The Western Cape Government's interventions to improve municipal audit outcomes

The Western Cape Government welcomes today's tabling of the Auditor-General's 2010/2011 Municipal Finance Management Act (MFMA) General Report (see here - PDF).

The report provides key insights into the administration and service delivery within municipalities and, more importantly, highlights challenges and identifies causes for the problems in some municipalities.

Municipalities are the coal face of service delivery. Audit outcomes produced by the AG in previous financial years have shown that the service delivery crises in many municipalities are often a result of poor financial management. The ability of municipalities to manage their finances efficiently and effectively is critical to ensuring that resources are spent on providing services to citizens.

The MFMA provides the framework and guidelines for the sound and sustainable management of the financial affairs of municipalities and sets out the treasury norms and standards for local government.  These guidelines require several layers of complex bureaucratic procedures, but they establish a regulatory framework designed to minimise corruption. Municipalities must therefore subscribe to the regulations contained in the MFMA to ensure clean audit outcomes.

The AG has noted that when it comes to the 2010/2011 financial year, audit outcomes of Western Cape municipalities have remained where they were. The Western Cape Government agrees with the AG that this "stagnation" is a cause for concern. This must change, and we must work hard to secure improvements in audit outcomes.

However, it is also important to recognise that there has been some improvement over the last three financial years. For example, there has been a marked decrease in the number of municipalities receiving "disclaimers" or adverse opinions - the worst audit outcome. In the 2008/2009 financial year 15% of municipalities received disclaimers or adverse opinions, which dropped to 9% in 2009/2010 and to 0% in 2010/2011.

There has also been a decrease in the number of municipalities receiving qualified audit opinions over the last two financial years (from 12% in 2009/2010 to 9% in 2010/2011).

It is concerning that there has been a drop in municipalities receiving clean audits and an increase in the number receiving unqualified audits with findings, however minor such findings may be in some cases.  But the most worrying trend of all is the increase in the number of municipalities that have failed till now to submit their audit documents to the AG. Three municipalities failed in this regard, although twelve municipalities missed the first deadline.

In other words, while the reduction in qualified opinions and adverse opinions or disclaimers is positive, an inertia has developed where municipalities are struggling to move out of the "unqualified with findings" bracket into the clean audit bracket. This stagnation does not sufficiently advance the achievement of the target set by the national government's Operation Clean Audit Initiative, which envisages every municipality achieving a clean audit by 2014.

It is clear municipalities need to up their game in order to move out of the "financially unqualified with findings" bracket and the Western Cape Government has a constitutional mandate to assist them in this regard - Section 154 (1) of the Constitution requires both national and provincial governments to support and strengthen municipalities, through legislative and other means, so that they can manage their own affairs, exercise their powers and perform their functions.

The AG has highlighted that the key obstructions to clean audits in the province are control weaknesses in supply chain management, human resource management, information technology controls and some significant errors in financial reports.

He also identified the following specific problems:

• A minimal improvement in service delivery reporting;
• A failure to take corrective action on internal control shortcomings;
• A lack of consequences for poor performance and transgressions;
• A lack of appropriate skills at senior official level;
• A need for a greater coordination between the public accounts committees and the portfolio committees responsible for municipalities;
• A need to strengthen the coordination between the Provincial Department of Local Government and the Provincial Treasury.

It is evident that if we hope to reverse this stagnation, municipalities must be supported to overcome these challenges and to promote good governance, strengthen financial management and encourage accountability.

The Western Cape Government, more specifically the provincial departments of Treasury and Local Government, have committed to a number of interventions aimed at addressing the problems raised by the AG.

The first category of interventions focuses on strengthening the relationship between the provincial government, the provincial legislature and the municipalities and includes the following initiatives:

• A joint working group has been set up between the provincial departments of Treasury and Local Government that is tasked to provide support to municipalities;
•  Municipal budget performance is also published on a quarterly basis and tabled in the Provincial Legislature, to ensure oversight and accountability;
• Provincial debt owing to municipalities is also tabled in the Provincial Cabinet on a quarterly basis, which assists municipalities with improving cash flow;
• The provincial government has assisted some municipalities in submitting a cash funded budget for the 2012/2013 financial year;
• The Local Government Medium-Term Expenditure Committee (MTEC) has had engagements with 30 municipalities on their draft 2012/2013 budget assessments; and
• There have been a number of scheduled visits by provincial government officials to municipalities in order to improve their in-year monitoring process and reports.

The second category of interventions focuses on providing support to municipalities. It addresses a number of the control weaknesses raised by the AG.

When it comes to the lack of appropriate skills in municipalities, our provincial government has introduced the following interventions:

• A service provider has been appointed to assist with recruitment and selection of municipal officials and has assisted in the appointment of people to 20 positions including 9 municipal managers;
• The provincial department of Local Government was directly involved in the initial induction and training of newly elected councilors in all municipalities after the 2011 local elections;
• Local Government has also run ongoing councilor training programmes, which include courses on the role and responsibilities of councilors in terms of the MFMA, procurement processes, oversight in local government and the code of conduct for councilors;
• Our government has also developed "municipal capacity building projects" in partnership with the University of Stellenbosch that provide training in a number of fields including supply chain management, financial management, corporate governance, generally recognised accounting practice (Grap) and the development of standard operating procedures.

The Western Cape Government has also taken steps to assist municipalities in promoting greater accountability and strengthening performance managements systems:

• The provincial department of Local Government has assisted municipalities with the implementation of responsive performance management systems, in particular Langeberg and Stellenbosch municipalities;
• Local Government has also procured the services of a labour consultant with specialist knowledge in local government who has provided advice to municipalities.

When it comes to addressing internal control shortcomings across the board, both the provincial departments of Treasury and Local Government have introduced the following interventions:

(a) Western Cape Government Financial Support Grant - R3.450 million

• Provincial Treasury continuously monitors the provision of this grant which is aimed at financially assisting municipalities to improve and optimise their revenue collection, develop responsive and credible budgets, improve their financial governance and audit outcomes, strengthen their supply chain management and their financial systems.

(b) Accounting reform initiatives

• A helpdesk has been established by Provincial Treasury to assist municipalities;
• Provincial Treasury is currently assessing the GRAP implementation of all municipalities and training in new GRAP standards is being arranged;
• Most municipalities have also submitted their financial management improvement plans (FMIP's) to Provincial Treasury and these will now be assessed and feedback will be provided to municipalities on where these can be improved;
• Provincial Treasury has performed the Local Government Financial Government Review and Outlook (FGRO) on 30 municipalities and provided them with remedial action points to move them to a level 3 compliance (controlled environment).

(c) Corporate governance initiatives

• Provincial Treasury has engaged with National Treasury and has requested the national department to provide specific guidelines on laws, regulations and practice relating to corporate governance;
• Provincial Treasury has implemented support plans that are aligned to PSO12 and Operation Clean Audit in order to drive municipalities' FMIP's and is also monitoring municipal corrective action plans;
• Both the provincial departments of Treasury and Local Government are driving and coordinating Operation Clean Audit for the Western Cape;
• During 2011, Provincial Treasury initiated the Financial Governance Review and Outlook process, which aims to assess and support municipalities to receive clean audits and a level 3+ maturity. This process has evolved into the Municipal Governance Review and Outlook process, which will include assessment by the provincial department of Local Government;
• Provincial Treasury has set up a website to assist the Chief Audit Executives (CEA), Chief Audit Executive Forum, Chief Risk Officer Forum and Enterprise Risk Management (ERM) units in municipalities

(d) Establishment of Municipal Public Accounts Committees (MPACS)

• The Western Cape government has created awareness on the important role played by MPACS as an oversight mechanism;
• The provincial government also provided training during June to municipalities on the function of MPACS;
•  The provincial government is currently drafting a position paper on MPACS, which will be completed by September 2012, after consultation with MINMAY, and tabled at the PCF. Municipalities will be requested to endorse the paper after adoption by the PCF.

I am also pleased to announce that last week the Western Cape Cabinet endorsed the newly drafted Local Government Framework for Municipal Support. The purpose of this framework is to provide a co-ordinated approach between provincial departments when providing support to municipalities. A Municipal Support Committee (MSC) has been established that will guide and facilitate aligned and combined provincial support actions to municipalities. The MSC will ensure that these co-ordinated support actions between provincial departments, other spheres of government and other stakeholders are tailored to a specific municipality's needs, requirements and priorities.

The Western Cape Government is confident that all these initiatives will assist municipalities in improving their financial management and addressing current control weaknesses so that audit outcomes are improved over time.

However, it is important to highlight that we face challenges in this regard.

First, some municipal laws are so complex and prescriptive that municipalities have great difficulty implementing and complying with them. In addition, municipalities have continuously raised concerns about the cost of compliance. Some legislation has also been drafted without taking into consideration the limited capacity of most municipalities in the country and the differences between metropolitan municipalities and small municipalities.

In 2009, we submitted a list of national legislation that unnecessarily hampers the service delivery of municipalities in the Western Cape. Included in this list were a number of provisions in the MFMA and recommendations that GRAP regulations need to be reconsidered and where warranted scrapped altogether.

President Zuma referred our submission to the national department of Local Government and Traditional Affairs for consideration but we have had no feedback on our suggestions to date - despite indicating that changes to this legislation need to be considered as a high priority.

Another challenge is the political instability in some municipalities in the province, which despite our various interventions, paralyses municipal councils and prevents them from performing their duties, including complying with MFMA regulations, in particular tabling their own budgets.

It is also crucial that leaders in municipalities take responsibility for ensuring their municipalities are running effectively and efficiently and that service delivery to citizens are placed before their own self-interest. I would like to congratulate the leaders of both Swartland and West Coast District municipalities for the leadership they have shown when it comes to ensuring their municipalities receive clean audits. I would also like to commend the leaders of all municipalities who have improved their audit outcomes over the last three financial years. These municipalities are examples of what can be achieved if leaders are committed to promoting good governance and improving the financial management in their municipalities.

While, these problems pose challenges to the success of some of our interventions, we remain committed to assisting municipalities in finding solutions to the problems raised by the AG when it comes to their municipal financial management and good governance.

We would also like to thank the AG's office for their assistance and support. We will study the contents of 2010/2011 MFMA General Report closely, in particular, the concerns raised by the AG that threaten a greater number of municipalities moving from financially unqualified audits with findings, to clean audits.

The Western Cape Government is committed to working with the AG and with all municipalities in the province to ensure public money is spent efficiently and effectively and citizens enjoy access to the basic services they are constitutionally entitled to.

Statement issued by Western Cape Premier Helen Zille, July 23 2012

Click here to sign up to receive our free daily headline email newsletter