial failure
To build financial capacity within these municipality in order to provide a long-term sustainable solution.

KEY FOCUS AREAS
Institutional Arrangement
Financial Management
Credit Control
Infrastructure Planning

Key Elements of Programme
Strategic alignment
Strategic prognosis
Stabilisation
Transformation

Strategic Alignment
Stakeholder buy-in
Commitment to the programme
Review of vision, mission & strategic objectives
Agree on change management team
Acknowledgement of crisis by Council

Strategic prognosis
review of current status
identification of problem areas
development of business plans
development of an implementation strategy and a project charter
designing of a monitoring and evaluation strategy

Stabilisation phase
Focus on short-term crisis measures
Develop & implement a credit control policy
Determine alternative service provision mechanisms
Determine alternative revenue collection systems
Implement cost reduction measures
Review budgets

Transformation
Rationalisation of organisation structure
Identification and elimination of non-core functions
Eliminate waste & inefficiencies
Development of long-term financial plan
Alignment of IDPs and LDOs
Staff training and development

CURRENT SHORTCOMINGS (Weaknesses & Gaps)
It is a supply driven exercise
Lack of capacity at provincial level
It excludes big municipalities
Insufficient funding - restructuring costs
- amalgamation costs
- capacity building
Inability to get bridging finance

PROPOSED SOLUTIONS
Beef up programme management capacity (consortium appointed as from 1 July 1999)
Increase allocation of funds to cover:
-restructuring costs
-capacity building
Make the programme to be demand driven
Design an intervention programme for Big Cities

Appendix 2:
Municipal Finance: Presentation by The Banking Council

1. PRESENT ENVIRONMENT
Local Government is in the throes of massive change

• Local government restructuring, demarcation and amalgamations
• A total revamp of the local government financing system
• Substantial changes in structures, personel, leadership and operational and financial responsibilities.
• Changes in the political and socio-economic bases of municipalities.
• Withdrawal of central government backing for local government debt.

Deteriorating financial situation of many councils

• An increase in the geographic area and population served by municipalites without a corresponding increase in their tax base.
• Stretched municipal budgets which result from, failure to collect revenue, administrative ineffeciencies, deteriorating infrastructure, unstable and inconsistent revenue streams.
• Serious cash flow problems leading to an Increase in defaults on loans, over-drafts and other debts
• Cancellation of contracts and serious cutbacks on infrastructure projects
• lack of a political will to deal with failure to pay for rates.

Market perceptions of local government

• Increasing media reports about local authority defaults to the Water Boards, Eskom and financial institutions.
• Lack of transparency in the financial management systems of various municipalities.
• Market anxiety due to the financial crisis in municipalities eg JHB.
• Inadequacy and unreliability of Project Viability Information.
• Inadequate budgeting, inconsistent accounting practices and poor reporting mechanisms.

Market Reaction

• There has been a severely negative market reaction to the lack of information, instability and uncertainty in the local government sector.
• Investors have gradually withdrawn from this sector.
• The main reasons cited for investor withdrawal and concern were:
• A deterioration in the perceived credit quality of outstanding municipal debt because it is no longer guaranteed by either provincial and national government.
• A market perception that the demarcation process will dilute security on formerly sound investments.
• A general investor anxiety and scepticism about the willingness and or ability of most local municipalities to pay debt service on their short and long term debt.
• Increasing doubt about the financial viability of the new municipal structures

2. GOVERNMENT REACTION

• Development of a new policy framework for the new local government system.
• An overhaul of the local government financing system.
• Revamping the local government's governance system, through legislation.
• Rationalisation of local government through the Demarcation process.
• Commissioning studies and surveys with the view to build a more efficient and effective local government system.

3. BANKING AND INVESTOR COMMUNITY REACTION
Given the magnitude of the problems, The Banking Council became
of the view that:

• South Africa urgently needs a well-focused, sustainable, inclusive and interactive intervention to address the problems of local government.
• The banking and investor community needs to pro- actively engage the government and all other stakeholders on the requirements for enhancing a municipal debt market.

The Development & Public Finance Forum was formed

MEMBERSHIP

• Banks, Life offices, Pension funds and the Bond Exchange.

AIMS & OBJECTIVES

• To advance our interests and protect our investments
• To contribute to the development of a viable, stable and delivery orientated municipal sector.
• To foster understanding in the local government sector about the constraints, limitations and opportunities facing the banking and investment community.
• To build consensus with government and other stakeholders on the challenges, problems and priorities of the local government sector.

Changes we have proposed to the government

• The demarcation process should be undertaken in an open, consultative and impartial manner, that will take into account the interests of creditors.
• The present information, reporting, budgeting and accounting system needs a major overhaul in order to promote best international practises in financial management.
• Municipalities should generate sufficient own-source revenues
• Intergovernmental transfers should be distributed through a manner that is properly targeted, integrated, consistent, predictable and clear
• Municipalities need to invest skills, resources and time to the establishment of appropriate credit control mechanisms.
• The government must legislate or regulate appropriate remedies in cases of default and proper sanctions in cases where legislation or regulations are not complied with.
• The setting up of a reliable, accurate and easily accessible information market place for local government and private sector financing.
• The need for an enabling regulatory and legislative framework for municipal borrowing

4. SUCCESS ACHIEVED

• An agreement that municipal financial viability will be one of the key objectives of the demarcation process.
• An acceptance of our proposal that affected creditors be consulted before a new municipality is established.
• An agreement in principle to the sharing of information and the broadening of the Project Viability exercise.
• A concession that the demarcation process should take into account the interests of creditors.
• A study commissioned on the regulatory framework for municipal borrowing.
• A task team to focus on budgeting, accounting and report back mechanisms.
• A greater willingness by MECs to issue instructions.

5. WHAT REMAINS CRITICAL
In looking at the latest Project Viability figures, we can deduce the following

• The situation has not stabilised
• Credit control mechanisms remain poor
• Budgeting and accounting and reporting procedures remain poor and ineffective
• There are still tensions between elected officials and appointed official
• There is still unrealistic budgeting, budgeting based on unrealistic revenue expectations
• There is still no sanctions for non-compliance
• Cutbacks still raise concerns as some are aimed at the maintenance of infrastructure

We are willing Players

We need local councils to accept the following:

• Investors have a lot of choices - in terms of global investment opportunities
• New York, Cape Town, London, Berlin are all in competition
• Municipalities must make themselves attractive to investors
• Investors will not enter into unprofitable business
• Investors, particularly banks, have a responsibility to shareholders and to the depositors
• The international regulatory environment is becoming stricter due to the Asian crisis
• The Registrar of Banks has increased the capital adequacy requirement for loans to municipalities

Will I get my money back

• Will I get it on time
• What kind of returns will I get on my investment
• In case of a default, will I realise my security

6. THE FUTURE
What is required ?

• Political will to address the shortcomings of local government.
• A conducive and enabling environment for municipal credit market development.
• An upgrading of public management skills
• Stable and reliable sources of income for municipalities.
• Transparency and accountability on municipal finances.
• Appropriate sanction for non compliance with legislation and regulations.
• Municipalities have to develop adequate credit control mechanisms.
• Local government needs to receive an equitable share of the national revenue.
• Sharing of accurate and reliable information.
• Co operation between public and private sector financial institutions.
• Responsible and consultative demarcation process.

THE WAY FORWARD?

• We propose a one day workshop to focus on local government finances
• Suggested participants :
• MINMEC
• Development and public finance forum
• DBSA
• SALGA
• Portfolio Committee
• LGTP
• International Donors
• Local government departments

We need to discuss:

• Objectives of such a workshop
• Expected outcomes
• Before or after the local government elections?

1. Stability
2. Certainty
3. Transparency
4. Political will