• 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.

The District Municipality and its local municipalities budgeted for a total expenditure of R221,5 million for 2004/05 financial year. Of this amount R44,1 million was for capital expenditure and R177,4 million for operating expenditure. Total operating revenue of R185,4 million was budgeted for, which resulted in an operating surplus of R8 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.

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 40% of capital expenditure was financed through capital grants, which accounts for the high 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 Namakwa District Municipality and its local municipalities in terms of the intergovernmental transfers for the 2006/07 financial year.

 C. OPERATING AND INFRASTRUCTURE GRANTS FOR 2006/07 (R’000)

These levels of operating grants should ensure that the high level of expenditure on infrastructure for the provision of water, electricity, sewerage, housing infrastructure, community assets and movable assets included in the capital budget is sustainable due to the small revenue base of some of the local municipalities within the District.

The Namakwa District received R9, 677 million in the 2004/05 financial year. All the funds were transferred to the Namakwa District municipality.

The District received a total of R15, 054 million from the MIG allocation during the 2005/06 financial year. The Namakwa District Municipality received 37% of the total allocation and the rest was shared among the local municipalities as follows: Nama Khoi 57%; Karoo Hoogland 1%; Khai-Ma 5%. Local municipalities received MIG funds for the first time in the 2005/06 financial year.

The 2006/07 District’s total MIG allocation is R16, 460 million. The amount included allocations to the district municipality and to the local municipalities. Nama Khoi will get the biggest allocation of R8, 355 million, the allocation for Nama Khoi includes and allocation of R5, 787 million for bucket eradication. Kamiesberg and Hantam respectively receive R409 500 and R3, 127 million for bucket eradication.

 Project Management Units

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 fulfill 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 to maximum amounts allowed for PMUs in Namakwa District Municipality, as well as the dates on which the PMUs were approved:

The following progress has been made by municipalities in terms of committing projects against allocations. The table indicates the commitments of 2006/07 and 2007/08 MIG allocations as at 31 March 2006:

Sector departments were requested to assist the municipalities with the implementation of the bucket eradication programme. The provincial MIG Unit introduced weekly meetings with the provincial department of Environmental Affairs and Tourism. The meetings focus on the outstanding EIA approvals and how municipalities can be assisted with the EIA’s. Municipalities were also requested to re-submit copies of the EIA’s that were submitted previously, in order to fast track the approvals.

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

The debtors’ balances outstanding will adversely impact on the financial viability of the local municipalities, as insufficient cash will be collected to finance expenditure. It is likely that the provision for bad debts including in budgeted operating expenditure is insufficient. This will create cash flow problems for all the municipalities as spending usually takes place as if all budgeted revenue will be collected. This confirms the statement made earlier in the report that the local municipalities do not provide sufficiently in their operating budgets for bad debts.

The information on external audit reports has been obtained from the Office of Auditor-General directly.

No audit reports are ready yet for the 2004/05 financial year. In the report of the Auditor-General on the submission of financial statements by municipalities for the 2004/05 financial year five of the six local municipalities, Kamiesberg, Hantam, Nama Khoi, Khai-Ma and Karoo Hoogland, are listed as not having submitted annual financial statements by 20 October 2005, the date of the report of the Auditor-General. The remaining local municipality, Richtersveld Municipality, is listed as having submitted annual financial statements after the due date of 31 August 2005. Information provided by the municipalities indicates that all financial statements were subsequently submitted.

The criteria used by National Treasury to classify the financial capacity of local governments was based on, amongst others, the internal capacity in the finance department to implement the Municipal Finance Management Act and the associated reforms contained therein, treasury and project management capacity as well as budget spend. The District Municipality together with three local municipalities is classified as having medium capacity while the remaining local municipalities are classified as low capacity. No municipality in the District is classified as high capacity.

• Credit control and revenue management

The local municipalities in Namakwa District 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. In addition, specific assistance needs to be given to the local municipalities to develop indigent support policies and revenue enhancement strategies to improve their cash flows and debt collection. This strategy will need to be undertaken in conjunction with the budget restructuring referred to below.

• Financial Management Support

Municipality, which received a disclaimer from the Auditor-General for the 2003/04 financial year, should be assisted with reviewing their financial policies, control procedures, accounting processes and overall systems of internal control in order to rectify this adverse situation. The details of the Audit Report will set out specific details of what support strategy is required.

In respect of those municipalities that received qualified opinions, support to rectify the circumstances giving rise to the qualification should be provided.

• Budget Restructuring

The District Municipality and all the local municipalities will benefit from structured training in budgeting with specific emphasis on budget restructuring. Structural issues such as containment of personnel costs, ensuring repairs and maintenance are adequate and ensuring that realistic revenue is included in the budget are key areas of budget restructuring support that is required. This may also require a critical review of affordable service levels and a review of how services are rendered. It may also require a review of the sustainability of infrastructure grant funding to ensure that municipalities budget for the increased costs emanating from infrastructural development in their operating budgets.

Targeted capacitation of both councillors and officials to understand the importance of restructuring the budget will need to be done. This must not be an academic exercise but rather a focused and capacitation exercise tailored to each municipality’s unique circumstances and challenges.

If this is not done, it is unlikely that the Namakwa District Municipality and its local municipalities will address their financial viability challenges.

The analysis of the viability of Namakwa District Municipality and its local municipalities indicates that emphasis should be placed on the repair and maintenance of property, plant and equipment in the District to ensure that the grant funded assets are adequately maintained and thereby enabling sustainable service delivery in the District to be rendered.

There is also a need to enhance revenue collection strategies in the local municipalities in order to improve the financial viability of these municipalities. Collecting outstanding debtors’ balances is an important challenge but equally important is the development of the revenue base of the municipalities through local economic development. This will reduce their dependence on operating grants thereby strengthening their financial viability.