• An analysis of the capital and operating budgets of the municipalities against best practice;
• The dependence on grant revenue and inter-governmental funding;
• Amounts owed by taxpayers and consumers to the District Municipality and its local municipalities;
• Audit findings and financial management capacity.

This analysis concludes with the overall findings and an indication of the possible strategies that may be needed to improve the viability of the District Municipality and its local municipalities.

The District Municipality and its local municipalities budgeted for total expenditure of R1,495 billion for the 2004/05 financial year. Of this amount, R335 million was for capital expenditure and R1,160 billion for operating expenditure. Total operating revenue of R1,186 billion was budgeted, which resulted in an operating surplus of R26 million.

The operating and capital budgets of the District Municipality and its local municipalities for the 2004/05 financial year are summarised in the table below.

The budgeted operating revenue that was used to finance salaries and wages, repairs and maintenance, interest and redemption and the provision for bad debt is summarised in the table below.

Interest and redemption was well below the norm of 15 – 20% of total operating revenue. This was due to infrastructural capital expenditure being financed primarily from capital grants rather than other interest bearing and repayable forms of financing (see comments on budgeted capital expenditure below).

Provision was made in the budgets of the local municipalities within the District for bad debt. The 4% of the annual operating revenue that was set aside by the District as a whole for the writing off of bad debt indicated that the collection of rates and service charges included in budgeted annual revenue was effectively 96%. Notwithstanding this the Auditor General qualified the audit reports of some of the municipalities for inadequate provision being made for bad debt over the last three financial years (see Table in section on audit findings).

Capital expenditure as a percentage of total expenditure (consisting of operating and capital expenditure) was approximately 22% for the District Municipality and its local municipalities. Sustainable capital expenditure levels were deemed to be between 10 – 15% of operating expenditure. It should be noted that 22% of capital expenditure was financed through capital grants, which accounts for the relatively higher spending on this category of expenditure. Kannaland Municipality is under Project Consolidate and cannot fund capital expenditure from own sources for the current and next few financial years.

The budgeted capital expenditure by nature of asset for the District as a whole is summarized as follows:

The table below indicates the operating as well as the infrastructure grants funding for Eden District Municipality and its local municipalities in terms of the intergovernmental transfers for the 2006/07 financial year.

The Municipal Systems Improvement Grant for Kannaland Local Municipality for 2005/06 was R 2 884 000, of which R 1 015 595 was used for the Recovery Plan of the municipality. An amount of R 2 884 000 was also allocated for 2006/07 which will be used for management and administration, finance, corporate services, technical services, community services, project management and Project Consolidate.

MIG allocations represented about 10,4% of all capital expenditure in the Eden District in 2004/05. Other grants funded a further 11.6% of all capital expenditure. This shows that the bulk of capital expenditure in the District was funded by the local municipalities from their own revenue base.

The Eden District Municipality received a total of R25,131 million in the 2004/2005 financial year and managed to spend 84 percent of their budget by 30 June 2005. The reason for the 16 percent underspending was, according to the municipality, a low level of preparation with regard to the increased allocation and additional projects. This delayed the implementation of projects which in turn had a negative impact on expenditure.

Eden District’s total allocation for 2005/06 was R34, 830 million. Knysna, Bitou, Oudtshoorn and Hessequa (Langeberg) local municipalities received MIG funding for the first time in this financial year. Kannaland Local Municipality’s allocation was still being channelled through the District Municipality. The District performed much better in this financial year and by end of May 2006 had already spent 97.8 percent of their allocation.

For the current financial year Eden District Municipality receives a total of R37, 916 million. All of the local municipalities apart from Hessequa receive their own allocation with the District’s allocation diminishing significantly from the previous two financial years. It can be seen from Table 11, that Eden will not receive a MIG allocation in the forthcoming two financial years. This is due to the fact that most of the local municipalities will receive their own funds and that the applicable powers and functions are not performed by the District Municipality.

The Project Management Unit (PMU) is a ring-fenced unit within a municipality responsible for the management of (MIG) infrastructure (capital) projects. However, should a municipality have adequate capacity to fulfil project management functions, it is not necessary to establish a PMU. A receiving municipality may utilize from 0.5 – 5% from its MIG allocation, as determined on a sliding scale, for project management functions.

The following table indicates maximum amounts allowed for PMUs in Eden District Municipality, as well as the dates on which the PMUs were approved:

The following progress has been made by the District and the local municipalities in terms of committing projects against allocations. The table indicates the commitments of 2006/07 and 2007/08 MIG allocations as at May 2006:

The National and Provincial MIG Units had several meetings with the District Municipality and the local municipalities to discuss the challenges that they are facing and how they can be assisted. The Provincial MIG Unit provided hands on training to the MIG representative of Eden District Municipality. The Provincial MIG Unit has also assisted with the technical reports of the municipalities. The Provincial MIG Unit has monthly meetings with the Sector departments where MIG challenges are discussed as well as assistance that can be given to municipalities. The Provincial MIG representative for Eden District Municipality will continue to assist the municipalities with all the challenges that they are facing. Monthly meetings will be held with all the receiving municipalities. Bi-weekly reporting on progress was also introduced.

Engineering capacity has been deployed to Eden District to provide hands on support to the District and local municipalities. Two senior engineers and two graduates have been deployed to fast track infrastructure delivery and to eradicate the backlog. This initiative is enabling the two graduates to receive on the job training through mentorship from the senior engineer. Through this process, engineering capacity will be sustained in municipalities.

The table below shows the collection period in days for each municipality in Eden District based on information obtained for the 2004/05 financial year. The formula used to calculate debtors’ days outstanding is [Debtors outstanding / (Billed revenue x 365 days)]. The norm is a 45 day collection period after consumers have been billed.

However, if debtors are outstanding for such long period it is unlikely that these amounts will be collected and therefore may have to be written off. (See later the findings of the Auditor General on this).

Kannaland Municipality takes on average 277 days to collect revenue from consumers from the date the consumers are billed. A debt collection policy has been approved and is being implemented. The current collection percentage is about 83 % of billed revenue.

• The lack of a fixed assets register and a lack of reconciliations in the Revenue Section (Hessequa);
• Long outstanding consumer debt and inadequate provision for bad debt (Bitou, Oudtshoorn, Eden (DMA));
• Management of fixed assets; debtors system and reconciliations of rates not done (Knysna); and
• No supporting documents for outstanding creditors (Oudtshoorn).

The audit findings of the municipalities, even though some are qualified, are not too disturbing as the problem areas giving rise to the qualifications can easily be rectified. It flows generally from insufficient provisioning for irrecoverable debt. Kannaland is already under Project Consolidate and Oudtshoorn is the only other local municipality that has problems submitting supporting documents for accounting transactions. This problem was carried over from the transitional period of local government.

National Treasury has classified the financial capacity of the District Municipality and five of the local municipalities as medium. The remaining two local municipalities, George and Mossel Bay, are classified as having high capacity.

• Credit control and revenue management

Oudtshoorn, Hessequa and Eden District Municipality will benefit from credit control and revenue enhancement support. In respect of credit control, existing procedures will need to be analysed in detail to determine which processes require improvement. Their revised credit control policies must be submitted to their Councils for approval and implementation.

• Financial Management Support

Kannaland Municipality is receiving assistance under Project Consolidate and the recovery plan is implemented. Ongoing monitoring is needed to ensure that the required results are achieved.

There is also a need to enhance revenue collection strategies, as is currently applied in Kannaland, in Oudtshoorn, Hessequa and Eden District Municipality. This will at the same time also address one of the main reasons for the qualification of audit reports, namely inadequate provisioning for irrecoverable consumer debt.