IMFO Annual Conference – October 2015 Breakaway Session 3: mSCOA and the Local Government Accountability Cycle National Treasury I 6 October 2015

2 Objectives of the local government financial management reform programme To modernise local government budgeting and financial management processes and practices, particularly with regards to: –Budgeting and financial reporting –Accounting –Asset management –Supply chain management To improve financial governance by clarifying and separating roles and responsibilities of Mayors, executive and non-executive councilors vis-à-vis those of municipal officials. To maximise municipal capacity to deliver services by attending to issues of efficiency, effectiveness and sustainability, and dealing with corruption. To set-up the accountability cycle by ensuring proper linkages between IDPs, budgets, SDBIPs, in- year reports, annual financial statements, annual reports, oversight reports and audit reports.

3 Milestones so far in reforming the budget and budget processes… Efforts to reform local government budgets and budget processes have been ongoing Key dates and achievements so far have included: –2000:the establishment of the current system of local government, along with the system of intergovernmental finances, particularly the local government equitable share. –2003:the enactment of the MFMA, that sets out the required content of budgets and key process dates. –2005:issuing of MFMA Circular 28 – giving guidance on budget formats. –2007:issuing of MFMA Circular 42 – dealing with funding of a municipal budget –2007:issuing the Funding Compliance Guide – setting out a procedure for assessing whether municipal budgets are funded in accordance with the MFMA. –2009:the promulgation of the Municipal Budget and Reporting Regulations. –2010:implementation of the Municipal Budget and Reporting Regulations by all municipalities – : Significant improvements in in-year financial reporting by municipalities –A r ange of supporting reforms have also been implemented during this timeframe, including the introduction of GRAP (accounting standards), the strengthening of the in-year financial reporting system, issuing of guidelines for annual financial statements and the DoRA in direct support of municipal funding.

4 Aims of the local government budget reforms Ensure that municipal budgets and financial management processes are transparent, aligned to the accountability cycle and facilitate democratic governance accountable to local communities Ensure municipal budgets generally support the provision of basic services to communities, facilitate social and economic development and promote a safe and healthy environment in a manner that is sustainable Ensure that budget and financial information is reliable and timely, and consistent across municipalities, and that municipalities, provinces and national government use it in management and policy decision-making The medium-term aim is to ensure that each municipality produces a budget document that is aligned to the IDP, that passes the funding compliance test and that contains accurate financial information backed-up by useful, informative narratives. The document must be user-friendly and facilitate engagements with communities and informed decision-making by Council

5 Budget reform focus areas National Treasury is focusing on seven areas in its efforts to reform local government budgets and budget processes: 1.Reviewing the structure and allocation of functions of local government to ensure the institutional framework for local government facilitates sound budgeting and budget processes. 2.Reviewing the intergovernmental fiscal arrangements as they relate to local government, including conditional grants, to ensure an equitable allocation of resources, and aligning the incentives to reinforce sound budgeting and financial management. 3.Ensuring that the IDP priorities and budget allocations are properly aligned. 4.Ensuring that the new budget formats inform the structure of all other elements of the accountability cycle, i.e Alignment. 5.Strengthening financial reporting systems, particularly the forecasting component of the section 71 reports. 6.Building-up the budgeting capacity of municipalities, especially their Budget and Treasury Offices. 7.Building-up the capacity of National Treasury and provincial treasuries to exercise oversight of local government budgets, adjustments budgets and in-year reports.

Influencing the LG accountability cycle Greatest Impact

7 A multi-faceted approach to reforming the budget and budget processes The National Treasury has adopted a multi-faceted approach to the financial management reform agenda in addressing these focus areas. The main elements of the approach are: –Raising the profile of LG budgeting e.g. publishing the s.71 reports, and writing regular memo’s to brief the Minister and Cabinet –Policy reform and regulation e.g. the introduction of the Fuel Levy, the MIG reforms and the Municipal Budget and Reporting Regulations –Guidance and advice through the issusance of MFMA Circulars –Review and feedback e.g. Budget oversight and review process and the funding compliance procedure –Enforcement e.g. repayment of unspent conditional grants in terms of DORA –Training and mentoring e.g. budget reform workshops and other training –Material assistance e.g. and FMG The aim of this multi-faceted approach is to tackle the process of budget and financial management reforms in local government at all levels – using all available levers to effect the required changes. The sequence in which these levers are ‘pressed’ is largely aligned to the budgeting and reporting cycle, but also as the opportunities present themselves

Legislative Framework  Sections 215 and 216 of the Constitution provides NG with the authority to legislate uniform norms and standards to ensure transparency and expenditure control in each sphere of government  This can be interpreted as including norms and standards in relation to financial systems of municipalities  In terms of Section 5 of the MFMA, National Treasury may investigate any system of financial management and internal control in municipalities and recommend improvements  In terms of the preamble to the SCOA regulations it also proposes the specification of minimum business process requirements for municipalities and municipal entities as well as the implementation of processes within an integrated transaction processing environment 8

Legislative Framework – Financial management accountability cycle as enshrined in legislation 9 Municipal Finance Management Act, No 56 of “Budget preparation process 21. (1) The mayor of a municipality must – (a) co-ordinate the processes for preparing the annual budget and for reviewing the municipality’s integrated development plan and budget-related policies to ensure that the tabled budget and any revisions of the integrated development plan and budget-related policies are mutually consistent and credible;” Municipal Systems Act, No. 32 of 2000 “Adoption of integrated development plans 25. (1) Each municipal council must, within a prescribed period after the start of its elected term, adopt a single, inclusive and strategic plan for the development of the municipality which: (a)links, integrates and co-ordinates plans and takes into account proposals for the development of the municipality; (b)aligns the resources and capacity of the municipality with the implementation of the plan; (c)forms the policy framework and general basis on which annual budgets must be based;” Municipal Regulations on Standard Chart of Accounts Gazette No “Object of these Regulations 2. The object of these Regulations is to provide for a national standard for the uniform recording and classification of municipal budget and financial information at a transaction level by prescribing a standard chart of accounts for municipalities and municipal entities which (a) are aligned to the budget formats and accounting standards prescribed for municipalities and municipal entities and with the standard charts of accounts for national and provincial government;”

10 Financial management accountability cycle in it’s current form - Notwithstanding all effort and initiatives to date

Standard Chart of Accounts Improved Service Delivery 11 IDP 5 Year Strategy Budget 3 Year Budget SDBIP Annual Plan to Implement IYR Monitoring AFS Oversight Annual Report The integrated development plan (unlimited needs and wants) must directly inform the formulation of the budget (limited basket of resources). In a mSCOA perspective, this requires budget formulation (as per the MBRR) from a project level. Consequently the Project Segment is consider the departure point in formulating budgets across all seven segments. Budget, implementation (transacting) and reporting MBRR and reporting to LG Database (all 7 segments) Formulation of implementation plan such as regional perspective, funding, cash flow breakdown etc. In-year reporting (focus MBRR), Section 71 & 72 Budgeting to directly inform implementation and transactional environment Seamless alignment One version of the truth Evidence based financial management in real time Transactional validation and audit trails Accountability Reporting Incorporation of GRAP Improved standardisation Improved audit process across 278 Consistent comparability Transparency mSCOA provides for alignment of the accountability cycle; Improved transparency and accountability; Classification based on leading practice and internal standards; Consistent aggregation of municipal financial info across the entire accountability cycle Whole of government reporting Financial management accountability cycle – mSCOA and the golden thread of alignment

Thank you!