• 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; and
• 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 a total expenditure of R1,094 billion for the 2004/05 financial year. Of this amount R221 million (20.2%) was for capital expenditure and R873 million (78%) for operating expenditure. Total budgeted operating revenue of R968 million resulted in an operating surplus of R95 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 is 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 more than 50% of infrastructural capital expenditure being financed from capital grants rather than other interest bearing and repayable forms of financing (see comments on budgeted capital expenditure below).

Hardly any provision was made in the budgets of the local municipalities within the District for bad debt. The less than a percentage of the annual operating revenue that are set aside by the District as a whole for the writing off of bad debt indicate that the collection of rates and service charges included in budgeted annual revenue was almost 100%. The Auditor General qualified the audit reports of one of the municipalities for inadequate provision being made for bad debt over the last three financial years (see table in section on audit findings). Three of the municipalities have not received audit reports for the three years under review, so the opinion of the Auditor-General on this matter in these municipalities is not known.

Capital expenditure as a percentage of total expenditure (consisting of operating and capital expenditure) was approximately 20% 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 54% of capital expenditure was financed through capital grants, which accounted for the relatively higher spending on this category of expenditure.

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

The following table shows the dependence on operating grants by the District Municipality and its local municipalities for the 2004/05 budgeted year.

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

The Ehlanzeni District Municipality received a total of R100, 250 million in the 2004/2005 financial year. The municipality managed to spend 99 percent of their budget by 30 June 2005. The reason for the 1% under-spending was that the Mbombela projects were registered late due to the lack of information on project registration. The Bushbuckridge projects were implemented by the Bohlabela district.

Ehlanzeni District’s total allocation for 2005/06 was R121,458 million. Umjindi and Nkomazi local municipalities received MIG funding for the first time in this financial year. Thaba Chweu Local Municipality’s allocation was channelled through the District Municipality. By June 2006 the District had spent 95% of its MIG allocations. The following factors contributed to the remaining 5% under-expenditure:

• Late approvals of certain projects by council;
• Re-tendering on a number of projects; and
• Revising tender documents to comply with the CIDB tender format.

For the current financial year Ehlanzeni District Municipality received a total of R234,841 million. All of the local municipalities received their allocations directly with the resulting consequence of the District Municipality’s allocation being reduced significantly from the previous two financial years. Thaba Chweu received MIG funding for the first time in this financial year. As table 14 reflects, Ehlanzeni will get a MIG allocation in the 2007/08 and 2008/09 financial years.

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 reflect the maximum amounts allowed for PMUs per the municipalities, as well as the dates on which the PMUs were approved:

Unlike the previous financial years, all the Local Municipalities including the District have been allocated PMU funds for the 2006/07 financial year. Of these municipalities, only two (i.e. Thaba Chweu LM and Ehlanzeni DM) have submitted business plans for their PMUs for approval.

The table below presents the MIG allocations commitments for the 2006/07 and 2007/08 financial years per municipality as at 30 June 2006:

All municipalities including the district have committed a total of R205,92 million (i.e. 88%) of the MIG funds allocated for 2006/07 financial year. Thaba Chweu, Mbombela, Umjindi and Bushbuckridge Local Municipalities have committed 100% of their allocations and are thus able to commit their 2007/2008 allocations. Ehlanzeni DM and Nkomazi LM have committed 84% and 42% of their allocation for the 2006/07 financial year.

All municipalities including the district have committed a total of R93,07 million (i.e. 36%) of the MIG funds allocated for 2006/07 financial year.

The National MIG Unit and the Provincial MIG Unit have engaged with Ehlanzeni District Municipality and the local municipalities to discuss challenges faced and how assistance can be provided. The Provincial MIG Unit provided hands on training to the MIG representative of Ehlanzeni District Municipality. It has been agreed that monthly meetings will be held with all the receiving municipalities. In order to monitor progress closely, bi-weekly reporting arrangement was also introduced.

The table below shows the collection period in days for each municipality in Ehlanzeni 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.

(Sources: Direct enquiries, municipalities in the District, June 2006)
* Bushbuckridge has been excluded in this section as there ere too many discrepancies in the financial data that has been obtained. (See also the section on audit findings.

All the municipalities in the District are exceeding the norm of not collecting billed revenue within 45 days of consumers being billed. Mbombela and Thaba Chweu Municipalities take on average 233 days and 220 days respectively to collect revenue from consumers from the date the consumers are billed. If debtors are outstanding for long period it is unlikely that these amounts will be collected and therefore may have to be written off.

 Nkomazi Municipality collects it debtors in a relatively short period but it still has to implement cost recovery for services in the rural areas. The cost recovery and stringent credit control measures are only taken place in the previously established towns. The issue of cost recovery for services is also highlighted in the section on service delivery and infrastructure.

The information on external audit reports has been obtained from the municipalities directly.

The qualified audit findings of Mbombela and Umjindi can be rectified. It flows generally from insufficient provisioning for irrecoverable debt and incomplete fixed assets registers. However, in the case of Umjindi the reasons for qualified audit reports are carried forward from one year to another with other reasons gradually being added to the reasons for the Auditor-General qualifying the audit reports.

National Treasury has classified the financial capacity of the Ehlanzeni District Municipality and Mbombela Municipality as high. Two local municipalities, Umjindi and Nkomazi, are classified as having high capacity, while Thaba Chweu is the only low capacity municipality in the District.

• Revenue collection and cost recovery

All the municipalities will benefit from credit control and revenue enhancement support. What is more important is to find ways to reconcile the ability of municipalities to recover costs and providing minimum level of services.

• Financial Management Support

Thaba Chweu and Nkomazi Municipalities have already received assistance under Project Consolidate. In respect of those municipalities that received qualified opinions, support to rectify the circumstances giving rise to the qualification should be provided. This can be done as a following phase of the collaboration project amongst the municipality, dplg and IMFO.

The analysis of the viability of Ehlanzeni District Municipality and its local municipalities indicates that the District spent a relatively large portion of its operating budget on the repair and maintenance of property, plant and equipment in the District but that emphasis should be put on ensuring that the grant funded assets are adequately maintained and thereby enabling sustainable service delivery in the District to be rendered. The percentage of operating revenue that is spent on maintenance must be compared with the large amount of capital expenditure that is taken place on the provisioning of service infrastructure.

There is also a need to enhance revenue collection strategies in especially Mbombela, Thaba Chweu and Umjindi Municipalities. This will at the same time also address one the main reason for the qualification of audit reports, namely inadequate provisioning for irrecoverable consumer debt.