ATC121130: Report of the Select Committee on Appropriations on the Progress with the Local Government Turnaround Strategy, Operation Clean Audit By 2014, and the Establishment of the Municipal Infrastructure Support Agency, dated 27 November 2012

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE PROGRESS WITH THE LOCAL GOVERNMENT TURNAROUND STRATEGY, OPERATION CLEAN AUDIT BY 2014, AND THE ESTABLISHMENT OF THE MUNICIPAL INFRASTRUCTURE SUPPORT AGENCY, DATED 27 NOVEMBER 2012

1. Introduction

The Committee invited the Department of Cooperative Governance and Traditional Affairs ( CoGTA ) to a meeting on 29 August 2012, to make presentations on the following:

· Local Government Turnaround Strategy;

· Operation Clean Audit by 2014; and

· Municipal Infrastructure Support Agency.

During the meeting referred to above the Committee decided not to continue with the engagement on the presentation on progress with Operation Clean Audit because it contained insufficient information. CoGTA was requested to prepare a more detailed report to present to the Committee at a later date.

During a follow-up meeting on 17 October 2012, a delegation from the Department of Cooperative Governance and Traditional Affairs, led by the Director-General, presented a more detailed report on the progress with Operation Clean Audit by 2014, as requested by the Committee at the meeting of 29 August 2012.

2. Department of Cooperative Governance and Traditional Affairs progress report on Local Government Turnaround Strategy

The Local Government Turnaround Strategy (LGTAS) had been approved by Cabinet in December 2009 and had been intended as the overarching strategy that included flagship projects such as Operation Clean Audit, Business-Adopt-a-Municipality, Revenue Enhancement as well as the Special Purpose Vehicle - now the Municipal Infrastructure Support Agency (MISA) - and Clean Cities / Clean Towns .

CoGTA indicated that as a result of restructuring in the Department there had been a state of paralysis for approximately 18 months from 2011 to the middle of 2012; with uncertainty on political and administrative levels. The original LGTAS team had also been disbanded in the beginning of 2011. However, CoGTA reported that due to the buy-in of the provinces and municipalities to the impetus of the LGTAS, some of them continued implementing some components of the strategy, like the establishment of provincial coordinating committees of OPCAs and the institutionalisation of LGTAS units in provinces.

With the arrival of the new Minister for Cooperative Governance and Traditional Affairs, there had been a renewed focus and emphasis on the acceleration of the LGTAS. The strategy had been revived with a refined focus on 108 targeted municipalities. These had been approved by MINMEC on 25 May 2012. The following priority areas, that would be critical in improving municipal audit outcomes, were identified:

· Accelerating service delivery;

· Enhancing good governance;

· Promoting sound financial management;

· Fighting corruption; and

· Facilitating sustainable infrastructure development.

According to CoGTA , the LGTAS was being co-ordinated by a team of senior officials from three branches within CoGTA . The state of permanence of the team was being finalised. CoGTA branches were in the process of incorporating and mainstreaming the LGTAS into their Annual Performance Plans ( APPs ).

CoGTA identified the following key stakeholders for the roll-out of LGTAS:

· National Departments of Energy, Water Affairs, Public Works, Economic Development, Human Settlements, Rural Development and Land Reform, and Environmental Affairs;

· Heads of provincial CoGTA departments;

· Provincial sector departments;

· Provincial LGTAS coordinators;

· Municipal Managers of district and local municipalities

· CoGTA Technical Support Units;

· CoGTA branch representatives;

· South African Local Government Association (SALGA) National and Provincial Executive Officers; and

· Municipal Infrastructure Support Agency (MISA) deployees .

3. Department of Cooperative Governance and Traditional Affairs progress report on Operation Clean Audit by 2014

3.1 Vision, goal and purpose

CoGTA reported that the guiding vision of Operation Clean Audit by 2014 (OPCA), was that by 2014, all 278 municipalities would achieve unqualified audit opinions on their Annual Financial Statements. CoGTA further stated that their strategic goal was to provide assistance to all municipalities to achieve sustainable improvement of systems for maintaining quality financial and information management. They further reported that their strategic purpose was to address all issues raised by the Auditor-General and to reduce the vulnerability to risks in the municipal financial management and governance process through targeted interventions.

3.2 Objectives and performance

The first objective had been that between 2010 and 2011, no municipality would receive adverse and disclaimer audit opinions. This objective had not been achieved. According to preliminary results, 50 disclaimers and seven adverse audit opinions had occurred.

The second objective had been that 60 per cent of all municipalities would achieve unqualified audit opinions by 2012. This had not been achieved. According to preliminary results, 44.5 per cent of municipalities had achieved unqualified audit opinions for the 2010/11 financial year.

The final two objectives had been for at least 75 per cent of municipalities to achieve unqualified audit opinions by 2013; and for 100 per cent to achieve unqualified audit opinions by 2014. CoGTA conceded that these targets were unlikely to be achieved. They reported that, through combined effort and commitment, they believed that at least 70 per cent of municipalities would achieve clean audit opinions by 2014.

3.3 Alignment with LGTAS focus areas

CoGTA reported that from July to the end of August 2012, visits had been conducted to all provinces to discuss the provincial LGTAS action plans for the 108 identified municipalities. A report on the profile of the 108 municipalities in relation to the five LGTAS focus areas would be concluded by the end of November 2012.

3.4 Audit outcomes

CoGTA presented the progress report with regard to municipal audit outcomes from the 2008/09 to the 2010/11 financial years as follows:

Audit Opinion	2010/11	2009/10	2008/09
Clean	5%	2%	0,3%
Financially unqualified with findings	41%	43%	41%
Financially unqualified financial statements	46%	45%	42%
Qualified	20%	26%	17%
Adverse	5%	3%	4%
Disclaimer	23%	25%	37%
Audits not issued	6%	2%	0,3%
Total municipalities	278	278	278
AFS submission outstanding	3%	2%	0,3%
(Based on information as at 27 July 2012)

CoGTA reported that the above table showed an improvement in the municipalities that had received financially unqualified opinions without findings and those with findings from 42 to 46 per cent. They further pointed out that the number of municipalities that received a qualified opinion had fluctuated. In the two previous financial years, there had been no improvement in municipalities that had received adverse and disclaimer opinions.

3.5 Action plan

CoGTA reported that they had developed an action plan that clustered activities to be undertaken up to 2014 within the context of the following three critical areas identified from the Auditor-General’s report:

· Leadership (political and administrative);

· Governance; and

· Financial management.

The action plan identified stakeholders responsible for particular actions in the drive to support municipalities to achieve better audit opinions. A Local Government MINMEC meeting had been convened in September 2012, to which municipalities that consistently achieved a clean audit; municipalities that consistently failed to submit Annual Financial Statements and municipalities that had shown significant improvement, had been invited. This had been in order for them to share with MINMEC what issues needed to be looked at, and for MINMEC to refine the action plan accordingly. From this engagement it had become clear that the key drivers for clean administration, leading to good financial management, included the following:

· The leadership take ownership of key controls.

· Audit recommendations are consistently implemented.

· Governance structures ( MPACs , finance portfolio committees, audit committees, internal audit units and risk management committees), are functional.

· An action plan is developed and properly implemented.

· There are proper financial management skills.

· Record keeping is good.

At the same time, the following factors that negate the achievement of a clean audit had been identified:

· Lack of ownership by political leadership and management.

· Lack of financial management skills.

· Repeated findings are not addressed properly.

· Non-availability of critical staff during the audit process.

· Non-functional governance structures.

3.6 Support to municipalities

CoGTA reported that they had already taken steps to support municipalities in the areas of governance and leadership, fighting corruption, and financial management.

3.6.1 Governance and leadership

According to CoGTA , they had supported the appointment of municipal managers and chief financial officers ( CFOs ). They reported that 219 out of 278 municipal manager posts and 278 CFO posts had been filled by the end of September 2012. In addition, draft regulations for municipal senior managers had been developed, governing the appointment and conditions of service of municipal managers and section 56 managers. These regulations had been tabled at the MINMEC of 16 September 2012 and consultations pursuant to the MINMEC decisions were being finalised.

CoGTA further reported that it had supported municipalities in developing and implementing recruitment and retention strategies. Work was being conducted in a pilot municipality, with the intention to roll it out to 69 municipalities. CoGTA had also supported municipalities to develop technical skills and in this regard, two human resources officials from 35 municipalities had attended a three day programme hosted by the Institute of Municipal Personnel Practitioners . In addition, CoGTA had partnered with the Department of Social Development to develop a programme for the 35 municipalities for IDP interventions.

CoGTA indicated that guidelines on the establishment of Municipal Public Accounts Committees ( MPACs ) had been put in place and they had also supported the establishment of MPACs . CoGTA also monitored governance structures such as Audit Committees and Internal Audit Units. They reported that, although 79 per cent of municipalities had established Internal Audit Units. CoGTA reported that these units may not meet the Office of the Accountant-General’s desirable maturity levels.

3.6.2 Fighting corruption

CoGTA reported that they continued to train municipal officials on ethics management and that the following district (DM) and local municipalities (LM) had been trained and were establishing ethics committees:

· Cacadu DM ( Koega LM, Makana LM, Kougama LM, Camdeboo LM);

· Alfred Nzo DM (Matatiele LM, Umzimvubu LM);

· OR Tambo DM (Mhlontlo LM, Nyandeni LM, Ngquza Hill LM, King Sabata Dalindyebo LM); and

· Overberg DM ( Mosselbay LM).

3.6.3 Financial management

CoGTA reported that they had supported 39 municipalities in KwaZulu-Natal and 18 in the Northern Cape with credit control and debt collection policies. A programme had also been developed to roll this out to municipalities in other provinces. They further reported that they had strongly encouraged municipalities to develop and implement audit remedial action plans in a timely manner. According to CoGTA , 89 per cent of municipalities had developed audit remedial action plans by 20 July 2012. CoGTA indicated that provincial cooperative governance departments and treasuries would monitor the implementation of these plans.

4. Municipal Infrastructure Support Agency

4.1 Background

The acting Chief Executive Officer (CEO) of the Municipal Infrastructure Support Agency (MISA) reported to the Committee that MISA was one of the Local Government Turnaround Strategy (LGTAS) targets meant to introduce a turnaround mechanism in dealing with the provisioning, refurbishment and maintenance of municipal infrastructure. MISA had officially been proclaimed as a government component on 11 May 2012, with CoGTA as its principal department. Prior to this, CoGTA had piloted the implementation of MISA and its programmes through a unit within the Department called the Special Purpose Vehicle for Infrastructure Development Unit. The acting CEO further reported that MISA became the direct successor in responsibility to the support programme that the Development Bank of Southern Africa (DBSA) had been providing through the Siyenza Manje project. In 2011 government had taken a decision to unbundle Siyenza Manje , with the infrastructure component transferred to CoGTA and the financial management component transferred to National Treasury.

4.2 Strategic focus

The acting CEO reported that CoGTA had taken into account the lessons to be learned from the implementation of Siyenza Manje , identified in both the Siyenza Manje Evaluation Report and the submission by the Financial and Fiscal Commission to the Select Committee on Finance. In light of these, the following five key strategic focus areas had been identified:

4.2.1 Municipal Infrastructure Diagnosis

This was a scientific and in-depth assessment of the state of the municipal infrastructure required for the provision of water, sanitation, roads, electricity and refuse removal services.

4.2.2 Technical Support

This entailed providing specialised technical support to municipalities through the deployment of technical experts to develop master plans, feasibility studies, business plans, as well as the design and implementation of infrastructure projects.

4.2.3 Municipal Capacity Development

This involved the building and/or strengthening of the in-house capacity of municipalities to be able to develop, operate and maintain their infrastructure on their own in the medium to long term.

4.2.4 Sector capacity and skills development interventions

This referred to interventions designed to enhance the technical capacity of local government. These include skills development programmes such as bursaries, learnerships and internships for infrastructure development as well as partnerships with tertiary institutions and professional bodies.

4.2.5 Monitoring and Evaluation

This involved specialised technical experts undertaking the monitoring of the development, management and maintenance of the municipal infrastructure to ensure enhanced and sustainable delivery of municipal services.

4.3 Diagnosis and findings

The acting CEO reported that a total of 88 municipalities had been subjected to a diagnosis to evaluate their municipal infrastructure provisioning. These municipalities had been identified in conjunction with provincial governments using the following criteria as a basis for prioritisation :

· High infrastructure and basic services backlogs;

· Low technical capacity;

· High vulnerability; and

· Low economic base and/or inability to collect revenue.

The acting CEO reported that, although findings had differed from one municipality to the next, the following common findings had been identified:

· Lack of appropriate skills in planning and technical units for infrastructure maintenance.

· Absence of infrastructure master plans.

· Overloaded infrastructure requiring refurbishment (especially waste water treatment plants).

· Ageing infrastructure leading to service interruptions.

· Serious challenges in supply chain management processes when procuring infrastructure projects as well as in contract management.

· Lack of infrastructure maintenance (water, sanitation, roads, electricity, land fill sites).

· Lack of bulk infrastructure (water, sanitation, roads, electricity, land fill sites).

· Huge infrastructure backlogs.

· Insufficient government funding and a need for MISA to support municipalities to mobilise additional private sector funding for infrastructure projects.

· High vacancy rate in technical positions.

He indicated that MISA had learned the following lessons from the above findings:

· There was a need for central and effective coordination of support in order for the programme to succeed.

· Multi-year planning was a key instrument for infrastructure delivery.

· MISA’s programmes must focus on the sustainability of the infrastructure and the municipality. All MISA’s interventions must recognise the central role of skills development and capacity building.

· All MISA’s support programmes must have clear deliverables and milestones and there must be consequences for non-delivery.

4.4 Interim arrangements

The acting CEO reported that, apart from himself - who was a directly appointed employee of MISA - and two senior officials seconded from COGTA, MISA was staffed with short-term transferees and employees of the DBSA, whose contracts would end by the end of September 2012. Included in the DBSA transferees were 81 technical experts in the fields of engineering and planning. This situation would allow MISA to finalise its organisational development and policies. According to the acting CEO, full implementation was targeted for 7 September 2012. The 2012 Medium Term Expenditure Framework provided a total amount of R613 million for MISA, and was distributed as follows:

· R197 million (2012/13);

· R202 million (2013/14); and

· R214 million (2014/15).

5. Findings

During interaction with the Department of Cooperative Governance and Traditional Affairs and the National Treasury the Select Committee on Appropriations made the following findings:

5.1 There is no capacity within provincial departments to implement the plan presented by CoGTA .

5.2 There is a need for CoGTA and MINMEC to jointly monitor the implementation of the action plan.

5.3 There is a need for a local government fiscal framework summit to clarify local government fiscal policy.

5.4 There is a long turnaround time to fill strategic positions in municipalities such as municipal managers and chief financial officers positions.

5.5 CoGTA has no clear strategy to deal with the lack of capacity within municipalities and provincial departments.

5.6 There is a need to analyse the correlation between the improved audit outcomes and failure to submit audited financial statements in time or not at all. While clean audit improved from 0.3% in 2008/09 to 5% in 2010/11, financially unqualified remain at 41% and financially qualified increased from 42% to 46%; the failure to submit audited financial statements incidences increased from 0.3% in 2008/09 to 3% in 2010/11 and outstanding audits increased from 0.3% in 2008/09 to 6% in 2010/11.

5.7 There is a need for CoGTA to specify the number of seconded officials to MISA and places where they are stationed.

5.8 CoGTA is silent on non-compliance with the MFMA which is a general cause of negative audit opinions in most municipalities.

5.9 CoGTA over-emphasised the establishment of certain structures such

as municipal public accounts committees ( MPACs ) rather than their performance.

Analysis of the facts do not show any positive correlation between the

establishment of such structures and improved audit opinions and that casts

doubt on the effectiveness of such structures.

5.10 The Departmental rapid response team that used to do such good work is no longer active.

5.11 There is a need to assess the viability of certain municipalities.

5.12 There is a need for the Committee to call all CoGTA MECs during the in-year monitoring of the plans by municipalities to address audit queries.

5.13 The majority of municipalities continue to rely on consultants.

5.14 The lack of progress in municipalities receiving disclaimer and adverse audit opinions casts doubt on the value for the money spent.

5.15 There are some duplications of support to municipalities by various stakeholders.

5.16 The target of clean audits for all municipalities by 2014 will not be achieved.

6. Recommendations

After interaction with the Department of Cooperative Governance and Traditional Affairs and the National Treasury, the Select Committee on Appropriations recommends the following:

6.1 The Department of Cooperative Governance and Traditional Affairs should conduct a skills audit in provincial departments to assess the extent of the lack of capacity within provincial departments.

6.2 The Department of Cooperative Governance and Traditional Affairs and MINMEC should develop a joint strategy to monitor the implementation of the action plan.

6.3 The Department of Cooperative Governance and Traditional Affairs should facilitate the planned local government fiscal framework summit to clarify the local government fiscal policy.

6.4 The Department of Cooperative Governance and Traditional Affairs should ensure that the turnaround time to appoint municipal managers and CFOs is minimised.

6.5 The Department of Cooperative Governance and Traditional Affairs should come up with a clear strategy to deal with the lack of capacity within municipalities and provincial departments.

6.6 The Department of Cooperative Governance and Traditional Affairs should ensure that failure to submit financial statements for audit is taken seriously.

6.7 The Department of Cooperative Governance and Traditional Affairs should provide the Committee, in writing, with the number of seconded officials in the Municipal Infrastructure Support Agency (MISA) and also the places they are located, within two months of the adoption of this Report by the NCOP.

6.8 The Department of Cooperative Governance and Traditional Affairs should ensure that steps are taken against failure to comply with applicable legislation since such incidences are the main causes of wasteful and fruitless expenditure and corrupt practices.

6.9 The Department of Cooperative Governance and Traditional Affairs should not only focus on compliance with the establishment of certain structures but also on their functionality as well as effective leadership.

6.10 The Department of Cooperative Governance and Traditional Affairs should revive the rapid response team that was established when Operation Clean Audit was introduced.

6.11 The Department of Cooperative Governance and Traditional Affairs should provide clarity on what constitutes viability so as to guide future municipal demarcations.

6.12 The Committee will in future invite the provincial CoGTA MECs during the in-year monitoring of municipalities’ compliance with audit queries.

6.13 The Department of Cooperative Governance and Traditional Affairs should develop a strategy that will minimise the use of consultants by municipalities and where consultants are used, there is transfer of skills.

6.14 The Department of Cooperative Governance and Traditional Affairs should prioritise municipalities with disclaimer and adverse audit opinions for intervention.

6.15 The Department of Cooperative Governance and Traditional Affairs should ensure that there is proper coordination of all the interventions in municipalities to avoid any duplication of support.

6.16 Due to the consistent criticism by the Auditor-General about the poor quality of Annual Financial Statements submitted by municipalities for auditing, the Department of Cooperative Governance and Traditional Affairs should re-evaluate the 2014 Operation Clean Audit target because it is not possible to achieve.

Report to be considered.