National Treasury
National Treasury
Budget Forum
Discussion Document
A Strategy to Address Municipal Performance Failures
(A sustainability perspective)
August 2019 (Revised)
Table of contents
1 Introduction 3
2 What constitutes a functional, well-performing local municipality? 3
3 Evidence of municipal performance failures 8
3.1 To provide democratic and accountable government of local communities 8
3.2 To ensure the provision of services to communities in a sustainable manner 9
3.3 To promote social and economic development 10
3.4 To promote a safe and healthy environment 10
3.5 To encourage the involvement of communities and community organisation in the matters of local government 11
4 The Local Government Reform Agenda 11
5 Initiatives to build municipal capacity 14
5.1 Extensive efforts to strengthen municipal capacity 14
5.2 Significant funds allocated to building municipal capacity 16
5.3 Outcomes at the municipal level have been disappointing 17
5.4 Problems with past and current capacity building initiatives 17
5.5 Lessons to take forward 19
6 Moving forward 20
6.1 Starting from the Five-Year Strategic Agenda for Local Government 20
6.2 Building on the National Capacity Building Framework 21
7 Framework for understanding the root causes of municipal performance failures 21
7.1 Political accountability and failures in political leadership 23
7.2 External factors that may be implicated in municipal performance failures 24
7.3 Internal factors that may be root causes of municipal performance failures 26
7.4 Capacity assessment tools versus routine performance monitoring 27
8 Going Forward: A Revised Strategy to address municipal performance failures 28
8.1 Maintaining the Status Quo 28
8.2 Overview of the revised Strategy 29
8.3 Step 1: Identifying the prerequisites for success 30
8.3.1 Critical Success Factor 1: Clarification of roles and responsibilities 31
8.3.2 Critical Success Factor 2: Priority to be given to the MoU between NT and DCoG 31
8.3.3 Critical Success Factor 3: Political Support Solutions to Political Problems 32
8.3.4 Critical Success Factor 4: Adequate Resourcing (Skills and Funding) 33
8.3.5 Critical Success Factor 5: A single, inclusive system to monitor and categorise municipal performance failures 34
8.3.6 Critical Success Factor 6: Establishment of a Steering Committee to oversee interventions 35
8.4 Step 2: Using Existing Tools appropriately 35
8.4.1 System based reporting, legislative reporting and Institutionalised Engagements 36
8.4.2 Legislative Tools 36
8.4.3 Capacity Building and Support Initiatives – Adopting a Differentiated Approach 37
8.4.4 Cost Containment Regulations 39
8.5 Step 3: Key Focus Areas and Game Changers 39
8.5.1 Key Focus Area 1: The Game Changers 40
8.5.2 Key Focus Area 2: Review of the External Environment 44
9 Timeframes 47
10 Resourcing 49
Introduction
1. Since the adoption of a new democratic dispensation for local government, the transformation of local government has probably been the largest undertaking within the entire transformation process. While enormous progress has been made in the local sphere, there is still a long way to go before all 257 municipalities are fully functional and financially sustainable.
2. Since 2000, the former Department of Provincial and Local Government (DPLG) (now Department of Cooperative Governance (DCoG)), National Treasury (NT), the South African Local Government Association (SALGA) and a range of other role players have been involved in a wide-range of programmes and initiatives such as the Local Government Turnaround Strategy, the Municipal Infrastructure Support programme, the Municipal Financial Management Improvement programme, Operation Clean Audit and the City Support Programme to build the capacity of local government. There are also increasing examples of innovative provincial-level responses to the provision of effective support and monitoring within the local sphere of government.
3. Enormous amounts of funds have been spent on these initiatives and increasing numbers of ‘technical experts’ are being deployed to municipalities through them. Nonetheless, there is growing evidence that government is failing to get the results it needs and is looking for.
4. National Treasury’s analysis of the state of local government finances indicates that almost half of the country’s municipalities are currently in varying levels of financial distress[1]. The poor state of many municipalities’ financial management is further emphasised by the poor audit outcomes and the exponential increase in the number of violent service delivery protests in recent years. Common grievances remain: inadequate basic services, inadequate housing, weak accountability and a sense of marginalisation.
5. The purpose of this document is to create a common understanding of what constitutes a well-functioning municipality, the achievements that have been made thus far in building the local government sphere and highlights the focus areas for the term of the Budget Council.
6. The desired goal is to ensure that municipalities that are functional and well-performing are sustained at that level and that municipalities that are non-functional and under-performing are effectively supported and monitored.
7. In 2009, the National Treasury drafted a Strategy to Address Municipal Performance Failures, which was later updated in 2014. Both the strategy and updated version were endorsed by the Budget Councils of those terms. There have been a number of new developments in local government since 2014 and it is therefore necessary to revise the strategy in light of lessons learned.
What constitutes a functional, well-performing local municipality?
8. To develop sound strategies to address municipal performance failures it is necessary to describe what constitutes a functional, well-performing local municipality, so one has a benchmark against which to measure. Essentially there are four dimensions that are important:
a. Is the municipality performing its functions and delivering on the desired outcomes?
b. Is the political leadership and organisational capacity of the municipality of such a nature that it will be able to do so on a sustainable basis?
c. Are the finances of the municipality sustainable to allow the municipality to meet its current and future service delivery needs?
d. To what extent are citizens actively participating in the affairs of the municipality?
9. Regarding the first dimension, section 152(1) of the Constitution sets out the objects of local government as being:
a. to provide democratic and accountable government of local communities;
b. to ensure the provision of services to communities in a sustainable manner;
c. to promote social and economic development;
d. to promote a safe and healthy environment; and
e. to encourage the involvement of communities and community organisation in the matters of local government.
10. Section 153 of the Constitution is more explicit and states that “a municipality must structure and manage its administration and budgeting and planning processes to give priority to the basic needs of the community, and to promote the social and economic development of the community, and participate in national and provincial development programmes.”
11. Section 156 of the Constitution identifies the functions which municipalities are responsible for as those listed in Part B of Schedules 4 and 5. In 2005 the Municipal Demarcation Board (MDB) released a report which ranks each function according to the importance attached to the delivery of the service. Priority 1 functions were regarded as high importance and must be delivered by municipalities. Priority 2 functions were seen as having moderate importance and should be delivered while Priority 3 functions were regarded as low importance only to be delivered if funds were available. The following table sets out the MDB’s priority ranking of local government functions:
Table 1: MDB’s priority ranking of local government functions
|Priority 1 functions |Priority 2 functions |Priority 3 functions |
|Water (Potable) |Cleansing |Local sport facilities |
|Municipal roads |Building regulations |Municipal parks and recreation |
|Sanitation |Street lighting |Public places |
|Refuse removal, refuse dumps and solid waste |Licensing and control of undertakings that |Local tourism |
|disposal |sell food to the public |Billboards and the display of advertisements |
|Municipal Planning |Street trading |in public places |
|Storm water |Trading regulations |Local amenities |
|Cemeteries, funeral parlours and crematoria |Control of public nuisance |Licensing of dogs |
|Electricity reticulation |Fencing and fences |Municipal airport |
|Municipal Health Services |Noise pollution |Control of undertakings that sell liquor to |
|Fire Fighting |Pounds |the public |
|Traffic and parking |Air pollution |Child care facilities |
| |Beaches and Amusement facilities |Facilities for the accommodation, care and |
| |Municipal public transport |burial of animals |
| |Pontoons and ferries |Markets |
| | |Municipal abattoirs |
Source: MDB, 2005, Local Government Powers and Functions –Definitions, Norms and Standards
12. It was envisaged in the 1998 White Paper on Local Government and the Constitution that a municipality that achieves the above constitutional objects consistently by performing these functions within its financial and administrative capacity could be described as a functional, well-performing municipality. However, based on more recent indications, the quality of governance in a municipality, the financial health of the municipality and the level of citizen involvement are also fundamental factors to consider.
13. Various performance indicators have been put in place to monitor municipalities’ performance of their functions and delivery against these objects. However, there is a strong bias towards measuring the ‘provision of services to communities’, with far less attention being given to whether it is being done in a sustainable manner, and to the other objects of local government – such as community involvement.
14. Regarding the second dimension, the following figure illustrates the key elements that are necessary to enable a municipality to continue delivering the desired outcomes on a sustainable basis.
Figure 1: Key elements of a functional, well-performing municipality
15. Recently, the importance of sound political leadership has come to the fore as one of the key elements that threatens the organisational capacity of a municipality. A failure in political leadership – where leaders have placed personal rent-seeking behaviour before the interests of the municipality and the community through blatant tender manipulation and preoccupation with power relations, have seen competent officials being replaced with political appointees. This has effectively collapsed professionalism and strategic, managerial focus on service delivery as a primary objective of local government.
16. Community Oversight and Accountability is an important element of a well-functioning municipality. Elections provide for periodic accountability. However, these need to be supplemented by ongoing interactions between communities, councillors and municipalities. Councils and municipalities need to put in place more constructive mechanisms to facilitate community oversight and accountability – such as the proactive implementation of ward committees, performance scorecards, effective consultation processes linked to the IDP and budgets, and the publication of user-friendly and transparent accountability documents and reports.
17. A Mayor with vision and sound political leadership skills and a good working relationship with management is essential to moving a municipality from a low level of performance to a higher level of performance, and for keeping it there. Councillors committed to the principles of good governance and service delivery also play a critical decision-making and oversight role.
18. Strong Organisational Capacity is built upon the way the municipality is structured and functions in practice. In a functional, well-performing municipality, its organisational capacity is built upon:
a. Ethical behaviour, a sound work ethic, a striving for excellence, an acceptance of diversity and a ‘public service’ orientation;
b. Positive and negative incentives for legislative compliance;
c. A range of formal and informal learning opportunities that pass on skills and preserve institutional memory; and
d. An appropriate organisational structure, competent staff in key positions, a sound system of delegations, strong co-ordination, appropriate reporting and oversight mechanisms and the following key systems:
• Financial management systems for budgeting, accounting, cash-flow management, debtor management and financial reporting systems;
• Supply chain management systems, especially for procurement;
• HR systems, especially the appointment processes;
• Spatial planning and development approval processes;
• Capital project management processes;
• Asset registers and planned maintenance systems.
19. The relationship between the size of the municipal operation (Economies of Scale) and the Choice of Technology matters. A large part of a functional, well-performing municipalities’ success depends on its ability to match its choice of technology to the scale of its operations and its socio-economic context as it has a bearing on:
a. The capital cost of infrastructure, which may impact on the number of people that can benefit from an investment (more sophisticated infrastructure is invariably more expensive and so reaches fewer people);
b. The operating costs (including repairs and maintenance) of delivering services, and therefore the affordability and financial sustainability of the services; and
c. The useful life of the infrastructure, which has medium to long term impacts on the municipality’s financial health.
20. It also has a bearing on the extent to which a municipality can take advantage of differing economies of scale by choosing appropriate service delivery models, which can include:
a. Community-based supply options, where the municipality works directly with local communities to deliver services;
b. Labour intensive production approaches that contribute to local employment;
c. Shared services that leverage economies of scale through co-operation with neighbouring municipalities; and
d. Outsourcing which can facilitate part-time access to specialist skills.
21. However, smaller municipalities have less room to manoeuvre when it comes to:
a. The relationship between expenditure on Governance and Administration versus expenditure on service delivery functions;
b. The scale at which they procure goods and services; and
c. The ability to mobilise own revenues and borrowed funds to finance large capital projects.
22. This raises the question: is there a threshold size for a well-functioning municipality? There are divergent views on this issue. There are those involved in local government who believe that many of the existing 186 local municipalities (excluding metro’s, secondary cities and district municipalities) are too small to realise cost-effective economies of scale in Governance and Administration and in certain other areas. There are others who are of the view that a well-functioning municipality is also a function of the interpretation of expenditure assignments and appropriate service delivery modes – of ensuring that the levels of service and fixed costs are appropriate to the context and resources available to the municipality. However, to determine the appropriate size threshold for local municipalities and what level of subsidisation through the intergovernmental fiscal system is appropriate requires further research and should consider the revenue base of the municipality.
23. It should also be noted that the poor investment and/or maintenance of the ICT infrastructure by municipalities have caused major challenges. As a result, municipalities are not budgeting, transacting and reporting directly from their financial systems. This has impacted negatively on revenue management as bills are not issued or are incorrect, debtors are not updated which result in termination of water and electricity services of those that are not paying and “getting away with it”. It is also impacted on audit outcomes as unauthorised expenditure is often incurred when municipalities are receipting and making payments outside of their financial system. Consequently, the controls that are built into the system to indicate when a payment will be exceeding the Council approved budget for a specific vote is not used, resulting in over-expenditure of votes. Furthermore, the poor ICT environment at a number of municipalities impede the implementation of the Municipal Standard Chart of Accounts (mSCOA) reform. In addition, the non-payment of system providers by municipalities often results in the suspension of essential ICT support services by the system provider.
Evidence of municipal performance failures
24. As indicated above, municipal performance needs to be assessed against the objects of local government set out in section 152(1) of the Constitution and the performance of the functions outlined in section 156 of the Constitution. A municipality that achieves these constitutional objects consistently by performing the relevant functions within its financial and administrative capacity could be described as a functional, well-performing municipality.
25. However, it should also be noted that municipalities function within a system of local government, and so there are a range of external factors that impact on the environment within which municipalities work. Very often problems in these external factors cause or aggravate problems in municipalities. These different external factors are discussed below.
3.1 To provide democratic and accountable government of local communities
26. There can be no doubt that enormous progress has been made in the transformation of local government since 1994. Numerous policies and legislation to govern local government have been put in place and most of the larger Metros and some secondary cities have established best practices and produce municipal documents that compete favourably with other well-performing cities in the world.
27. However, many district and local municipalities’ key accountability documents (the IDP, Budget, SDBIP, Annual Financial Statements and Annual Reports) are of such poor quality that they undermine accountable local government.
28. Furthermore, there are municipalities that do not produce their accountability documents timeously, and do not publicise them adequately – so disempowering local communities from holding the Mayor, Council and municipality accountable. During the 2018/19 financial year, only 141 municipalities published their annual budgets on their municipal websites as required in terms of Section 75 of the MFMA.
29. The extent to which municipalities comply with the governing legislation for local government remains problematic. This is reflected by the fact that in the 2017/18 financial year, only 18 municipalities obtained unqualified opinions without findings. This was a 47 per cent decrease compared to 34 municipalities in 2016/17. There was a decrease in the number of unqualified audit opinions with findings from 113 municipalities in 2016/17 to 101 municipalities in 2017/18. However, according to the Auditor General, the closing amounts for irregular expenditure increased from R62.7 billion in 2016/17 to R71.1 billion in 2017/18 while unauthorised expenditure increased from R11.2 billion in 2016/17 to R12.8 billion in 2017/18.
30. According to the report on the State of Local Government Finances and Financial Management for 2017/18 produced by the National Treasury, 125 municipalities were in varying levels of financial distress. The report also highlighted that municipalities continue to have insufficient cash coverage to fund their operations. 121 non-metropolitan municipalities and 3 metropolitan municipalities reported cash coverage of less than one month (the norm is between one to three months) in 2017/18. These municipalities will not be able to pay their fixed monthly operating expenses in an event that no revenue is received in the month or an unplanned financial burden is incurred (e.g. when the equitable share is withheld or unspent grants must be paid to the National Revenue Fund). Often these municipalities then illegally use conditional grants to cover fixed operating expenditure. Other issues identified include the persistent under-spending of capital budgets, growth in outstanding consumer debtors, high levels of outstanding creditors, inadequate spending on asset management, high water and electricity losses and the adoption of unfunded budgets by some municipalities.
31. The conclusion is often wrongly drawn that that the smaller municipalities (especially in rural areas) find themselves in financial distress because they are ‘non-viable’. National Treasury’s research, backed-up strongly by the Auditor-General’s findings, indicates that failures in governance, financial management and administration are the primary causes of municipalities finding themselves in financial difficulties. Key contributing factors include political interference and “municipal capture”, weak management practices and processes. This has effectively destroyed the social compact necessary to run an effective municipality.
3.2 To ensure the provision of services to communities in a sustainable manner
32. Significant progress has been made in extending access to basic services (i.e. water, electricity, sanitation and refuse removal) in previously marginalised communities. These improvements were largely made possible by substantial increases in both the operational and infrastructure transfers to local government from national government.
33. According to the 2018 Statistics South Africa’s General Household Survey (GHS), 89 per cent of households had access to piped water in 2018, compared to 84.4 per cent in 2002.
34. In terms of other services, the percentage of households connected to an electricity supply from the main grid increased from 76.7 per cent in 2002 to 84.7 per cent in 2018.
35. The percentage of households with access to improved sanitation, that is flush or pit toilets with ventilation pipes, has increased from 61.7 per cent in 2002 to 83 per cent in 2018. The percentage of households without access to any sanitation facilities, or who were still using a bucket, similarly continued to decline, decreasing from 12.6 per cent in 2002 to 2.8 per cent in 2018.
36. In terms of refuse removal, while the percentage of households whose refuse is removed at least once per week has increased from 56.1 per cent in 2002 to 64.7 per cent in 2018, large differences exist between urban and rural areas. Whereas 82.7 per cent of households in urban, and 88.3 per cent of households in metro areas had their trash removed once per week, 81.9 per cent of rural households still had to rely on their own refuse dumps compared to 10.6 per cent of households in urban and 4.5 per cent of households in metro areas.
37. While there is little systematic information on municipal service delivery failures, the available information (e.g. the Department of Water Affairs (DWA) reports on water quality, and NERSA reports on electricity infrastructure), media reports and other anecdotal information (e.g. letters to the Minister from rate-payer associations) suggest that many municipalities are experiencing serious difficulties maintaining service standards, and even the services themselves. The current wave of protests against local government in the past few years also indicates growing community frustration with the lack of services.
38. There exists a general public perception that all local government service delivery failures can be attributed to corruption, graft, and maladministration. While this perception is valid as evidenced in a number of high profile cases, most notably the VBS Bank Saga it is not always true that corruption is at the heart of service delivery failure. Many municipalities experience service delivery failures owing to weaknesses in their human resource management, skills in planning, engineering, and service delivery, weak oversight structures and financial management processes and procedures, which might also be a consequence of inadequately focused or corrupt officials.
39. In the National Treasury’s Local Governments Budgets and Expenditure Review for 2011, one of the key observations was that limited expenditure on repairs and maintenance is threatening the quality and reliability of municipal services. The medium to long term consequences of underspending on repairs and maintenance include the deteriorating reliability and quality of services; move to more expensive crisis maintenance, rather than planned maintenance; increasing the future cost of maintenance and refurbishment; shortening the useful life-span of assets, necessitating earlier replacement; and reduced revenues due to the failure to sell water and electricity, and other services.
40. National aggregate spending on repairs and maintenance as a percentage of property, plant and equipment averages 3.5 per cent in the period 2014/15 to 2020/21. Although a rising trend in investment is evident, with full year forecasts reflecting an increase of up to 4.1 per cent by 2020/21 and the aggregate proportion of capital expenditure on asset renewal increasing from 34.7 per cent in 2015/16 to 56 per cent in 2017/18, significant under-investment in asset management continues to be evident. The pace of asset depreciation continues to outstrip investment in asset renewal by a significant margin, with renewal investments accounting for only 83 per cent of depreciation values in 2017/18.
41. The implementation of unfunded mandates for essential services such as health, housing and firefighting continue to place undue pressure on municipal budgets, while the increasing demand for services is being compounded by the “mushrooming” informal settlements.
3.3 To promote social and economic development
42. In the 2008 and 2011 Local Government Budget and Expenditure Review, it was highlighted that the prevailing trends of rapid urbanisation and a reduction in the average size of households are reshaping the contexts for service delivery and governance. Economic developments continue to create pressures on municipalities to expand local infrastructure.
43. The overall conclusion is that “the limited provision of strategic infrastructure and a declining quality of service are growing constraints to economic growth and poverty reduction”, and that “if this trend is not arrested it might undermine the future sustainability of everything.”
3.4 To promote a safe and healthy environment
44. The spatial planning function (as distinct from municipal planning) of municipalities is key to achieving this objective. It is critical to determining and remoulding the urban form to create safer, healthier and more functional cities and to mitigate against spatial marginalisation of the past as required in the National Development Plan. Unfortunately, in many municipalities the function does not exist, or is not effective – due to the lack of clear policy and qualified staff and in some cases, the lack of available land.
45. Even where municipalities do have a spatial planning function, the complex institutional arrangements make co-ordination of processes relating to the built environment difficult; there is no periodic review of planning frameworks, and the mechanisms to prevent corruption are weak. The consequence is that most municipalities are unable to plan and influence the spatial form of land use patterns. This has resulted in the perpetuation of apartheid-style spatial development patterns, or undirected developments that compromise communities’ health and safety (e.g. developments in areas prone to flooding, or the location of housing developments next to heavy industries).
46. Other functions important to this objective are: fire-fighting, building inspections, air and noise pollution control, water purification, the proper management of refuse dumps and sewerage works, the provision of municipal amenities such as parks, and sports facilities. Generally, municipalities are under-funding those functions that are not directly linked to the provision of the key basic services, or have simply not established the functions as yet.
3.5 To encourage the involvement of communities and community organisation in the matters of local government
47. The legislative framework for local government places great emphasis on facilitating and encouraging community participation. To this end, the Municipal Structures Act (1998) provides for the establishment of Ward Committees in metropolitan and local municipalities, and Chapter 4 of the Municipal Systems Act (2000) sets out processes and mechanisms to facilitate community participation in key areas of municipal governance. The Systems Act also requires that the community be consulted when the municipality reviews its IDP, as well as community participation in setting key performance indicators and targets. Similarly, the MFMA prescribes a budget process that specifically requires a two-month community consultation period – between the tabling of the budget at the end of March and the initiation of the process to adopt the budget at the end of May.
48. There are Councils and municipalities that have gone to great lengths to facilitate meaningful community participation. However, by far the majority do it for compliance purposes, effectively just paying lip-service to the process. Consultation processes have tended to devolve into ‘information sessions’ – with little input from the community being solicited or considered. In some instances, the products of consultation processes tend to be wish-lists that have little value for planning and budgeting purposes, rather than the processes being used to draw out the real priorities of communities – so that these can inform plans and budgets.
49. To conclude this brief assessment of municipalities’ performance, it is evident that while there are many examples of exceptional efforts and remarkable successes by individual municipalities, the local government system does not, at present, appear to be responding to these challenges very effectively.
50. It is worth noting that an inability to deliver services in itself does not necessarily reflect a capacity challenge, but could be a manifestation of the failure of local government procedure and systems.
The Local Government Reform Agenda
51. The promulgation of the Municipal Finance Management Act (MFMA) in 2003 laid the foundation for the broader financial management reform agenda for local government to improve transparency, accountability and governance and ultimately service delivery.
52. Some of the key milestones of these reforms include:
a. Developing and implementing Regulations: These include Regulations dealing with budgeting and reporting, supply chain management (SCM), investments and public private partnerships, debt disclosure, the minimum competency requirements of municipal finance officials, asset transfers and disposals, financial misconduct and the Standard Charts of Accounts (mSCOA), municipal cost containment and disclosure of irregular, wasteful and fruitless expenditure;
b. Development and implementation of norms and standards: These include international accounting standards (GRAP), investments and public private partnership arrangements, systems of delegations for effective decision making in municipalities and to assist in improving performance management; risk and internal audit frameworks;
c. Development and implementation of a municipal budgeting systems: Municipal budgeting reforms introduced include: (i) the promulgation of Municipal Budget and Reporting Regulations which have standardised the formats for the compilation of the medium-term revenue and expenditure frameworks (budgets) of all municipalities; (ii) implementation of a funding compliance assessment tool which enables municipalities to assess the level of funding of a municipal budget prior to adoption; (iii) issued the “Dummy Budget Guide” to ensure a balance between financial and narrative information contained in the budget document; development of a Funded Budget Assessment tool that is being used by all treasuries to determine if tabled and adopted municipal budgets are funded;
d. Development and implementation of a municipal reporting system: Developed and implemented a comprehensive reporting system for local government through: (i) the creation of a Local Government Database to facilitate the collection and storage of data; (ii) institutionalised a culture of monthly reporting in terms of Section 71 of the MFMA by all 257 municipalities; (iii) routine publication of municipal budget and in-year financial performance; and (iv) continually striving to increase the scope and quality of the reporting. In-year reporting is now well institutionalised with most municipalities consistently producing in-year financial reports. A sound reporting system facilitates transparency, better in-year management and oversight of budgets, making these reports management tools and early warning mechanisms for councils to improve municipal performance. The aim of an early warning system for local government is to provide government with timely information on the state of municipalities’ finances that highlights possible areas of risk so that such risks can be investigated and mitigated before they give rise to serious problems;
e. Citizens Portal on Municipal Money: National Treasury has also introduced the Municipal Money portal to improve the awareness and participation of citizens in the municipal finances of their respective municipalities;
f. Routine publications: The routine publishing of budget and in-year financial performance information for local government has escalated the performance of local government into the public domain. These publications provide information which was previously not readily available. Routine publications include the consolidated MTREF budget information for all municipalities; quarterly Section 71 reports; State of Municipal Finances Report; over- and under spending report to Parliament; Local Government Budgets and Expenditure Review; and report on the tabling dates of budgets to Parliament;
g. Development and implementation of a Local Government Conditional Grant Monitoring System – In addition to improving the oversight and monitoring of local government conditional grants, a number of initiatives are specifically targeted at strengthening municipal infrastructure grant performance, namely (i) supporting the acceleration of the capital infrastructure projects through the conditional grants pledging process in line with the MFMA; and (ii) the invoking of section 20 of the Annual Division of Revenue Act in respect of unspent conditional grants;
h. 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;
i. Establishment of a MFMA Helpline to provide technical assistance to Provincial Treasuries and municipalities in complying with the MFMA and its Regulations;
j. Tariff Setting and Costing – Municipalities are increasingly operating at a deficit on their trading services. This results in cross subsidisation between service, liquidity and cash challenges and limited maintenance and asset management as part of the budgeting process. While effectively managing the revenue value chain is an important part of the overall financial management cycle, if the tariffs are not cost reflective, there is very little chance for service delivery improvements. This project was concerned with research and development of costing and tariff setting methodologies. A service provider was appointed to assist the National Treasury in this project. In addition, project identification and prioritization was also considered a weak performance area and this project addressed this weakness by providing municipalities with a project prioritization tool. High level outcomes included:
• The development of modelling tools for the costing of services;
• The development of methodologies and implementation tools in the facilitation of tariff determination for trading services in ensuring they trade at a surplus; and
• The development of project prioritization methodology.
k. Implementation of a Municipal Chart of Account (mSCOA) – While significant progress has been made with reporting in terms of the Municipal Finance Management Act, 2003 (Act No. 56 of 2003)(MFMA) and its Regulations (2009), there were still several challenges with the quality, reliability and overall credibility of municipal information. Following the research done on the development of a potential system solution for local government and in response to this challenge, the Minister of Finance approved publication of the Municipal Regulations on a Standard Chart of Accounts (mSCOA) (Notice No. 37577) on 22 April 2014. mSCOA is the uniform classification framework that must be used by municipalities and their entities to capture transactions in their financial systems. Importantly, mSCOA is an organisational change reform that effects all business units with a municipality and not just a financial reform, making it one of the biggest and most complex financial reforms ever implemented in the country. It is also not limited to a standardised financial classification, but incorporates the:
• Modernisation of the Local Government business processes (regulation of minimum business processes and system specifications);
• Application of basic processes and procedures for the daily operation of the municipality; and
• Improvement of the municipal ITC and control environment.
l. Municipal Revenue Management – The municipal revenue value chain includes all the activities that impact billing information used to generate the customers municipal account. These activities usually originate in the Town Planning department (may differ at smaller municipalities) where townships are promulgated, building applications approved, land usage established and certificates of occupation issued prior to the property owner’s application for municipal services and municipal account activation. Generally, municipalities are responsible for generating a large portion of their own revenue and through effectively managing the value chain they can ensure higher levels of own revenue generation resulting in increased viability and sustainability i.e. service delivery. In the recent past it has been observed that many municipalities are digressing in effectively managing the entire revenue value chain resulting in significant leakages within the system;
The research and development phase of this project work stream has been finalised and the focus of the project will shift to supporting improved implementation by municipalities. This would consist of various initiatives including the capacitation and empowerment of 17 non-delegated municipalities and nine provincial treasuries responsible for the 240 delegated municipalities. High level outcomes include:
• The maximisation of revenue collection;
• The introduction of effective debt and credit management practices; and
• Achievement of alignment between revenue management policies and implementation.
m. Financial indicators – To address the inconsistent application and interpretation of financial ratios in the municipal environment National Treasury has developed uniform sets of key municipal financial ratios and norms that was issued through a MFMA Circular No. 71. These ratios and norms should assist municipalities to identify and resolve potential financial problems and make strategic decisions on a more informed basis. National and provincial departments can also use these indicators to monitor municipal financial performance and intervene. Municipalities are also required to develop dash boards in their core financial systems based on these ratios as minimum indicators to assist them to monitor their own performance;
n. Service delivery performance management indicators – The White Paper on Local Government (1998) proposed the introduction of performance management systems to local government, as a tool to ensure that service delivery could be monitored and measured. Over the years, a number of government departments have developed various tools to assist municipalities to better manage both the financial and non-financial performance. The existing performance indicators for local government are fragmented; therefore, there is a need to rationalise these indicators. National Treasury in an effort to align planning and reporting instruments such as the Integrated Development Plan (IDP), the Service Delivery and Budget Implementation Plan (SDBIP) and the Annual Report for a prescribed set of municipal performance indicators, issued a common set of performance indicators through MFMA Circular No. 88. Municipalities are required to report on a quarterly basis as part of the Section 71 reporting process.
Initiatives to build municipal capacity
53. The establishment of the current system of local government entailed a total redesign of the existing systems, and in many areas putting in place local government structures for the first time.
54. In order to effect this transformation, government has put in place numerous capacity-building strategies and programmes.
1 Extensive efforts to strengthen municipal capacity
55. The Siyenza Manje programme (2008 to 2010) was designed to enable national government to leverage the expertise and project management skills of the Development Bank of South Africa (DBSA) to build local government capacity. The initial focus was on technical engineering and project management capacity, but this expanded to include financial management capacity, as well as a Young Professionals programme that placed interns in municipalities for two years.
56. Following a review of Siyenza Manje Programme, it was decided to unbundle the programme and that National Treasury, given its legislative mandate, should be responsible for the financial management capacity building component. The Municipal Finance Improvement Programme (MFIP) commenced on 1 April 2011 under the management of the Office of the Accountant-General in the National Treasury, while the Infrastructure component of the Siyenza Manje programme was moved to DCoG under the Municipal Infrastructure Support Agency (MISA). Under the MFIP Phase I, 94 technical advisors were deployed to municipalities and Provincial Treasuries. The Municipal Finance Improvement Programme (MFIP) is now in its third phase. Through MISA, 65 technical consultants and 19 professional service providers are providing support to 102 municipalities.
57. Municipal Infrastructure Support Capacity Unity (MISA) - Aimed at strengthening municipal technical capacity building for infrastructure delivery. MISA’s focus is building on technical capacity and professionalising local government officials in terms of professional body standards. The programme offers technical bursaries, technical training, mentoring and experiential learning. MISA is currently championing in the Presidential Infrastructure Co-ordinating Committee (PICC) Project that is focused on potentially introducing transversal contracts for the procurement of specialised electrical equipment.
58. Section 139 Constitutional Interventions: Currently, there are 40 Section 139 interventions underway. A rapid response team, consisting of a specialist panel with multi-disciplinary expertise, has been established to assist with the preparation of the financial recovery plan as provided for in Chapter 13 of the MFMA. Previous provincial interventions have not yet yielded the desired results. It is critical that before the interventions are terminated, the issues and reasons for the basis for intervention are resolved so that the objectives of the intervention are met. Clear deliverables and timelines should form part of the Terms of Reference of administrators. Any interventions in municipalities must be synchronised between all the relevant government departments in order to increase effective coordination, avoid double-dipping and overstretching government resources, and also to avoid overwhelming municipalities.
59. City Support Programme (CSP): The CSP was designed to respond to demands from metropolitan municipalities for an integrated programme of assistance in addressing strategic challenges they face in transforming their built environments. Although this is a programme that is coordinated nationally, cities are seen as the drivers and the institutional arrangement for the cities’ participation and engagement has been the City Budget Forum. At a national level the interdepartmental technical committee that has been overseeing the development of the Integrated Urban Development Framework (which DCoG is leading on) is also the forum for national departments’ co-ordination on the CSP. The implementation support covers the sectors of urban governance, planning and financing; human settlements; public transport and environmental sustainability.
60. Local Government SETA, PALAMA, the DBSA’s Vulindlela Academy Training programmes and numerous private training providers are also involved in the training of municipal officials and councillors on an ongoing basis. These training programmes provide short courses, learnerships, bursaries and apprenticeships in areas ranging from ABET, LED, leadership and management, as well as administration and finance.
61. SALGA’s support programmes focus on accelerated service delivery, good governance, sound financial management, fighting corruption, the facilitation of sustainable infrastructure and the capacitation of municipal councillors on their roles and responsibilities.
62. Sector departments, parastatals, the Auditor-General’s Office, professional bodies, educational institutions and trade unions and international donor countries also provide varying levels of support and monitoring services to the local sphere of Government. The key sector departments currently involved in the local sphere are: Water Affairs, Environmental Affairs, Energy, Transport and Human Settlements. There are many more that have support and monitoring responsibilities towards municipalities and whose mandates have a direct impact on the ability of municipalities to fulfil their developmental mandates.
63. Provincial Advances in Municipal Support – All provinces have institutional structures and programmes in place to support municipalities. In most instances the provinces support the roll-out of the national support programmes. In 2014, the Budget Council agreed that there is a need for a provincial support and capacity building programme that addresses the specific capacity needs of each Provincial Treasury. A differentiated approach was adopted based on the individual capacity of each Provincial Treasury to strengthen provincial treasuries so that they are better equipped to monitor and support their respective municipalities on financial management and budgeting related issues. It was further agreed that the key “game changers” required to address municipal performance failures in the next period are funded budgets, revenue management, mSCOA, Supply Chain Management (SCM), asset management and audit outcomes. Each Provincial Treasury developed a Province Specific Strategy based on the key game changers. These strategies were signed off by the respective MECs for Finance, where after experts were deployed through the Municipal Finance Improvement Programme (MFIP) to support Treasuries with the implementation of their strategies. A number of dysfunctional and distressed municipalities were also supported through MFIP.
2 Significant funds allocated to building municipal capacity
64. A substantial amount of money has been allocated to date to support capacity building in municipalities to improve financial management (R7.5 billion for the period 2014/15 to 2017/18 and R7.3 billion for the period 2018/19 to 2020/21). However, despite the considerable spending on capacity building initiatives, unqualified audit outcomes (both with and without findings) were only reduced from 149 municipalities in 2014/15 to 121 municipalities in 2017/18.
65. The Financial Management Grant (FMG) was introduced in 2004 in response to the scarcity of suitably skilled and experienced municipal finance staff, especially in rural areas. It funds the appointment of financial management and accounting graduates as interns in municipalities. Interns are sourced from a pool of unemployed regionally-based Accounting, Economics, Finance and Risk Management graduates and appointed for 24 to 36 month periods. In 2017/18, R502 million in FMG funding was transferred to municipalities, of which 38 per cent was spent on the appointment of at least five interns per municipality; 20 per cent on upgrading and maintenance of financial management systems; 15 per cent on training municipal officials to attain minimum competencies; and 14 per cent on the preparation and timely submission of Annual Financial Statements.
66. A substantial amount per year is also raised from the skills levy for funding capacity building initiatives run by the Local Government SETA. Additional funds also come from donor-funded programmes, and from private sector initiatives.
67. The European Union also allocated R148 million to local government over the period 2019 to 2023 to:
a. Increased Professionalisation of PFM within all 3 spheres of government (national, provincial and local);
b. Strengthening the capacity of PTs to fulfil their delegated functions with respect to provincial departments and municipalities; and
c. Improving the capacity of municipalities to manage public funds and deliver services.
68. These amounts also do not take into account the allocations to PALAMA, the cost of the running the national and provincial departments involved in co-ordinating and managing the different conditional grants and capacity building initiatives, and the funds that municipalities themselves spend on capacity building initiatives.
3 Outcomes at the municipal level have been disappointing
69. When one considers the diversity of strategies and programmes, the amount of hands-on-support given, and the funding going to capacity building in the context of the municipal performance failures outlined above, there is reason to be disappointed with the outcomes of these efforts. This is despite the fact that all programmes are considered to have achieved, or are reported to be achieving their objectives.
70. This raises the key question of this analysis: Does government simply continue doing the same thing going forward? Is it a case of simply throwing more programmes, experts and money at the problem – and eventually it will disappear? Or does government need to step back and consider doing things differently? Furthermore, who is being capacitated and are these skills being retained in local government?
4 Problems with past and current capacity building initiatives
71. This analysis below of problems with past and current capacity building initiatives is not intended to be comprehensive, but rather focuses on issues that inform the approach presented later:
72. The diagnosis of the problem is inaccurate. The prevailing assumption is that all municipal performance failings are due to a lack of capacity – whether it be individual, organisational or environmental capacity. This is despite there being clear evidence of shear laziness, incompetence, mismanagement and political interference. Maintaining this ‘lack of capacity’ assumption enables institutions and officials to focus on the softer, nicer ‘building capacity’ type interventions, rather than the more, messy processes of dealing with bad behaviour and bad performance, and a longer-term focus on aligning systems and incentives to ensure sound administration. There is evidently a lack of political will and consequence management to address many of the perennial problems that impact on the poor performance of local government.
73. Poorly defined roles and responsibilities and turf-wars between national departments, and their provincial counterparts, and between government and other role-players has meant:
a. There is no long-term strategic focus – instead there is a series of ad hoc, successive and parallel initiatives based on a similar methodology (hands-on-support) – but apart from ‘building capacity’ it is not clear what role each initiative plays in relation to the others;
b. The management of capacity building is fragmented, sometimes resulting in overlapping initiatives being undertaken by different role-players in a single municipality;
c. The on-going turf battles between departments distract them from the task at hand; and
d. The lack of co-ordination results in the duplication of efforts and a waste of resources.
74. Little attention has been given to holding municipalities’ accountable for poor performance. In this regard:
a. National government does not have a systematic approach to developing and maintain capacity, and designing approaches based on municipalities’ needs;
b. Programmes have no clearly defined end-dates – so municipalities anticipating ongoing support have no incentive to acquire the capacity they need;
c. The allocation of assistance does not require any matching funding from the municipality, nor does it involve the municipality committing to say filling certain positions going forward;
d. The fiscal system, particularly the design of conditional grants, is not complementing or reinforcing the capacity building programmes;
e. The powerful role that communities can play in holding Mayors, Councils and municipal officials accountable is not being facilitated and mobilised. If anything it is being stifled, resulting in the current wave of service delivery protests; and
f. Political problems require political solutions and relevant political structures should enforce consequences for poor performance by municipalities. There needs to be strong condemnation for poor performance, corruption, unethical and immoral behaviour by the higher levels of political leadership. Broader political issues should not override municipal functionality.
75. The current design of the hands-on-support approach has been too supply-led without municipal ownership. This has consequently led to perverse outcomes, namely:
a. The fact that the deployed ‘experts’ earn more than people working in municipalities is resulting in an exodus of skilled employees from municipalities to these programmes. This is distorting the market for technical skills and making it more difficult to build permanent capacity in municipalities;
b. In practice most experts are gap filling rather than capacity building, because there is (a) no-one to train, (b) the focus is on quick-wins in service delivery so there is no time to train, (c) the expert does not have an aptitude for mentoring and training. The result is that support programmes tend to take over the role of municipal officials instead of helping them do their work;
c. Individuals and organisations have developed vested interests in the current hands-on-approach. The experts want the programmes to continue – because it is their livelihood; and
d. Programmes that simply provide additional support to failing municipalities most often treat the immediate symptoms of failure rather the underlying causes, and reward municipalities with weak performance while effectively penalising (through removing support from) strong performers.
76. Although the performance of experts and capacity building programmes are monitored and audited, there is evaluation of the real impact of and value for money received from capacity building programmes.
77. The current design of capacity building programmes provides for a “crack team” to provide support in instances where a municipality has been identified as being significantly at risk of experiencing a persistent financial crisis and in need of a rapid intervention. Mechanisms to manage the transition between providing support and intervention must be fine-tuned.
5 Lessons to take forward
78. Given the above-mentioned problems with the past and current initiatives to building municipal capacity there is a need to take stock, and consider what needs to be done differently. However, in doing so it is important to identify the key lessons from past experiences to take forward:
a. Focus must be on addressing the root causes of municipal performance failures. A lack of capacity (however this is defined) may be one of the causes, but there are others (both internal and external) that need to be addressed as well, such as incentive issues. In addition, there should be a single source to collect financial and non-financial data on local government that is used by all relevant stakeholders for analysis and reporting requirements; eliminating the duplication of efforts by municipalities in submitting the same information continuously by several departments. By using the same set of data, government and other stakeholders will be able to compare “apples with apples” when they identify areas of concern and municipalities in distress. This is possible through the mSCOA;
b. Improving municipal performance is a long-term and dynamic process. This implies there are no quick fixes, and progress is not necessarily linear. It also implies that government needs to stick with a longer-term strategy and not continually chop and change support programmes;
c. Roles and responsibilities need to be clearly articulated, and mechanisms put in place to ensure proper co-operation and co-ordination between role-players responsible for local government;
d. Align the incentives faced by Councils, Mayors and municipalities to do the right thing and so improve their own performance. This can be done in various ways – through the fiscal system, through the performance management system, and as a result of better monitoring and oversight;
e. Focus on getting the basics right;
f. Use all possible levers to improve performance. There is no single right method or approach to getting municipalities to perform. This recognises the need to address the problem at various levels, through a diversity of means, and for a differentiated approach based on the situation of each municipality;
g. Ensuring that initiatives are properly sequenced. This applies both when addressing environmental issues and when designing support for a single municipality. For instance, one needs to address vacancies before capacity building can take place;
h. Ensuring capacity building initiatives are properly designed, managed and evaluated. This includes ensuring that the causes of performance failure and baseline capacities inform the design of support and intervention initiatives. Enhanced co-ordination between all relevant stakeholders is required to ensure that efforts and resources are not duplicated and the roles of the stakeholders in managing and implementing the various aspects of the programme must be clearly specified at ensure accountability and sustainability;
i. Allowing a municipality to fail needs to be an option. The political crisis that results will encourage local understanding and ownership of what is needed to get things right, and the consequences of not doing so; and
j. The relevant national and provincial government departments should perform proper oversight to ensure that local government addresses municipal performance failures and the appropriate action should be taken to immediately rectify poor municipal performance. If these departments do not have the required capacity or skills to perform the required oversight or provide support to local government, then obtaining or building such capacity should be included in the specific capacity building programme.
Moving forward
79. If it is agreed that things need to be done differently, this does not imply that everything that has gone before should be abandoned. Much good capacity building work has occurred; there are programmes that are performing well. The challenge is to build on what exists, moulding it to be aligned to what needs to be done going forward.
80. The current policy framework, consisting of the Five-Year Strategic Agenda for Local Government and the National Capacity Building Framework for Local Government, provides a useful point of departure. Then there are also a range of initiatives that are performing well, and that should form part of a revised strategy going forward.
1 Starting from the Five-Year Strategic Agenda for Local Government
81. The Five-Year Strategic Agenda for Local Government identifies three strategic priorities:
a. Mainstreaming hands-on support to local government to improve municipal governance, performance and accountability;
b. Addressing the structure and governance arrangements of the State in order to better strengthen, support and monitor local government; and
c. Refining and strengthening the policy, regulatory and fiscal environment for local government and giving greater attention to the enforcement measures.
82. It is clear from the way these priorities are formulated that they recognise many of the problems with the current approach to capacity building, and so are undoubtedly moving in the right direction. Particularly useful elements to take forward include:
a. The commitment to defining roles and responsibilities;
b. The commitment to a pro-active and co-ordinated approach;
c. The recognition that a differentiated approach is required dependent on the needs of a municipality – and that the hands-on approach is one option; and
d. The recognition that a more integrated approach is required, which focuses on individual, institutional and environmental factors that impact on municipal performance.
2 Building on the National Capacity Building Framework
83. The National Capacity Building Framework (NCBF) for Local Government identifies five strategic priorities:
a. Strengthen leadership and professionalisation of municipalities through:
• Structured leadership and management training; and
• Policy and procedures around recruitment and performance management of senior and middle managers.
b. Hands-on support through:
• Direct work-place support to build both individual and organisational capacity.
c. Programme-based and short-term support through:
• Training, internships, learnerships and capacity building events;
• Strengthen existing skills; and
• Facilitate the roll-out of new policies, programmes and processes.
d. Strengthening the environment for municipalities to deliver through:
• Refine policy, legislative and processes to support municipalities ability to fulfil their developmental role.
e. Strengthening capacity to co-ordinate and delivery capacity for municipalities.
84. Again, these programmes address a range of concerns with the current approach to capacity building. The use of the ‘individual – institutional – environment’ framework provides useful insights into the nature of the challenges that need to be addressed – but it also needs to be elaborated upon to bring other critical elements to the fore (see below).
Framework for understanding the root causes of municipal performance failures
85. Figure 2 below makes the very simple point that any municipal performance failure is in the first instance reflective of a failure in national, provincial or municipal political leadership.
Figure 2: Identifying the location of the root causes of municipal performance failure
86. Determining where the root cause of a problem is located immediately identifies who is primarily accountable for the fact that the problem exists and also for developing a strategy to address it:
a. If the problem is internal to the municipality, the primary accountability for the problem lies with the Council and the Mayor, while responsibility for developing a strategy to address the problem lies with the Council, the Mayor, the municipal manager and the management of the municipality, with national, provincial and districts playing a supporting role; and
b. If the problem lies in the external environment, to identify who is politically accountable and responsible for addressing it requires that the different role-players’ roles and responsibilities be clearly articulated.
87. Before proceeding with more detailed descriptions of the internal and external environments it is necessary to address two very difficult questions, namely:
a. When is the lack of finances the problem?
b. How does one distinguish between a failure due to a lack of capacity and a failure due to laziness, incompetence, poor motivation (fear of political repercussions), corruption or dereliction of duty?
88. Firstly, on the question of finances: there are undoubtedly instances when the lack of finances may appear to be the root cause of a particular problem. For instance, when a municipality is unable to raise the funds to finance a new sewerage works. However, before jumping to the conclusion that lack of finances is the problem, one needs to analyse whether the particular choice of technology is appropriate, and then why the municipality is unable to raise the necessary funds – and there may be any number of root causes, including the possibility that the municipality has a poor credit rating due to a bad administration record. The focus needs to be on resolving these root causes, and not simply on the lack of finances.
89. There are, however, many municipalities that are simply too small and consequently cannot realise the necessary economies of scale to do certain things such as raise the funds to finance a sewerage works or employ a full-time urban planner. In these instances, the root cause of the problem lies in the design of the local government system, and therefore a strategy to address the problem must be developed by one or other of the role-players in national and provincial government. Either small municipalities need to be consolidated to form larger municipalities or a new approach to funding the administration overheads and large capital projects of small municipalities needs to be developed.
90. Secondly, on the question of distinguishing between a lack of capacity and laziness, incompetence or dereliction of duty, usually direct observation of or contact with the individuals concerned will provide the necessary answer. The problem is that dealing with laziness, incompetence and dereliction of duty is difficult and messy. It is far easier to assume lack of capacity and prescribe a hands-on support type intervention. However, this approach does not help get the system right. Bad apples do not get thrown out, but remain to undermine the organisation and frustrate fellow employees. To address this problem a greater degree of honesty is required when analysing so-called municipal capacity problems.
1 Political accountability and failures in political leadership
91. The buck stops with the President, the Premier or the Mayor, depending on the sphere of government concerned. It is harsh, but if one signs-up for any of these positions this is what accountability means: taking credit when things go right, and taking responsibility when things go wrong.
92. The constitutional and legal framework make the Council and Mayor of a municipality responsible for ensuring that the municipality is structured and functions in a way that ensures the sustainable delivery of services. If the municipality fails to do so and the cause for the failure is internal to the municipality, the Council/Mayor is accountable for such performance failures. This implies that all persistent municipal performance failures that have internal causes can be attributed to failures in the Council/Mayor’s political leadership.
93. It is the Council/Mayor’s responsibility to provide strategic guidance to ensure that the municipal management resolve the factors that are hindering the municipalities’ performance. Very often this takes time, but what is important is the direction of movement. If things are getting progressively better, the Council/Mayor is providing good political leadership. If not, there is a failure in political leadership.
94. When evaluating municipal performance failures, the first question to address is: Did the Council/Mayor play any direct or indirect role in causing the performance failure?
95. This question addresses the unfortunate reality that many municipal performance failures can be directly attributed to failures in political leadership, where the incentive of officials is to align with political not service delivery priorities:
a. A council paralysed by disruptive, internal political conflicts is unable to fulfil its decision-making role properly: consequently, key appointments do not get made, plans and budgets do not get passed, critical decisions on tariffs are not made, etc.
b. Councillors and Mayors that are corrupt undermine municipal systems and service delivery, and are often directly responsible for performance failures;
c. Slightly more subtle are those councillors and Mayors that are in it for themselves, but rather than being overtly corrupt seek to ‘work the system’ to their advantage. They push the boundaries of good governance, which will ultimately undermine the organisational culture and impact negatively on service delivery; and
d. Lastly, certain councillors are simply incompetent, unable to give strategic leadership on critical issues. If they remain in Council they can hide in the group, it is when they are made Mayor that it becomes a problem.
These political ‘root causes’ cannot be solved through technical support, they require political solutions.
2 External factors that may be implicated in municipal performance failures
96. The following figure sets out the range of external factors that may be implicated as root causes of municipal performance failures.
Figure 3: External factors that may be root causes of municipal performance failures
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97. Political environment: Does the prevailing political climate place pressure on Mayors and councillors to give strong and effective leadership to their municipalities so as to ensure success? Or is the political environment tolerant of mediocrity, careerism, self-enrichment and corruption? Are sanctions for non-delivery and corruption sufficiently harsh, and do they get applied consistently?
98. The national and provincial political leadership play a critical role in shaping the political environment. Firstly, by the example they set, secondly by the messages they send out, and thirdly by demonstrating the political will to deal with the poor performance of their political colleagues in local government.
99. At least one of the reasons for the persistence of political problems in local government can be attributed to a failure of the national and provincial executives to properly exercise the powers vested in them by section 139 of the Constitution and to deal decisively with dysfunctional Councils and corrupt Mayors. More recently there has been more tough-talking, but still not enough tough action to quell the perception that Mayors and Councillors are somehow above the law.
100. Party political structures are also important. They determine which leaders ‘rise to the top’ to take on important leadership roles. They are also responsible for monitoring the performance of political leaders, and sanctioning them if they do not perform. Party political structures can also contradict local leadership structures, e.g. a Mayor is accountable to party officials at a regional level who can determine policies outside of a Council’s area to protect a corrupt individual or process.
101. Roles and responsibilities in relation to local government. If national and provincial government is going to be effective in providing support to local government it is absolutely essential that the roles and responsibilities of all the different role-players get clearly defined, and mechanisms put in place to ensure proper co-operation and co-ordination between them.
102. The other factors: Ongoing policy and institutional analysis is required to evaluate how each of the other factors identified in the figure impact on the performance of local government. Where problems are identified, steps need to be taken to eliminate them. For instance, the identification of cross-boundary municipalities as an obstacle to effective municipal functioning resulted in provincial boundaries being redrawn so as to eliminate them. Current examples of problems with these other factors are outlined below.
3 Internal factors that may be root causes of municipal performance failures
103. The description of a functional municipality outlined previously provides the basis for identifying the internal root causes of municipal failure. If any of the features of what makes up a functional municipality are lacking – then it is more than likely that it is either a root cause or at least a contributory factor to the identified performance failure. For instance, if a municipality does not have a Chief Financial Officer, and there are no competent staff in the Budget and Treasury Office then one does not need to look very far to identify the root cause of the municipality’s Budget being a useless document.
Figure 4: Internal factors that may be root causes of municipal performance failures
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4 Capacity assessment tools versus routine performance monitoring
104. National Capacity Building Framework (NCBF) argues that “The first step in developing and implementing capacity building initiatives is to properly understand the existing capacity of municipalities. This sort of assessment enables targeting of limited capacity building resources, and provides a mechanism to monitor improvement in municipal capacity.” According to the NCBF, this assessment requires:
• Agreed assessment processes;
• Agreed categories of capacity levels of municipalities;
• Mechanisms to link the categories with targeted capacity building support; and
• A system for reviewing capacity building progress and its impact.
The NCBF goes on to propose the development of ‘a standard assessment approach’ and ‘a categorising or typological system’ for municipalities.
105. National Treasury’s view is that rather than investing in building and rolling-out a ‘standard assessment approach’ to measure municipal capacity, the time and effort should be allocated to developing and rolling-out the financial and performance monitoring systems that are required to properly monitor municipalities. After all the ‘big issue’ is municipal performance.
106. National Treasury also strongly advises against the use of a standard ‘categorising or typological system’. In the past municipalities were categorised as ‘high, medium and low capacity’ municipalities by the MDB. These labels have stuck, and are not helpful. There are so-called high-capacity municipalities that are failing, and so-called low-capacity municipalities that are performing well. If these labels were used to direct assistance it would result in poor targeting.
107. The A, B1-4 and C1-2 typology developed by the Palmer Development Group and presented in the NCBF is also not helpful, largely because it is static and based on variables that are unrelated to municipal performance (i.e. size and ruralness, and the allocation of functions). Also using these labels, or similar labels to direct capacity building support stands in direct opposition to adopting a demand driven approach informed by the expressed needs of the municipalities themselves. It also does not accommodate the fact that improvements in municipal performance are dynamic and not necessarily linear.
108. If each of the national and provincial departments fulfil their role to monitor municipalities within their defined area of responsibility, this will generate a body of information that can be used to evaluate the performance of municipalities, and design appropriate responses. Each area of monitoring will bring a different perspective on a municipality’s performance. Where performance problems manifest themselves, the next step is to investigate the root causes of the problem and to design an appropriate response.
Going Forward: A Revised Strategy to address municipal performance failures
109. Since the development of the original Strategy to Address Municipal Performance Failures in 2009 as endorsed by the Budget Council, several developments have taken place which require an amendment to both the original 2009 strategy and the revised 2014 strategy.
1 Maintaining the Status Quo
110. The situational analysis provided in the earlier parts of this report relating to the number of municipalities in financial distress, the outcome of audit opinions, the increase in the number of S139 interventions collectively paint a bleak picture of municipal performance, in spite of the R7.5 billion rand spent on capacity building in from 2014/15 to 2017/18.
111. If these trends had to be extrapolated into the future, there is little, if any, doubt that the trajectory of poor performance will continue to show an incline. To reverse this trend of persistent poor performance, it is necessary to ensure the implementation of a strategy which defines agreed upon priorities, distinguishes between the respective roles and responsibilities of the different role-players, coordinates capacity building and support, correctly sequences interventions or initiatives to improve performance and ensures allocative efficiency in the use of available resources.
112. The risks of maintaining the status quo of fragmented efforts to address municipal performance problems, poor coordination, constant “turf battles” and the lack of appetite to enforce consequences for poor performance can be depicted by the figure below:
Figure 5: Four pillars of sustainability
2 Overview of the revised Strategy
113. The purpose of this strategy is to develop a synergised approach to dealing with municipal performance failures. It is not intended to address the issue of municipal financial emergencies which forms part of a separate document. It is also not intended to deal specifically with the process of municipal interventions in terms of Section 139 of the Constitution. While the National Treasury can advise and contribute to process of a S139 intervention, the Constitution places responsibility for such an intervention in the hands of the Provincial Executive. The effectiveness of such an approach is a relevant issue that should form the basis of a separate discussion and is therefore not included as part of this document.
114. The figure above provides an overarching view on which the four pillars of an effective and well-functioning municipality is premised.
115. It is also critical to emphasise the interdependence between the pillars. All four pillars must be in place in order for the municipality to execute its constitutionally mandated roles.
116. This strategy draws on work done in the 2009 and 2014 versions of the Strategy to address Municipal Performance Failures. It has been amended to align with some of the initiatives underway in the sector.
117. The revised strategy highlights where attention should be focused over the next few years to improve municipal (financial) performance, but does not include the detail of the activities required to achieve the objectives. However, the detailed strategies are available through several other documents presented to the Budget Council and the Technical Committee on Finance.
Figure 6: Identifying the location of the root causes of municipal performance failure
118. The strategic steps required to revise the current capacity building approach are:
Step 1: Identifying the critical success factors;
Step 2: Using existing tools better; and
Step 3: Identifying key focus areas and game changers for capacity building support
3 Step 1: Identifying the prerequisites for success
119. The identification of critical success factors is an essential part of any strategy development. It explores the factors which are essential for the attainment of the objectives outlined in the strategy. Failing to identify the critical success factors will lead to failure in the implementation of the strategy.
120. The critical success factors are as follows:
Figure 7: The critical success factors
1 Critical Success Factor 1: Clarification of roles and responsibilities
121. It is still relevant to maintain the clarification of roles and responsibilities as a critical success factor in this version of the strategy as many of the short-comings of the past and present municipal capacity building initiatives can be linked directly to the lack of clarity around roles and responsibilities.
122. It is almost ten years since the strategy was first endorsed by the Budget Council and issues regarding the respective roles and responsibilities of key sector partners and stakeholders have not been satisfactorily resolved. In addition to the clarification of the roles of the two key departments involved with local government finance and service delivery, namely, NT and DCoG, it is also necessary to clarify the roles and responsibilities of other sector stakeholders to identify the value that these stakeholders could add within the context of their defined roles.
123. The role of SALGA and other emerging organised local government organisations in improving municipal performance warrants special attention. SALGA can play a direct role in empowering municipal councillors to ensure that they execute their oversight role effectively and attend to their assigned responsibilities as required in the regulatory framework. For instance, councils must meet regularly to take decisions, must operate more effectively by listening to communities, working through ward committee structures and be responsive to the needs of all citizens. Councils must report back regularly to their constituencies on performance.
2 Critical Success Factor 2: Priority to be given to the MoU between NT and DCoG
124. Discussions to ratify the issues of the respective roles and responsibilities between NT and DCoG began in 2009 when various policies, service delivery, financial management and institutional challenges were experienced at municipalities.
125. These discussions informed the proposal of the original MoU, where implementation has been the subject of negotiations since 2014.
126. The principles espoused in the MoU is that National Treasury will lead on local government financial management matters while DCoG will lead on the governance and service delivery coordination.
127. In 2015, the MoU was concluded and formally signed by the two DG’s in office at that time. This signed MoU would have formed the basis for the Presidential Proclamation to allow the President to confirm the functional changes of the two Departments; and then proceed to Minister of DPSA culminating in legislative amendments to both the MFMA and the MSA.
128. DCoG later cited areas of disagreement and rescinded the signed MoU. The two functional areas contested in the MoU pertains to revenue management the overlap of the MFMA and Chapter 9 of the MSA; and similarly, the audit outcomes.
129. In April 2018, premised on the evidence of growing municipal financial crisis and the impact on financial sustainability and service delivery, the two DG’s (NT and DCoG), together with their respective senior managers, met.
130. Among the issues discussed were the rescinded MoU; areas of collaboration; and the strategy to jointly support dysfunctional municipalities in a coherent and coordinated manner. The meeting concluded that the main drivers of the municipal financial crisis is attributed to weak governance and leadership failures, weakening oversight and accountability, and uncoordinated government efforts that target municipal service delivery failures.
131. In response to these challenges, it was agreed that the MoU will be an interim vehicle, to guide the collaborative approach between the two Departments and the required cohesive effort to undertake local government oversight, monitoring, reporting and support responsibilities. This will be cascaded to the respective provincial counterparts.
132. In the meantime, the legislative review already in progress will be expedited to confirm the roles, responsibilities and functions of the two departments.
133. The defining roles and responsibilities should result in a ‘terms of reference’ for each department / stakeholder (including provincial departments) that sets out their particular roles and responsibilities with regards to local government, including the kinds of monitoring and oversight they are responsible for managing. In the interim, these terms of reference could form the basis for co-operative MOU’s between role-players that would aim to better co-ordinate national and provincial relationships with local government. However, a legislative review will be required to formalise such clarification of roles and responsibilities.
3 Critical Success Factor 3: Political Support Solutions to Political Problems
134. The political environment contributes to shaping the incentives faced by Mayors and Councillors, and can either encourage them to do the right thing, or create the impression that it does not really matter. It is therefore proposed that the national and provincial political leadership can make an important contribution to shaping the political environment by:
a. Sending the right political messages;
b. Ensuring there is political oversight of the performance of Mayors;
c. Political interventions in dysfunctional Councils; and
d. Ensuring that allegations of corruption against Mayors and Councillors get properly investigated and prosecuted and that there is no appearance of rewarding malfeasance by redeploying implicated officials to other spheres of government, etc.
135. Sending the right political messages through the national and provincial leadership need to be consistently communicated. Examples of key messages on local government may include:
a. Zero tolerance of self-enrichment, nepotism and corruption;
b. Councils and Mayors are responsible for driving improvements in service delivery, and will be held accountable for service delivery failures;
c. Councils must appoint competent municipal managers, Chief Financial Officers and other senior managers; and
d. Households that can afford to pay for their rates and services must pay for what they use.
136. Political oversight of the performance of Mayors is extremely important if accountability and overall governance is to be improved. The enactment of the Public Audit Act by the Auditor General can play an important role in the impartial treatment of corrupt activities.
137. Political interventions in dysfunctional Councils: Certain Councils are rendered dysfunctional by political conflicts between political parties, or even between members of the governing party. These problems cannot be resolved administratively – they require political interventions by either the provincial or national leadership of the relevant political parties. It would be useful if there could be a mechanism to help identify potential conflicts early on so that steps can be taken to diffuse them before they impact negatively on municipal performance.
138. Ensuring allegations of corruption are investigated and prosecuted: There is an unfortunate, but widespread perception that corrupt politicians, especially in local government, always get away with it creating a negative incentive. This perception creates a sense of cynicism among rate-payers, and undermines any sense of civic duty – both of which impact negatively on their willingness to pay their municipal bills. The perception may also encourage other politicians to try their luck. To change this perception, it must become abundantly clear that that corruption is not tolerated, and the most effective way of showing this is to ensure that all substantive allegations of corruption against Mayors and Councillors get investigated and prosecuted. This requires political will, and a high degree of staying power, because these processes can generate significant political heat and is often time consuming.
4 Critical Success Factor 4: Adequate Resourcing (Skills and Funding)
139. Without adequate resourcing, efforts to build and maintain a sustainable municipality will not bear fruit.
140. Skills resourcing and capacity building does not imply only the allocation of nationally deployed resources (people) to local municipalities. For skills resourcing to be effective, there must be someone to supply the resources (typically national and provincial government through capacity building and support programmes) and someone to receive the knowledge and skills (a designated official within the municipality to whom the skills can be transferred). Without having both a “provider” and “recipient”, efforts to build capacity and successfully transfer skills will be ineffective.
141. In addition, there are various initiatives that aim to contribute to developing skills that are needed by local government. These include various interns’ placement programmes, placement of young professionals, bursary programmes and mentoring programmes. There is a need for better co-ordination, and these initiatives need to be expanded.
142. In all capacity building programmes there needs to be a clear separation between the authority role (who directs the deployment of ‘hands-on support’ to municipalities, and monitors and evaluates the success of the intervention) and the service provider role (who employs and manages the experts that get deployed to municipalities).
143. Support programmes must move away from gap filling. The approach of ‘deploying’ experts needs to be revisited with a view to re-establishing a better balance in the municipal market for technical skills available to municipalities, and ensuring capacity is built in municipalities over the medium term.
144. The oversight and support responsibility of 240 municipalities have been delegated to the Provincial Treasuries. Therefore, it is essential to continue strengthening the capacity of Provincial Treasuries to perform their support and oversight role over local government. The support will be based on the Province Specific Strategy of each Provincial Treasury and will focus on the six game changers of funded budgets, revenue management, mSCOA, asset management, SCM and audit outcomes.
145. In the case of a section 139 intervention, where national government deems it necessary to appoint an administrator, it will bear the full cost of appointing such a person, and providing other ‘experts’ to assist implementing the recovery plan.
5 Critical Success Factor 5: A single, inclusive system to monitor and categorise municipal performance failures
146. There are at present a number of different systems in use to identify and classify the need for municipal support and intervention. This is the main reason behind the quoting of different statistics by different stakeholders and failures to successfully arrest the problem of municipal failures. For example, the DCoG uses audit outcomes to identify municipalities requiring some or other form of intervention. National Treasury, on the other hand, has a sophisticated and reliable Local Government and Reporting Database from which municipal performance data is extracted.
147. It is critical that a single, inclusive method be found to identify municipalities with poor financial and service delivery performance. Given the shortage of skills in the sector, it is necessary to ensure that limited resources are allocated efficiently and aligned to where the needs are the greatest. A unified approach to identifying and classifying distressed municipalities will also ensure that interventions are not duplicated.
148. From the single system, it will be important to rank the municipalities in order of where the poorest performance prevails to where municipal performance requires intervention but to a lesser degree. It is proposed that a “triage” system be developed to assist in the allocation of support and other interventions to ensure that limited resources are used efficiently and target areas where a total municipal failure is imminent.
Figure 8: Identifying the location of the root causes of municipal performance failure
|Proposed Classification system |Type of Intervention required |Resources to be deployed |
|3 or more pillars of sustainability at risk | | |
|2 pillars of sustainability at risk | | |
|1 pillar of sustainability at risk | | |
|Municipal performance is satisfactory but requires | | |
|monitoring of certain KPIs | | |
|Municipality performs in terms of S152 of the | | |
|Constitution | | |
149. There must also be a requirement in respect of a single monitoring system that all information collected gets published according to a fixed time-table on an appropriate website so that it is accessible to other role-players, and where appropriate that it also be made public.
6 Critical Success Factor 6: Establishment of a Steering Committee to oversee interventions
150. Progress made in interventions or capacity building initiatives must not only be monitored but must be evaluated to determine whether they are successful in achieving the desired outcomes.
151. Interventions fail for a number of reasons. The units responsible for interventions or the allocation of resources are usually the ones that monitor the outcomes. In cases like these, they may be an incentive to “hide” the actual impact of the intervention as it might reflect poorly on their own performance or result in the termination of programmes and budgets. It is important therefore that an oversight committee consisting on different role-players be formed to objectively evaluate the success or failure of interventions.
152. This committee can be the same committee that will be responsible for identifying the municipalities most in need. This would assist Parliament oversight.
4 Step 2: Using Existing Tools appropriately
153. There are a wide range of tools available to address poor performance in municipalities. However, the right tool must be employed for the right purpose and under the right circumstance to yield the desired outcomes.
154. This step of the strategy involves knowing what tools are available and how best to employ the tools under given circumstances:
Figure 9: tools available to address poor performance in municipalities
1 System based reporting, legislative reporting and Institutionalised Engagements
155. The legislation, in this context referring to the Constitution and the MFMA, provides extensively for monitoring and reporting of municipal (financial) performance. Reporting takes places at different stages of the municipal accountability cycle allowing adequate opportunity for ex ante and ex post interventions when poor performance is identified.
156. The Local Government Financial and Reporting Database contains extensive financial and non-financial information. The database is the central repository for all local government data within the National Treasury.
157. In additional to the above, the processes of assessing municipal budgets before they are approved by Council and the mid-year budget and performance assessment engagements are two well-institutionalised processes. Both these processes allow for the early identification of potential financial and service delivery problems. Sector departments are invited to attend these sessions, however, attendance by sector departments is very poor.
158. Monitoring and reporting systems are generally underutilised. There is limited capacity to use the information for review and give feedback on the performance of municipalities. Often, data is analysed without giving consideration to how this influences the broader information and knowledge management within government. The silo approach to monitoring is still very prevalent where departments tend to monitor what is within their defined responsibilities without recognizing the interdependence between the pillars and performance indicators.
159. The general capacity of most national and provincial departments to analyse and provide useful feedback to municipalities on their performance is currently very weak. Significant effort needs to go into building this capacity, as an essential tool in strengthening the monitoring and oversight of local government.
2 Legislative Tools
160. Similar to the above section which highlights the need to use the right tool for the right purpose, it is important to know which type of legislative provision to invoke for the different types and levels of municipal transgressions.
161. The legislation, in this context again referring primarily to the Constitution and the MFMA make provision for interventions ranging from a soft, supportive, capacity building type of approach towards adopting a harder stance in the form of invoking Section 216(2) of the Constitution which allows for the stopping of transfers to a municipality for repeated transgressions or transgressions of a more serious nature.
162. Constitutional remedies apply to NT, DCoG and the provincial structures of both departments.
163. Interventions required to remedy financial problems are also available in the MFMA. Of particular importance in this respect is the establishment of a Municipal Financial Recovery Service.
164. Further guidance on how to intervene in terms of the provisions of MFMA is being compiled in the form of Steps of Intervention guideline to be shared amongst the relevant sector stakeholders.
3 Capacity Building and Support Initiatives – Adopting a Differentiated Approach
165. Failures in previous approaches to support programmes have been documented in the earlier sections of this strategy. It is evident that a differentiated approach to support and capacity building is required in light of the varying levels of skills and capacity in both the provincial treasuries and municipalities.
1 Support to Provincial Treasuries
166. Future support to Provincial Treasuries will be based on the specific requirements of the province at the time. The types of support and assistance rendered to a specific Provincial Treasury will be considered on a case-by-case basis. It may be that a provincial treasury performs well with the analysis of the quarterly Section 71 reports, but the same Provincial Treasury may experience difficulties with the budget assessment and benchmarking process. In such a case, a resource that is competent within that discipline will provide short term support to capacitate the Provincial Treasury.
167. Based on an assessment of their capacity to implement the local government reform agenda, it is envisaged that the nine provincial treasuries will be categorised in terms of the level of support they require as:
168. Well Performing: assistance will be short term and will mainly focus on guidance and advice, specialist support to strengthen specific functional areas, financial support to provincial programmes, advisors / experts in specific functional area(s).
169. Functional: treasuries will be supported to address their organizational and capacity challenges. Commitment and a clear plan to address capacity gaps in terms of adopting and populating a structure will be key requirements for technical support. A combination of long term and short term assistance will be provided, depending on extent of the treasury’s weaknesses. The focus will be on strengthening these treasuries’ ability to perform their functions.
170. Weak: a combination of long term and short term support will be provided according to the specific needs of the treasury. The focus will be on enabling these Provincial Treasuries to perform their monitoring, support and intervention functions, while at the same time providing the necessary support to weak municipalities on behalf and in conjunction with the treasury until it is capacitated enough to perform their required functions independently.
2 Support to Municipalities
171. The MFIP is now in its third phase. The Municipal Finance Improvement Programme (MFIP III) procured and deployed a total of 59 technical advisors during the 2017/18 financial year, of whom 5 exited the programmes during the year. As at 31 March 2018, the programme was providing support in the following areas:
• Direct capacity support to municipal Budget and Treasury Offices (BTOs) in general financial management areas: eight (8) advisors were deployed in municipalities, with an eventual target of supporting 20 municipalities across the nine (9) provinces by the end of the next financial year;
• Direct capacity support to the Municipal Finance Units of Provincial Treasuries (PTs): 27 technical advisors were placed at the nine PTs providing general PT support (8); specialist SCM support (8); mSCOA support (6); specialist asset management support (3); and specialist revenue management support (2). It is envisaged that a total number of 41 technical advisors will be placed at the PTs by the end of the next financial year;
• Direct capacity support to two National Treasury (NT) Chief Directorates (CDs), namely Local Government Budget Analysis and MFMA Implementation: 13 technical advisors were placed in the two CDs providing specialist support in Financial Management Capacity Maturity Model (FMCMM) (2); Audit outcomes (1); mSCOA (3); Budgeting and Reporting (1); Municipal Financial Recovery Services (MFRS) (5); and Revenue Management (1). An additional three (3) specialists for MFRS and mSCOA must still be procured in the next financial year which will increase the number of technical advisors placed at NT CDs to 16; and
• The full complement of six (6) technical advisors were procured to provide programme and project management capacity support to the officials in the MFIP Project Management Unit (PMU).
172. Cities Support Programme (CSP): The CSP support metropolitan municipalities to strengthen urban governance systems required to build more productive, inclusive and sustainable cities. It operates within the parameters of the Integrated Urban Development Framework (IUDF). The first phase of CSP entered its final full year of implementation in 2017/18. The implementation of the second phase of the Programme has been approved based on a number of evaluations including the Government Wide Evaluation System through the Department of Planning, Monitoring and Evaluation (DPME).
173. The CSP has delivered a broad range of outputs, documenting progress made in strengthening urban planning systems, financial strategy making and infrastructure delivery management. It has focused on key aspects of built environment management, including housing and urban public transport, while building a portfolio of activities that support metros to focus their actions on building resilience and accelerating inclusive growth. From a programme perspective there were two priorities for 2017/18: project (output) delivery and effective institutionalization. These were both essential to ensure that the CSP leaves an enduring legacy, across government, for the subsequent programme phase, and for any successor initiatives.
174. Revenue Management Support: A Revenue Management project is being implemented at provincial treasuries and their associated municipalities to achieve the following objectives:
• Strengthening support with respect to oversight of municipal revenue budget assessments with a view to protect and optimise municipal revenue streams;
• Assessing the credibility of the municipal revenue base and its revenue generation potential to maximise revenue collection (General Valuation Roll and supplementary valuation processes);
• Identify and fix the weaknesses in tariff determination processes (this will rely on mSCOA and correctly understanding costs per service; consumption patterns and demand management);
• Improving municipal revenue governance arrangements and implement effective cash management systems;
• Assisting with establishing a revenue committee at the municipality with a revenue champion to lead (preferably someone outside the BTO that reports directly to the municipal manager);
• Achieve alignment between revenue management strategies and policies; and
• Improve financial management performance in municipalities.
3 Parallel support initiatives
175. The President in 2014 launched the Back-to-Basics Programme (B2B). This re-focused municipalities on ensuring compliance with existing legislative requirements and on creating a more responsive, service delivery-oriented culture. From the above underpinning principles, DCoG initiated Back-to-Basics that focused on developing three categories of municipal performance through an assessment criterion to initiate focused action. Pillars of the Back-to-Basics approach against which municipalities had to report to the department were established. The assessment was conducted using the pillars of the Back-to-Basics programme which are political stability, good governance, service delivery, financial management, institutional management and community satisfaction.
176. The objective of this approach was to recognise good performance and to ensure appropriate consequences and support for under-performance. This assisted to ensure that challenges in the local government sphere, specifically in the short to medium term, are addressed. This exercise resulted in the development of municipality-specific action plans that included a financial component for which treasuries are responsible.
177. Initiatives such as DCoG’s “Back to Basics” with the support of MISA may be an avenue to lean on for resources.
4 Cost Containment Regulations
178. On 7 June 2019, cost containment regulations were promulgated and published in Government Gazette No. 42514 by the Minister of Finance in accordance with the requirements of the MFMA.
179. The object of these regulations in line with Sections 62(1)(a), 78(1)(b), 95(a) and 105(1)(b) of the MFMA, is to ensure that resources of a municipality and municipal entity are used effectively, efficiently and economically by implementing cost containment measures.
180. These regulations must be enforced at local government level to improve fiscal discipline.
5 Step 3: Key Focus Areas and Game Changers
181. The key focus areas have been divided into two sections. The first section addresses the “game changers” which have been adopted by the national and provincial treasuries and presented previously to Budget Council.
182. The second key focus area involves a review of the external environment to identify the factors that impede good municipal (financial) performance.
1 Key Focus Area 1: The Game Changers
183. The National and Provincial Treasuries have adopted 6 “game changers” which will service as streamlined focus areas to improve the capacity and financial performance of municipalities. These game changers will form the first set of key focus areas in this strategy. The game changers are identified below and represent the first part of this step:
1 Game Changer 1: The Funded Budget
184. The funded budget is intended to ensure that budgets adopted by a municipal council are funded, i.e. the anticipated revenue collections will be sufficient to finance anticipated expenditure in that year. A funded budget however, is dependent on the accuracy of revenue assumptions and the realisation of planned revenue depends on the fiscal effort applied by municipalities.
185. The overall objective of this game change is to ensure that municipalities are able to meet their financial obligations and having a positive cash position. In addition, improved financial sustainability over the medium to long term will facilitate improved service delivery.
186. Over the years, processes have been put in place to ensure that this game changer is well-institutionalised in Local Government. The concept of a funded budget is derived in terms of Section 18 of the MFMA. On 30 March 2007, MFMA Circular No. 42 was issued to municipalities to support the funding compliance methodology. A funding compliance guideline was also issued on 10 March 2008.
187. This was followed by the promulgation of Municipal Budget and Reporting Regulations (MBRR) on 17 April 2009 which specifies the budget formats that give effect to the funding compliance methodology as articulated in Schedule SA10.
188. Since the promulgation of the regulations, provinces and municipalities have been extensively trained on the MBRR and the funding compliance methodology and a standard budget assessment framework has been developed to guide the national and provincial treasuries in this task.
189. Despite the results of the funding compliance assessment have being consistently published as part of the annual MTREF budget publication and for the first time in the 2017 Budget Review, many municipalities are still adopting unfunded budgets, hence the importance of this item as a game changer.
190. When budgets are unfunded, recommendations are made to the administrators to elevate to Council to adopt, but these are not usually taken and are consequently not implemented. The MFMA provides for consequences in the case of non-compliance, however this is seldom pursued.
191. This game changer will focus on the coherent implementation of the assessment strategy by national and provincial treasuries and will explore ways in which municipalities are forced to implement the recommendations.
2 Game Changer 2: Revenue Management
192. The focus of the revenue management game changer is to ensure that municipalities are able to bill accurately for services provided and that they are able to effectively administer policies associated with revenue management, such as the indigent policy, debtors control policy and the creditors control policy.
193. Initiatives to date supporting revenue management in municipalities include the issuing of MFMA Circular No. 64 on 20 November 2012, undertaking research on the integrated revenue management strategy and presenting this to the TCF Lekgotla in 2015 – the intention being to pilot the methodology in each province for 1 municipality, collaboration with MILE and the WC PT to introduce revenue management master classes, placing revenue management advisors in 2 provinces (MP & NW) through the MFIP III programme, completing baseline assessments to identify critical areas and specific municipalities requiring hands-on support.
194. In addition, DCoG has also assisted 37 municipalities with simplified revenue management plans. The area that requires further engagement with DCoG relates to the holistic revenue management function and the linkages with tariff setting, credit control, debt collection, indigent policies.
195. NT and DCoG agreed in principle to a single integrated approach to revenue management that must be implemented in municipalities, however the details still need to be worked out. Indications are that SALGA has also commissioned work on revenue management.
196. Revenue Management is a highly contested issue when it comes to determining roles and responsibilities. It is one of the reasons why the MoU between NT and DCoG has previously been rescinded. This resolution of this issue must be given priority.
197. Top-level political messaging to pay municipal bills must continue and be further emphasised.
3 Game Changer 3: The Municipal Standard Chart of Accounts (mSCOA)
198. While significant progress has been made with reporting in terms of the Municipal Finance Management Act, 2003 (Act. No.56 of 2003)(MFMA) and its Regulations (2009), there were still several challenges with the quality, reliability and overall credibility of municipal information.
199. In response to this challenge, the Minister of Finance approved the publication of the Municipal Regulations on a Standard Chart of Accounts (mSCOA) (Notice No. 37577) on 22 April 2014. mSCOA is the uniform classification framework that must be used by municipalities and their entities to capture transactions in their financial systems.
200. Nine years prior to promulgating the Regulations, the national Treasury prepared the environment for the implementation of the reform through extensive consultation and piloting of the concept. After promulgation of the Regulations, municipalities and their entities had a three-year preparation period to comply with the Regulations by 01 July 20017.
201. The benefits of this reform are to:
a. Improve the quality of local government information informing national policy debates;
b. Improve the overall financial planning ability of municipalities as they implementation of the project segment demands that all senior managers actively partake in the formulation of operational and capital projects;
c. Provide the data structure to compile both budgets and financial statements;
d. Improve data comparability between municipalities to inform policy decisions;
e. Allow for better resource management and greater consistency in financial management;
f. Relieve reporting fatigue and the cost of reporting as mSCOA allows for data extraction in various reporting formats from a single collection source;
g. Modernise financial management through updated systems and technology; and
h. Improves transparency and accountability leading to a high level of service delivery.
202. Importantly, mSCOA is an organizational change reform that affects all business units within a municipality and not just a financial reform, making it one of the biggest and most complex financial reforms ever implemented in the country. It is also not limited to a standardized financial classification, but incorporates the:
a. Modernisation of Local Government business processes (regulation of minimum business processes and system specifications);
b. Application of basic processes and procedures for the daily operation of the municipality; and
c. Improvement of the municipal ICT and control environment.
203. Two-year post implementation, at least 10 of the 12 system vendors in the municipal space have fully intergrated system solutions, while the submission rate of financial information in the form of data strings by municipalities are exceeding 80 per cent.
204. Some of the key implementation challenges relating to mSCOA are:
From a municipal perspective:
• Inadequate ICT infrastructure to support and enable mSCOA implementation;
• Inadequate budget to purchase all modules of the financial system – impacts on seamless integration;
• Lack of adequate training and support by vendors; and
• Further change management required – mSCOA is still seen as a financial reform and not a business reform.
From a vendor perspective:
• Underestimated the time required to complete system development – some vendors, despite the requirements of the mSCOA Regulations and contrary to what was communicated since 2009 by NT, are phasing-in their applications;
• Cost of system development and version changes;
• Municipalities not doing their part (e.g. data cleansing) impacts on system implementation;
• Non-payment by municipalities resulting in support services being suspended; and
• Training has been provided to municipalities, but municipal officials require additional training but do not want to pay for the additional training – often the training provided was poorly attended, hence the need for additional training.
205. mSCOA is one of the key game changers to address municipal performance failures. Ultimately the aim is to get to a point where all municipalities plan, budget, transact, prepare their Section 71, Annual Financial Statements and Annual reports directly in and from the financial system.
206. In the latter part of 2019, National Treasury will appoint a service provider to conduct independent system audits on each core municipal financial system to determine if these systems are complying with the minimum requirements of the reform. The outcome of the audits will inform the issuing of another Transversal Tender for the procurement of municipal financial systems.
4 Game Changer 4: Asset Management
207. The purpose of asset management as a game changer is to ensure improved asset maintenance and timely replacement of municipal assets. This will enable a municipality to ensure both the quality and availability of basic municipal services. Proper asset management is also a prerequisite for protecting a municipality’s asset base through ensuring fewer interruptions in the delivery of billable services.
208. The National Treasury is in the process of developing the equivalent of the IDIP (IDMS) reform for local government. The CIDMS (Cities Infrastructure Delivery Management System) is piloted in Cape Town and eThekwini. mSCOA vs 6.1 cater for the reporting requirement for this reform.
209. The NT has issued the Standard for Infrastructure Procurement, which is now under review, the Office of Accountant General issued a framework for moveable assets (GIAMA), the MFIP II commissioned work on asset registers in 21 municipalities which should be regarded as best practices, the MFIP III currently placed advisors in 3 provinces (MP, KZN and WC) to assist PTs with the roll out of the asset management game changer, baseline assessments have been completed to identify critical support areas and specific municipalities requiring hands-on support.
210. As part of the municipal budget assessment process the following indicators are considered:
a) Spending on renewal and upgrading of existing assets; and
b) Spending on repairs and maintenance in relation to PPE.
5 Game Changer 5: Supply Chain Management
211. The purpose of SCM as a game changer is to ensure improvements in SCM processes and procedures. Functional Bid Committees will eliminate delays and leakages in the system to ensure that funding for projects are not diverted from the poor through poor SCM processes and that value for money is obtained in each project.
212. It is claimed that SA has one of the best budgeting systems in the world. However, funding intended for the poor does not always reach the poor. The establishment of the Office of the Chief Procurement Officer is intended to address leakages plaguing the system.
213. Initiatives to date include the new Public Procurement Bill to be issued to address targeted procurement strategies which will hopefully regulate GPS coordinates in all procurement processes, a Central Supplier Database (CSD) was introduced which maintains a list of organisations, institutions and individuals who can provide goods and services to government. The purpose of a centralised government supplier database is to reduce duplication of effort and cost for both the supplier and government while enabling electronic procurement processes.
214. In addition, the e-Tender portal was also introduced to provide a single point of access to information on all tenders made by all public sector organisations in all spheres of government. A review of existing good practices on contract management in KwaZulu-Natal was undertaken which informs the generic contract management guidelines soon to be finalised.
215. MFIP III currently placed 7 SCM advisors in provincial treasuries to assist with the implementation of SCM reforms and improvements. Key focus areas of support include SCM policy and SOPs, contract management, value for money procurement and UIF & W. Baseline assessments have been completed to identify critical areas of support and municipalities requiring hands-on support.
6 Game changer 6: Audit Outcomes
216. The purpose of this game changer is to improved governance as a result of implementation of proper internal controls and standard operating procedures (SOPs) to eliminate the root causes of the audit findings.
217. There was agreement that Audit Outcomes and related will be the responsibility of National and by extension Provincial Treasuries:
a) This will require detailed stock taking on who is doing what in this space;
• Effectiveness of structures such as internal audit, audit committees, MPACs;
• Impact on Human Resources and Performance management, etc
b) The immediate sharing of information will be a pre-requisite to give effect to this change, as the process envisaged in the MFMA Coordinators Joint engagements;
c) Gearing in support to reduce incidence of UIF&W in municipalities;
d) The review of audit action plans, monitoring and reporting progress; and
e) Responding to the AGSA reports on audit findings in the sphere of government.
218. The other areas of agreement reached relate to the consolidation of the legal framework on establishment and financial management of municipal entities.
219. The effectiveness of audit outcomes as a game changer, raises the following questions:
a) Can audit outcomes realistically improve if we still have a massive planning and budgeting challenges?
b) Can audit outcomes realistically improve between the release of the audit findings (January), the general report (May) issued by the AG, and the close of the next municipal financial year (June)?
2 Key Focus Area 2: Review of the External Environment
220. There needs to be an ongoing process of reviewing factors in the external environment to ensure that any obstacles to municipal performance are removed and these external factors create appropriate incentives to support municipal performance.
1 Review the structure and functions of local government
221. The following changes need to be considered:
a. The housing function needs to be devolved from provincial government to municipalities with the capacity to undertake the function so as to ensure better integration of plans and capital programmes relating to the built environment;
b. Many local municipalities are simply too small to realise economies of scale in their Governance and Administration functions and in other operations. Consideration should be given to consolidating certain local municipalities to form larger local municipalities. This process may also involve reviewing the need for districts;
c. The allocation of the electricity, water and sanitation functions needs to be clarified, rationalised and stabilised. One option is to deal with it by consolidating small municipalities as suggested above. Failing this, the alternative is to allocate these functions to the districts in those areas where the municipalities are too small;
d. The role and functions of districts need to be reviewed and clarified; and
e. The MDB’s annual process, required in terms of section 85 of the Municipal Structures Act, of recommending the re-allocation of functions between local municipalities and districts needs to be re-evaluated, and possibly replaced by a process that happens only once every five or ten years.
2 Reconsider policy positions that impact on local government
222. The following changes or refinements to existing policy positions need to be considered:
a. The Free Basic Services policy needs to be reviewed so it is clear what municipalities are required to provide in terms of national policy;
b. The promotion of the universal provision of Free Basic Services needs to be reviewed. Firstly, it is not clear that this is a government policy position in respect of all basic services. Secondly, why should households that can afford to pay for services be given free services? Such an approach undermines the redistributive intent of providing Free Basic Services, and means the lost revenues have to be raised elsewhere else in the system; and
c. There is a need to review practices with regards to the implementation of the Employment Equity Act in municipalities to ensure that an appropriate balance is maintained between the need to fill vacancies with competent employees and the objectives of the Act. Particularly problematic is the practice of not making an appointment because a suitable affirmative action candidate could not be found – particularly in areas where skills are scarce.
3 Address weaknesses in the legislative framework
223. There needs to be an ongoing awareness and willingness to review the existing legislative framework in the light of practical experience with its implementation. To start with, the following areas need to be re-examined:
a. Review of the structures and functions of municipalities which may require amendments to the Municipal Structures Act;
b. Greater attention needs to be given to the proper implementation of legislation. In this regard, more attention needs to be given to ensuring municipalities implement the governance, public consultation and accountability arrangement set out in the Municipal Finance Management Act and Municipal Systems Act;
c. Attention needs to be given to the implementation of the Code of Conduct for Councillors and Officials;
d. The current practice of placing all senior managers on fixed term contracts is undermining capacity in smaller municipalities. It is proposed that in smaller municipalities only the municipal manager should be on a fixed term contract and all other senior managers should be permanent appointments. The aim is to bring greater stability to these administrations. This requires section 57(7) of the Municipal Systems Act to be reviewed;
e. Certain chapters in the Municipal Systems Act and the Municipal Structures Act, as well as the Municipal Property Rates Act deal with matters that fall directly within National Treasury’s mandate. Consideration should be given to amending this legislation to consolidate National Treasury’s oversight of municipal finances; and
f. The provisions governing the establishment of municipal PPPs are very onerous and an obstacle to municipalities utilising this mode of service provision. This requires section 120 of the MFMA and the associated regulations to be reviewed.
4 Review the local government fiscal framework
224. The whole local government fiscal framework is designed to fund local government, and not just one component of it such as own revenues or the equitable share. How the local government fiscal framework provides for the funding of municipalities must be looked at holistically, taking into account the real differences between municipalities. The Constitution expects municipalities to show fiscal effort to raise revenues commensurate with their fiscal capacity.
225. The annual allocations in the Local Government Fiscal Framework are consulted on at the Budget Forum and any changes and reforms made to it must be approved by the Budget Forum. A detailed write-up of the local government equitable share and each local government conditional grant for a financial year is contained in the Explanatory Memorandum to the annual Division of Revenue Bill.
226. Individual conditional grants are often being restructured or reviewed, and there are also periodic reviews of the grant system more broadly. The recent review of local government infrastructure grants recommended three areas in which reforms are being implemented: consolidating the number of grants, and differentiating urban and rural challenges more clearly, using grants to renew infrastructure, and providing incentives to improve asset management and maintenance and strengthening national management of the grant system.
227. A review of the local government infrastructure grants is being undertaken, in response to infrastructure challenges at municipal level. The review is undertaken collaboratively and coordinated by National Treasury. The review is characterised by short- and long-term reforms to infrastructure grants. Ongoing work focuses on asset management, improving infrastructure grant structure; and management and efficiency in the grant system.
228. The 2019 Budget announced the intention to introduce separate grants to fund informal settlement upgrading (for metros and provinces). These grant structures will be designed, in collaboration with the Department of Human Settlements, and the proposed structure presented to Budget Forum for approval.
229. The 2019 Budget also announced that the capacity-building system of local government would be reviewed. National Government spends more than R2.5 billion per year on capacity support for municipalities, but a number of factors, including the deterioration in audit outcomes and increasing number of municipalities in financial distress, indicates that the current patchwork of local government capacity building initiatives are not succeeding in producing a sustained improvement in municipal capacity. The premise of this review is that significant changes are likely to be needed to improve the performance of the local government capacity building system. It is important that the review is managed in an open and consultative manner from the outset. To enable this and ensure buy-in on political-level, progress on the review will be regularly reported to the Budget Forum.
230. Municipalities largely use internally generated own revenues and external finance (for economic infrastructure), in addition to infrastructure conditional grants (for social infrastructure), to finance infrastructure costs. Reforms are underway to support municipalities to mobilise resources from the private sector. Although development charges have the potential to play a significant role in financing the upgrading and expansion of municipal infrastructure, they have not been fully utilised by municipalities due to legal and regulatory uncertainties. Processes are underway to amend the Municipal Fiscal Powers and Functions Act (2007) to incorporate the regulation of development charges. Municipal long-term borrowing is regulated through the Municipal Finance Management Act and the Policy Framework for Municipal Borrowing and Financial Emergencies, which was adopted by Cabinet in 2000. The policy framework is currently under review to deal with issues that limit this source being fully optimised, including longer tenors, an active secondary market in municipal debt instruments and the clarification the role of DFIs in the market space.
Timeframes
231. This strategy will coincide with the term of the Budget Council.
232. The following strategic focus areas were adopted by the Technical Committee on Finance at the Lekgotla on the 17-19 July 2019:
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Resourcing
233. Based on the above discussion it is advisable that a Blended, Agile and Bespoke (BAB) approach is proposed to ensure that the Strategy on Municipal Financial Sustainability and Interventions is resourced in an effective and integrated manner. This BAB approach would entail the following key elements.
• Support on municipal interventions (discretionary and mandatory) through the MFRS and PTs should be aimed at the resolution of financial problems in the short- to medium-term (6 to 24 months) with a view of turning around and stabilising the finances of affected municipalities within the shortest possible period;
• The resourcing and implementation of the “Game Changers” should provide a more medium- to long-term focus towards greater financial sustainability based on a key set of financial indicators. It was proposed that the certain game changers be merged or replaced to reduce the number of game changers from six to four. Proposals included a possible merging of revenue management and budgeting due to their functional interdependence and replacing audit outcomes and mSCOA with accounting and audit support to provide a more integrated methodology. Asset management and supply chain management will be retained as separate game changers as a result of its continued impact on poor audit outcomes. This proposal was discussed with Provincial Treasuries through the TCF Budget and Financial Sub-Committee. There was consensus amongst the Provincial Treasuries that a merger is premature at this stage as it would dilute the focus of the individual game changers. Provincial Treasuries recommended that the game changers remain unchanged as they still hold relevance for the short to medium term;
• Ensuring better alignment of priorities and focus areas of both national and provincial (internally and externally funded) capacity support programmes in support of the implementation of the adopted game changers; and
234. Implementation of a district-based approach to supporting municipalities through PTs on both municipal interventions and the game changers to align with the DCoG district model as announced by the President in SONA is proposed. Further, that capacity support to PTs and districts should, inter alia, be based on an assessment of existing institutional capacity, PTs ability to fund in-house support programmes, prevalence of municipalities that are financially distressed, municipalities with poor audit outcomes, municipalities with serious financial problems, etc. The adoption of a district-based support model will require significant changes to the way in which National and Provincial Treasury support is currently modelled and funded.
235. The above broad principles underpinning the Integrated Resourcing Framework are depicted in the diagram below.
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Contact Person:
Jan Hattingh
CD: Local Government Budget Analysis
Intergovernmental Relations
National Treasury
Tel.: (012) 315-5009, Fax: (012) 395 6553
E-mail: jan.hattingh@.za
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[1] As per National Treasury’s report ‘The state of local government finances and financial management as at 30 June 2018.
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Weak Governance
Institutional Deficiencies
Poor Financial Management
Inadequate Monitoring and Oversight by NG and PG
Unintended Consequence?
Outcomes reflect in Election Polls
Next LG Election: 2021
Loss of public/voter confidence
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Stable and Sustainable Municipality - consistent with objects of LG (S152)
Service Delivery
4 pillars of sustainability
Institutional /Admin
Stable Finances
Good Governance
Key focus areas and Game Changers
Strategic Steps
Using Existing Tools Appropriately
Critical Success Factors
Critical Success Factors
(Pre-requisites)
Clarify the roles and responsibilities of national and provincial depts and other stakeholders
Priority to be given to signing of MoU between NT and DCoG
Political solutions for political problems
Adequate resourcing: Skills and Funding
A single, inclusive system to identify and categorise municipal (financial) and service delivery failures
The establishment of a steering committee to monitor and evaluate progress
Capacity Building and Support Initiatives – differentiated approach
Legislative Tools: Constitution & MFMA
(Incl. Municipal financial recovery plan)
System based reporting, legislative reporting and institutionalised engagements
Cost containment regulations to strengthen fiscal discipline
Existing Tools
3
Municipal Std Chart of Accounts
4
Asset Management
1
Funded Budget
5
SCM
2
Revenue Management
Key Focus Area 1:
6 Game Changers
6
Audit Outcomes
Key Focus Area 2:
Review the external environment
Review the structure and functions of LG
Reconsider policy options that impact on LG
Address weaknesses in the legislative framework
Review the LG Fiscal Framework
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