INCA CBF SUMMER SCHOOL 19 February 2008 What everyone should know about Municipal Finance and Accounting Mare-Lise Fourie

INTRODUCTION Conceptual framework for municipal finance originally formulated in the White Paper on Local Government in 1998 Framework translated into legislative requirements in MFMA (Act 56 of 2003) Underlying principles of the Act: Promoting sound financial governance by clarifying roles; Strategic approach to budgeting; Modernisation of financial management; Cooperative government; and Promoting sustainability

INTRODUCTION (Cont) Act built around the responsibilities of accountability and the oversight within a culture of transparency and regular reporting Separation of responsibilities between executive and non-executive councillors and officials is important for good governance Financial governance can be illustrated as follows:

Financial Governance Framework Responsible for Oversight over Accountably to Council Approving policies and budgets Mayor Community Policy; budgets; outcomes; management of/oversight over MM Municipal Manager Council, Public Outputs and implementation Administration Mayor, Council, Public Chief Financial Officer Outputs Financial management Top Management Service delivery

WHAT ARE THE RESPONSIBILITIES OF THE VARIOUS STAKEHOLDERS IN FINANCIAL MANAGEMENT?

The Council, other political structures, mayor, other political office bearers and councillors In terms of MSA the executive and legislative authority of a municipality is exercised by its council Authority exercised, inter alia, by doing the following: Developing and adopting policies, plans, strategies and programmes, including setting targets for delivery; Implementing applicable national and provincial legislation and the municipality’s own by-laws; Preparing, approving and implementing budgets; and Imposing and recovering rates, taxes, levies, duties, service fees and surcharge on fees

The Council, other political structures, mayor, other political office bearers and councillors (Cont) Duties of the council governed by the MSA include the following: Integrated development Planning Performance management Tariff, rates and credit control and debt collection policies

The Council, other political structures, mayor, other political office bearers and councillors (Cont) In terms of the MFMA councils, political structures, political office bearers and councillors are variously charged with, inter alia, the following duties and responsibilities and invested with the following powers: Cash management and investment policy; Budgets; Unauthorised, irregular or fruitless and wasteful expenses; Supply chain management policy; Annual reports; and Resolution of financial problems

The Council, other political structures, mayor, other political office bearers and councillors (Cont) The mayor assigned various specific duties in terms of the MFMA In general, the mayor must provide political guidance over the financial and fiscal affairs of the municipality. In providing such guidance, the mayor may monitor and, to the extent provided in the MFMA, oversee the MM and the CFO in the exercise of their duties but may not interfere in the exercise of those responsibilities

The Council, other political structures, mayor, other political office bearers and councillors (Cont) Specific duties include: Provide general political guidance over the budget process and the priorities that must guide the preparation of the budget Coordinate the annual revision of the IDP Approve the SDBIP; and Receive, consider and take appropriate action with regard to the monthly budget statements and the mid-year budget and performance assessment

Municipal Manager The MM is the accounting officer of the municipality As such, the MM is invested with, inter alia, the following powers and charged with the following duties and responsibilities with regard to financial governance: Guidance to councillors and officials on financial matters; Assistance to the mayor in performing budgetary functions assigned to the mayor Legally required to accept responsibility and accountability for all income and expenditure, all assets and the discharge of liabilities and the proper and diligent compliance with the MFMA General management of financial administration Establishment of the budget and treasury office Charged with a wide range of specific financial and accounting responsibilities which will be highlighted later

Chief financial Officer Minimum specific responsibilities assigned to this position MSA: Charged with duty to make investments on behalf of the municipality if so delegated MFMA: Assume administrative responsibility for the budget and treasury office Advise the MM on the exercise of assigned powers and duties Assist MM in the administration of the bank accounts Advise senior managers on the exercise of assigned or delegated powers and duties

Chief financial Officer (Cont) Perform such budgeting, accounting, analysis, financial reporting, cash management, debt management, supply chain management, financial management, review and other duties as may be delegated Make investments if so delegated

Top Management Top management consists of the MM and all senior managers responsible for managing the votes. A vote is defined as being any one of the main segments into which the annual budget is divided Top management must assist the MM in managing and coordinating the financial administration of the municipality Take all reasonable steps within their areas of responsibility to ensure all of the following: That the system of financial management and internal control is diligently adhered to;

Top Management (Cont) That the financial and other resources are effectively, efficiently, economically and transparently utilised; That unauthorised, irregular and fruitless and wasteful expenses and losses are prevented; That all revenues due are collected; That assets and liabilities are properly managed and assets safeguarded and adequately maintained; and That all information required by the MM in order to ensure compliance with MFMA is timeously submitted

Top Management (Cont) Key matters in regard to which top management must play a significant and active role include: The formulation and implementation of financial policies; Designing and implementing an effective internal and external reporting structure; Developing and implementing sound and efficient financial systems and procedures; Formulating and implementing effective risk strategies and mechanisms; and Supporting important governance-related structures such as the interaudit unit and the audit committee.

WHAT ARE THE AREAS OF COMPETENCIES? Three (3) areas of competencies required by everyone involved in municipal finance and accounting, identified: Legal framework Technical skills/knowledge Financial governance

Legal framework Thorough knowledge of all applicable legislation a prerequisite for sound financial governance Specific statutes relating to municipal finance and accounting: The Constitution of the Republic of South Africa, 1996 (Act 108 of 1996) Local Government: Municipal Systems Act, 2000 (Act 32 of 2000) Local Government: Municipal Finance Management Act, 2003 (Act 56 of 2003) together with its Regulations and national directives, where applicable Procurement legislation such as PPPFA (Act 5 if 2000) and Broad-Based Black Economic Empowerment Act (Act 53 of 2003)

Technical skills/knowledge Range – basic to comprehensive Fields of knowledge: Integrated development planning Obligated to undertake developmentally orientated planning Plan must, inter alia, link, integrate and coordinate plans Take into account proposals for the development of the municipality Must align the resources and capacity of the municipality with the implementation of the plan

Technical skills/knowledge (Cont) Core components relating to financial management: The council’s operational strategies A financial plan which must include a budget projection for at least the next three years Goes further than a list of capital projects Include internal transformation needs and operational strategies

Technical skills/knowledge (Cont) Budgets Important mechanism in giving effect to service delivery strategies Provides the tool for implementing of the IDP Comprises of an operating budget and capital budget Divided into votes which should represent the principle activities Top management collectively and severally responsible for aligning service delivery outputs with realistically available financial and other resources

Technical skills/knowledge (Cont) Annual Financial Statements Purpose is to provide information in a manner that is useful to a range of users, particularly the council, MM and top management It represents the results of the implementation of operational strategies and the impact thereof on assets, liabilities and net assets during a specific year

Technical skills/knowledge (Cont) Annual Financial Statements (Cont) Detailed objectives of AFS are to provide information relating to the following: The way in which planned results were achieved; Economic resources, financial obligations and net fixed assets; The way in which cash and other liquid resources were obtained and spent; The municipality’s ability to meet its obligations; and Meaningful comparisons, explanations and interpretations which will help users understand the financial information better;

Technical skills/knowledge (Cont) Revenue Management To meet the objectives of local government as set out in the Constitution, the system of municipal finance must be based on the basic policy principles of revenue adequacy and certainty and financial sustainability Ability to maintain, Improve or extend service delivery is directly related to the ability to raise revenue Bulk of municipality’s revenue is raised through property rates and service charges determined in accordance with policies and by-laws developed to suit local circumstances Council responsible for policies while top management responsible for execution Revenue management includes indigent support, credit control and debt collection, customer care and debtor management (Billing)

Technical skills/knowledge (Cont) Debt Management Significant investment in property, plant and equipment required to provide services Revenue raised from rates and service charges insufficient to finance such investment Rely on external loans and other capital receipts A municipality may only spend money on a capital project if it has complied with the following: The council has considered the total projected cost; The future operational costs and revenues on the project, including the impact on rates and tariff implications have been considered;

Technical skills/knowledge (Cont) Debt Management (Cont) The project has been approved by Council; Sources of funding have been considered and are available; and Money for the project has been appropriated in the capital budget. Future operational costs of capital expenditure could include one or more of the following: Interest on external debt; Maintenance costs; Staffing; Operating expenses; and Depreciation

Technical skills/knowledge (Cont) Cash Management Proper management of cash resources is paramount in ensuring financial viability and sustainable growth and development. Requirements for effective cash management: All monies collected and banked as soon as possible. Effective control over expenditure and proper planning Administer and control available cash effectively through proper management of bank account/s Recognise interdependency between cash management and investment management.

Technical skills/knowledge (Cont) Supply Chain Management Each municipality to have and implement a supply chain management policy. Policy must give effect to prevailing legislation, be fair, equitable, transparent, competitive and cost effective Municipality must act in accordance with policy when procuring goods or services, disposing of goods, selecting contractors or selecting external mechanisms Council approves the policy and is obligated to delegate powers and duties to MM to – Discharge responsibilities i.t.o. prevailing legislation;

Technical skills/knowledge (Cont) Supply Chain Management (Cont) Maximise administrative and operational efficiency; and Enforce reasonable cost-effective measures for the prevention of fraud, corruption, favouritism and unfair and irregular practices in the implementation of the policy Supply chain management consists of demand management, acquisition management, logistics, disposal, risk and performance management systems

Technical skills/knowledge (Cont) Management of fixed assets Municipality has the responsibility of stewardship which refers to the holding of someone else’s assets by a steward who is charged with the acquisition, financing, maintenance and utilisation of such assets Fixed assets are represented by property, plant and equipment Management of fixed assets primarily consists of the following: Asset register; Depreciation/revaluation; Maintenance; Stocktaking; Safekeeping; and Accounting

Technical skills/knowledge (Cont) Risk Management and Internal Control Risk management is a process consisting of the following steps: Step 1: MM, CFO and top management must proactively, purposefully and regularly identify and define current as well as emerging risks Step 2: The assessment of such risks by considering the estimates of likelihood, severity and consequence in regard to the occurrence thereof Step 3: Identify appropriate and cost-effective methods of obviating or managing risks Risks commonly arise in the following categories: Operational, strategic, external, physical and financial

Technical skills/knowledge (Cont) Risk Management and Internal Control (Cont) Defined as the plan of the organisation and all the coordinated systems to assist in achieving objectives Not only about detecting errors and fraud but also promoting the municipality’s operational efficiency Legislative obligation to institute proper internal control e.g. MM responsible for the implementation, maintenance and management of systems of internal control relating to assets and liabilities, debtors and revenue and creditor payments Each senior manager and each official exercising financial management responsibilities required to take all reasonable steps to ensure that the system of financial management and internal control is carried out diligently

Technical skills/knowledge (Cont) Financial Management Information Systems Qualities of a good financial management information system are: Meaningful, adequate, timeous and user-friendly Stewardship and accountability implies that management must be supported by information systems which will enable it to – Ensure and demonstrate properly that assets and resources have not been misappropriated; and Assets and resources have been applied to the best advantage. Examples of such systems are: Annual budget; general ledger; assets and risk management; consolidated billing; cash management; fleet management and procurement.

Technical skills/knowledge (Cont) Performance Management Can be defined as a strategic approach to management which equips governance structures, management, employees and the community with a set of tools and techniques to plan regularly, monitor continuously and measure periodically the performance of the municipality in terms of a set of indicators and targets for efficiency, effectiveness and impact. It is a critical planning and control system that makes the municipality and its employees, individually and collectively, accountable to ensure that plans are implemented, that they have the desired developmental impact and that resources are used effectively.

Governance Seven (7) primary characteristics of good governance (King II): Discipline; transparency; independence; accountability; responsibility; fairness and social responsibility Good governance is the product of intelligent action and courage Good governance will flourish only in an environment of transparency, accountability and professionalism Many of these qualities already captured in the statutes governing the administration of municipalities. Compliance not, ipso facto, good governance Following basic requirements contained in legislation constitute the foundation of good governance: Statutory roles, responsibilities and duties; financial policies and delegations

Minimum competency levels National Treasury has introduced regulations which recognises the minimum skills, knowledge and experience required by MM, CFO, senior managers, all other financial officials and supply chain management officials NT has registered a unit standard based certificate in municipal financial management approved by SAQA at levels 5 and 6

Conclusion What everyone should know about Municipal Finance and Accounting - Publication sponsored by INCA CBF Title: Municipal Finance and Accounting Principle authors: M Fourie and L Opperman Co-author & projects coordinator: D Scott Consulting editors: W Zybrands, K Kumar and B Jwili Publisher: Van Schaik Publishers ISBN: 978 0 627 02657 7 Price: +/- R500

(Non-Executive Director, INCA Capacity Building Fund) Thank you Mare-Lise Fourie (Non-Executive Director, INCA Capacity Building Fund) Tel: 012 329 1646 Fax: 012 329 1646/0866959341 E-mail: m.ajfourie@iafrica.com