Progress Update on Municipal Audit Outcomes Presentation to Portfolio Committee on COGTA 14 August 2012

Background on Operation Clean Audit Municipal Audit Outcome Outline of Presentation Introduction Background on Operation Clean Audit Municipal Audit Outcome 2008/09- 2010/11 Municipal Accounting Officers 2010/11 Municipal Audit Outcomes Movement in Municipal Audit Outcomes STATS on municipal audit remedial plans What are the linkages Obervations by CoGTA Proposed solutions Conclusion

Introduction We hereby present to the Portfolio Committee, a comparative state of Municipalities on Audit Outcomes for the Financial Years 2010/2011, 2009/2010 and 2008/2009, with a view to allow the Committee to analyse the currently released Auditor General’s 2010/2011 outcomes. We also submit, for the Portfolio Committee to note too, the state of performance by Provincial and National Departments, as well as other State Entities, reflected in respective AG reporting periods, for the 2010 and 2009 cycles.

Introduction This we do as we analyse how big the challenge is and how much we have to do, in mobilising all actors to work together, in the spirit of Cooperative Governance, to turn the situation around, with the aim of achieving the Local Government Turn Around Strategy’s two aims, namely: Build Confidence between the people and Government and build a model Municipality characterised by the ability to provide quality services, uphold good governance, enhance sound financial management, roll out and maintain infrastructure as well as fight corruption effectively. We present additional information related to the state of public protests for the period 2004 to June 2012, with a view to facilitate the Portfolio Committee’s evaluation of the trends as public discourse suggests a close connection between the protests and the picture reflected as per the current AG’s report on the Audit Outcomes.

That all Municipalities shall achieve a Clean Audit opinion by 2014. Background on Operation Clean Audit(2/2) Audit Outcomes are financial performance accounting systems in terms of which the AG presents a report on the performance of Government Departments, Municipalities and State-owned Entities, reflecting on actual performance and providing details in dedicated Management letters indicating what each Unit should do The picture of performance should be viewed against the background that Government has set a target in terms of one of the Turn-Around Strategy Projects: Operation Clean Audit, directing as follows: That no Municipality should achieve a disclaimer or adverse rating by 2010/2011.  That at least 60% of the 278 Municipalities should receive unqualified Audit Opinion by 2011/2012;  That Municipalities achieving unqualified Audit Opinion should increase to 75% by 2013; and  That all Municipalities shall achieve a Clean Audit opinion by 2014.

THE MUNICIPAL AUDIT OUTCOMES We provide as follows, the information on the state of performance by Municipalities in terms of which it is indicated as to which Municipality in a particular Province received a Clean, Unqualified, Qualified, Disclaimer or Adverse rating, with the understanding that:  A Clean Audit (unmodified) rating is a performance level where the Municipality is found to have satisfied all the audit expectations and the AG has no further audit comment.  An Unqualified Audit (Modified) rating is a performance level where there are matters that are courses for concern and which the AG gives a specific directive that such should be attended to. A Qualified rating is where significant matters are highlighted but overall the financials still present a fair view  An Adverse-significant matters highlighted, financials do not present a fair view A Disclaimer rating is where there is fundamental lack of documentation to the extent that an opinion cannot be expressed.  There are those Municipalities that even just fail to submit Annual Financial Statements.

THE MUNICIPAL AUDIT OUTCOMES The details of the Audit outcomes are: The three year comparison is presented in Annexure A- it must be noted that this is the status quo as at 27th July 2012. There are 7 municipalities that did not submit their Annual Financial Statements (AFS). These are the municipalities per province: Free State (1): Nala local municipality. The National and Provincial Treasury have sent finance experts to assist with compilation of AFS Northern Cape (1): Renosterberg local municipality. The National and Provincial Treasuries have sent finance experts to assist with compilation of AFS. North West (5): Moretele local municipality, Kgetleng River local municipality, Ditsobotla local municipality, Mamusa local municipality & Kagisano-Molopo local municipality. The North West Provincial Treasury is providing support to these 5 local municipalities through the deployment of the MFMA Practitioners.

Comment on movement on audit outcomes Clean 5% 2% 0,3% 2008/09 To 2010/11 Municipal Audit Outcomes: National Audit Opinion 2010/11 2009/10 2008/09 Comment on movement on audit outcomes Clean 5% 2% 0,3% Lack of forward movement in audit outcomes is mainly due to two reasons, namely, stagnant and regressing municipalities. 2 municipalities that received clean audits in 2009/10 did not in 2010/11.The third did not but has been disestablished. Out of 278 municipalities to which audits were issued in 2010/11, 15% improved, whilst 63% remained unchanged and 16% regressed, audit pertaining to 6% not issued. From 2008/09 to 2009/10, 57 municipalities improved, whilst 165 remained unchanged and 15 regressed. Financially unqualified with findings 41% 43% Financially unqualified financial statements 46% 45% 42% Qualified 20% 26% 17% Adverse 3% 4% Disclaimer 23% 25% 37% Audits not issued 6% Total municipalities 278 AFS submission outstanding Notes: Based on information as of 27 July 2012.

Financially unqualified with findings 41% 28% 21% 67% 77% 10% 33% 25% 2010/11 Municipal Audit Outcomes Audit Opinion Nat EC FS GP KZN LP MP NC NW WC Clean 5% 0% 8% 6% 19% Financially unqualified with findings 41% 28% 21% 67% 77% 10% 33% 25% 9% 73% Financially unqualified financial statements 46% 85% 17% 52% 80% Qualified 20% 29% 13% 11% 43% 14% Adverse 4% 2% 26% Disclaimer 23% 38% 54% 27% 53% Audits not issued n/a 3% Total munics 278 45 24 12 61 30 21 32 23 AFS sub outstanding Notes: Based on information as of 27 July 2012. GP, KZN and WC have achieved the 2012 target of 60% unqualified opinion

Province Nat EC FS GP KZN LP MP NC NW WC Improvement 15% 29% 13% Nil Movement in Municipal Audit Outcomes per province from 2009/10 to 2010/11) Province Nat EC FS GP KZN LP MP NC NW WC Improvement 15% 29% 13% Nil 17% 10% 19% 9% 23% Unchanged 63% 44% 75% 92% 70% 53% 71% 69% 48% 60% Regressed 16% 27% 8% 37% n/a 7% Audits not issued 6% 4% 3% 52% Notes: Based on information as of 27 July 2012. LP has the highest number of municipalities that regressed while NW lead in relation to audit not issued

% of municipalities with Municipal Audit remedial Action Plans Stats on Municipal Audit Remedial Action Plans to Address the 2010/11 Municipal Audit Outcomes Province % of municipalities with Municipal Audit remedial Action Plans Info as of EC 100% 17 July 2012 FS 96% 20 July 2012 GP 23 March 2012 KZN 16 July 2012 LP 90% 4 April 2012 MP 95% 9 May 2012 NC 53% 2 April 2012 NW 43%% 24 May 2012 WC 83% National 86% Note: Stats takes into account information from provinces & the National Treasury.

Are there linkages between service delivery protests and the poor financial management of municipalities depicted by Audit outcomes? Again, for the reasons indicated in the Introduction, we present a trend analysis done on service delivery protests, as in the attached Annexure C, and for the period 2004 up to June 2012

May and June protests vs opinion PROVINCE Municipality No of protests Audit outcome EC Nelson MMB 1 Unqualified Buffalo City Adverse FS Managaung Disclaimer Kopanong 2 Gauteng Ekurhuleni 3 KZN No protest recorded Mpumalanga Albert Luthuli Emakhazeni Dr JS Moroka Bushbuckridge Mbombela 4

May and June protests vs Audit opinion PROVINCE Municipality No of protests Audit outcome Limpopo Musina 1 Qualified Polokwane 4 Greater Giyani Disclaimer Mogalakwena Unqualified Modimole Adverse Northern Cape Umsobomvu Sol Plaatjie Gamagara

May and June protests vs Audit opinion PROVINCE Municipality No of protests Audit outcome North West Rustenburg 4 AFS submitted late Mahikeng 1 Dr. Ruth Segomotsi Mompati AFS not submitted Western Cape City of Cape Town Unqualified Theewaterskloof Breede Valley

What is our observations regarding all these? The Municipal Audit outcomes is instructive for us to work harder if we are to succeed in realising the objectives we set ourselves as Government, of achieving audit ratings that will speak of a model Municipality we referred to earlier.  We should take a cue of success stories in Provinces, Municipalities and entities that are doing well and continue in the spirit of cooperative Governance to mobilise support for Local governance.  

Most municipalities are grant dependent What is our observations regarding all these? There are five focus areas in which we must get things right to achieve effective, efficient and accountable local government, namely, governance, financial management, service delivery, infrastructure and fighting corruption. Analysis of LG state of affairs on the five areas is as follows: Governance There are 84% of municipalities with MPACs , 91% with AC and 79% with IA units. There is 72% of municipalities with MM positions filled while 28% were still vacant as of March 2012 There is 78% of municipalities that have filled the CFO’s position as of March 2012 Financial Management Most municipalities are grant dependent There is high level of consumer debt-struggling to collect Non adherence to regulations especially SCM regulation

Infrastructure delivery What is our observations regarding all these? Service Delivery Conditional grants used in certain municipalities for operational activities like salaries There is under –spending on conditional grants Shortage of skills in various municipalities Vandalization of infrastructure by communities during protests Infrastructure delivery Municipalities are inadequately budgeting for repairs and maintenance The quality of infrastructure delivered is also very poor Fighting Corruption SCM processes not followed Corruption not brought to finality

108 municipalities identified using the diagnostic analysis of MISA Solutions to assist in the challenges above The establishment of MISA will assist in the multiple challenges faced in municipalities- 108 municipalities identified using the diagnostic analysis of MISA Provincial plans that focus on areas mentioned above have been finalized The deployment of SDFs to municipalities to deal with governance matters There are also 75 financial experts deployed by NT to Municipalities that require assistance and the majority of these deployees are in municipalities that obtained unfavourable audit opinion.

Conclusion The political leadership in the municipal environment must take keen interest and provide regular oversight on issues raised in the management letter. If this is achieved then consequence management will be applied and in many instances will deter certain practices at the municipal spaces. It should also be noted that the support by national and provincial government may be required but we have not achieved unmodified audit opinion at that level