1 Progress Report on Operation Clean Audit by 2014 Presentation to Select Committee on Appropriations 17 October 2012

Outline of Presentation 2 1. Introduction 2. LGTAS- Its Origin 3. Aims and Objectives of LGTAS 4. Original targets of LGTAS 5. A period of non activity-the lull 6. LGTAS today-the revival 7. Achievements 8. Operation Clean Audit: Background 9. Operation Clean Audit: Development of an Action Plan. 10. Operation Clean Audit: Refinement of Action Plan. 11. What have we done to support municipalities? 12. Actions by other role players to improve municipal audit outcomes 13. Conclusion

LGTAS-Where it originated? 3 The Local Government Turnaround Strategy (LGTAS) was approved by Cabinet during December It was intended as the overarching strategy that includes flagship projects such as Operation Clean Audit (OPCA), Business-Adopt-a-Municipality, Revenue Enhancement as well as the Special Purpose Vehicle (SPV), now the Municipal Infrastructure Support Agency (MISA) and Clean Cities Clean Towns. The objectives of LGTAS was to Build Confidence between the people and Government; Build a model Municipality characterised by the ability to provide quality services,

Introduction 4 The purpose of the presentation is to present to the Select Committee the status of LGTAS since its inception to date. An attempt will be made to present the details of what has been achieved in pursuit of the objectives set in 2009 The presentation will not dwell much on all the components of LGTAS but will focus on Operation Clean Audit (OPCA).

LGTAS-OPCA aims 5 Guiding vision: By 2014, all 278 municipalities achieve unqualified audit opinion on their Annual Financial Statements Strategic goal: To provide assistance to all municipalities to achieve sustainable improvement of systems for maintaining quality financial and information management Strategic purpose: To address all issues raised by the Auditor General and reduce the vulnerability to risks in the municipal financial management and governance process through targeted interventions

LGTAS-OPCA objectives 6 Between 2010 and 2011, no municipality achieving Adverse and Disclaimer Audit opinions. o Not achieved: According to preliminary results, disclaimers – 50 and adverse opinions – 7. At least 60% of the all municipalities achieving unqualified audit opinion by 2012 o According to preliminary results, now at 44.5% ( ) At least 75% of all municipalities achieving unqualified audit opinions by % of all municipalities achieving unqualified audit opinions by 2014.

A Period of non-activity – The Lull 7 As a result of restructuring in the department there was a state of paralysis for approximately 18 months (from 2011 to mid 2012) and with uncertainty at the political and administrative levels The original LGTAS team was disbanded at the beginning of The impetus of the LGTAS had so much buy in and Provinces and municipalities continued implementing some components of the strategy; e.g. establishment Provincial Coordinating Committees of OPCAs Institunalization of the LGTAS units in the Provinces, Appointment of staff for LGTAS support.

LGTAS today 8 With the arrival of the new Minister there was a renewed focus and emphasis created on the acceleration of the LGTAS. LGTAS was revived with a refined focus on 108 targeted municipalities. These were approved by MINMEC of 25 May 2012.

LGTAS today-the renewal 9 The renewed focus in terms of which LGTAS is accelerated up to 2014 is through the following priority areas: 1. Accelerating service delivery 2. Enhancing Good Governance 3. Promoting sound financial management 4. Fighting corruption 5. Facilitating sustainable infrastructure development. These five focus areas are mutually reinforcing and directly play a critical role in improving the audit outcomes of municipalities.

Aligning the OPCA vision with 5 areas Visits we conducted to all Provinces from July to end of August 2012 to discuss the Provincial LGTAS Action Plans for the 108 identified LGTAS municipalities; Finalised the action plans in respect of the 108 municipalities and A report on the profile of at least the 108 municipalities in relation to the 5 LGTAS focus areas will be concluded by the end of November 10

The Audit Outcomes 11 The slides that follow provide information with regard to the progress in municipal audit outcomes from 2008/09 to 2010/11 and the provincial breakdown of the 2010/11 Municipal Audit Outcomes

2008/09 to 2010/11 Municipal Audit Outcomes: National 12 Audit Opinion2010/112009/102008/09 Clean5%2%0,3% Financially unqualified with findings41%43%41% Financially unqualified financial statements 46%45%42% Qualified20%26%17% Adverse5%3%4% Disclaimer23%25%37% Audits not issued6%2%0,3% Total municipalities278 AFS submission outstanding3%2%0,3% Notes: Based on information as of 27 July 2012.

What the above figures tell us The figures above tell a story of improvement in the municipalities that received a financially unqualified opinion without findings and those with findings from 42% to 46%. It shows a fluctuation in numbers of those that received a qualified opinion In the two previous financial years there was no improvement in municipalities that received adverse and disclaimer opinion These figures serve as a point of reference regarding our intervention and support actions. 13

2010/11 Municipal Audit Outcomes: Provincial Breakdown 14 Audit Opinion NatECFSGPKZNLPMPNCNWWC Clean5%0% 8%6%19%0% 6% Financially unqualified with findings 41%28%21%67%77%10%33%25%9%73% Financially unqualified financial statements 46%28%21%67%85%17%52%25%9%80% Qualified20%29%13%33%11%43%14%19%13%10% Adverse5%4%8%0%2%13%0% Disclaimer23%38%54%0%2%27%33%53%26%0% Audits not issued 6%n/a4%n/a 3%52%10% Total munics AFS sub outstanding 3%n/a4%n/a 3%2%n/a Notes: Based on information as of 27 July GP, KZN and WC have achieved the 2012 target of 60% unqualified opinion

Trend per province: 2008/09 to2010/11Municipal Audit Outcomes (1/3) 15 Audit OpinionEC 10/11 EC 09/10 EC 08/09 FS 10/11 FS 09/10 FS 08/09 GP 10/11 GP 09/10 GP 08/09 Clean0% 8% Fin unqualified with findings 28%20% 21%13% 67%75%67% Fin unqualified fin statements 28%20% 21%13% 67%75% Qualified28%31%28%13%25%4%33%25% Adverse4%7%16%8%4%8%0% Disclaimer38%42%36%54% 75%0% Audits not issued n/a 4% n/a Total munics AFS sub outstanding n/a 4% n/a Notes: Based on information as of 27 July 2012.

Trend per province: 2008/09 to 2010/11Municipal Audit Outcomes (2/3) 16 Audit OpinionKZN 10/11 KZN 09/10 KZN 08/09 LP 10/11 LP 09/10 LP 08/09 MP 10/11 MP 09/10 MP 08/09 Clean8%0% 7%3%0%19%14%0% Fin unqualified with findings 77%85%72%10%27% 33%38%43% Fin unqualified fin statements 85% 72%17%30%27%52% 43% Qualified11% 13%43%40%27%14% 29% Adverse2% 0%13%0% Disclaimer2% 15%27%30%47%33% 29% Audits not issued n/a Total munics AFS sub outstanding n/a Notes: Based on information as of 27 July 2012.

Trend per province: 2008/09 to 2010/11Municipal Audit Outcomes (3/3) 17 Audit OpinionNC 10/11 NC 09/10 NC 08/09 NW 10/11 NW 09/10 NW 08/09 WC 10/11 WC 09/10 WC 08/09 Clean0%3%0% 7%3%0% Fin unqualified with findings 25%22%19%9% 17%73%70%80% Fin unqualified fin statements 25% 19%9% 17%80%73%80% Qualified19%53%13% 22%13%10%13%3% Adverse0% 26%0%4%0%7%0% Disclaimer53%22%69%0%49%61%0%7%17% Audits not issued 3%n/a 52%22%4%10%n/a Total munics AFS sub outstanding 3%n/a 26%22%4%n/a Notes: Based on information as of 27 July 2012.

Operation Clean Audit: Action Plan 18  The Municipal Audit outcomes are 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.  The identified three critical areas from the Auditor- General’s report to be looked at if the vision is:  Leadership (both political and administrative);  Governance; and  Financial management.

OPCA: Development of Action Plan 19  Developed an action plan (attached hereto) that clusters activities to be undertaken up to 2014 within the context of the three areas mentioned above.  The action plan identifies the stakeholders responsible for particular actions in the drive to support municipalities to achieve a favourable audit opinion.  The plan itself is a collaborative effort that draws from roles played by specific stakeholders in support of municipalities

OPCA: Refinement of Action Plan 20  Convened a LG MinMec in September 2012 and invited municipalities that consistently achieved a clean audit; consistently never submitted Annual Financial Statements; and municipalities that showed significant improvement to share with MinMEC what are issues to be looked at  This was to take a cue from success stories in municipalities that are doing well and to appreciate the challenges that some municipalities are experiencing.  Refined the action plan accordingly

Key drivers 21  Municipalities that achieved clean audits indicated the key drivers for clean administration that lead to good financial management which include the following:  The leadership taking ownership of key controls  Consistently implementing audit recommendations;  Functional governance structures- MPACs, Finance Portfolio Committees, Audit Committees, Internal Audit units’ Risk management Committees;  Development and proper implementation of action plan;  Proper financial management skills; and  Proper record keeping.

Factors that negate the achievement of a Clean Audit 22  Factors that may negate the achievement of Clean Audit include, but are not limited to:  Lack of ownership by political leadership and management;  Lack of financial management skills;  Repeat findings that are not addressed properly;  Availability of critical staff during the audit; and  None functional governance structures.

What have we done to support municipalities? 23 GOVERNANCE

What have we done to support municipalities? 24 Leadership We have supported the appointment of Municipal Managers and CFOs. The statistics regarding the filling of these posts are:  219 out of 278 Municipal Managers posts were filled as at end September 2012; and  278 CFO posts were filled as at the end of September Draft Regulations for Municipal Senior Managers have been developed governing the appointment and conditions of service of municipal managers and section 56 managers. It served before the LG MinMEC of 16 September 2012; Consultations pursuant to the LG MinMEC decisions are being finalised.

What have we done to support municipalities? 25 Leadership supported municipalities to develop and implement recruitment and retention strategies: Work is being conducted in a pilot municipality with the intent - to roll out to 69 municipalities based on lessons learnt. Supporting municipalities to develop technical skills and in this regard: 2 HR officials from 35 municipalities were subjected to a 3 day programme hosted by the Institute of Municipal personnel Practitioners. Partnered with the Department of Social Development to develop a programme for the 35 municipalities for IDP interventions.

What have we done to support municipalities? 26 Guidelines on the Establishment of MPACs have been put in place (joint DCoG-National Treasury Guideline issued on 17 August 2011). Supported the establishment of MPACs. 87% of MPACs are currently established (see next slide for a provincial breakdown). DCOG monitors governance structures such as Audit Committees and Internal Audit Units

Stats on Municipal Governance Structures 27 ProvinceMPACsAudit CommitteesInternal Audit units EC100% 98% 67% FS42% 100% GP100% 75% KZN100% LP100% MP100% 95% NC97% 91% 28% NW100% 75% 61% WC33% 97% 77% National87% 96% 79% Stats is as of 30 September 2012 for MPACs whilst for Audit Committees and Internal Audit Units is as of 29 th March Note: With respect to Internal Audit Units, the established units may not meet the Office of Accountant General’s desirable maturity levels.

Stats on Municipal Audit Remedial Action Plans to Address the 2010/11 Municipal Audit Outcomes 28 Province% of municipalities with Municipal Audit remedial Action Plans Info as of EC100% 17 July 2012 FS96% 20 July 2012 GP100% 23 March 2012 KZN100% 16 July 2012 LP90% 4 April 2012 MP95% 9 May 2012 NC53% 2 April 2012 NW43% 24 May 2012 WC83% 16 July 2012 National86% 20 July 2012 Note: Stats takes into account information from provinces & the National Treasury.

FIGHTING CORRUPTION 29

What have we done to support municipalities? 30 Continue to train municipal officials on ethics management: The following Four district municipalities and their local municipalities have been trained and are 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) Overberg DM (Mosselbay LM).

Financial Management 31

What have we done to support municipalities? 32 Supported municipalities on credit control and debt collection policies: 39 municipalities have been supported in KwaZulu-Natal and 18 in the Northern Cape Developed a programme to roll this out to municipalities in other provinces.

33  Coordination of effort by all relevant stakeholders at national and provincial level is important in order to avoid duplication  In order to improve municipal audit outcomes, the following is also being done: Municipalities have been prevailed upon to timely develop and implement municipal audit remedial action plans (by the 20 th July 2012, 89% of municipalities had audit remedial action plans developed Provinces (CoGTAs and Treasuries) monitor the implementation of the municipal audit remedial action plans.. Actions by partners.

Conclusion 34  Confident that the impact of our support interventions will become evident in the next 2011/2012 Audit Outcomes  The target that all municipalities shall achieve a Clean Audit opinion by 2014 is unlikely to be achieved  However, through combined effort and commitment seen in KZN we believe on average, our actions and interventions will result in 70% of municipalities achieving a Clean Audit opinion by  We wish to also bring to the attention of the committee that the recent capacity assessment report by the Municipal Demarcation Board has given us the new impetus to accelerate the approval of regulations so that competent personnel are appointed in this sphere of government