National Treasury has released the local government revenue and expenditure report for the third quarter of the 2020/21 financial year. This report covers the performance against the adjusted budgets of local government for the third quarter of the municipal financial year ending on 31 March 2021 and includes spending against conditional grant allocations for the same period.

Noteworthy, is that the report is prepared by using figures from the Municipal Standard Chart of Accounts (mSCOA) data strings. The mSCOA Regulations were promulgated on 22 April 2014 and prescribes the uniform recording and classification of municipal budget and financial information at a transaction level. All municipalities and municipal entities had to comply with the Regulations by 01 July 2017. The mSCOA Regulations require that municipalities upload their budget and financial information in a data string format to the Local Government portal across the six mSCOA regulated segments.

The report is part of the In-year Management, Monitoring and Reporting System for Local Government (IYM), which enables provincial and national government to exercise oversight over municipalities, and identify possible problems in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is a concern. At the core of the problem is:

• The incorrect use of the mSCOA and municipal accounting practices by municipalities;
• A large number of municipalities are not budgeting, transacting and reporting directly in or from their core financial systems. Instead they prepare their budgets and reports on excel spreadsheet and then import the excel spreadsheets into the system. Often this manipulation of data lead to unauthorised, irregular, fruitful and wasteful (UIFW) expenditure and fraud and corruption as the controls that are built into the core financial systems are not triggered and transactions go through that should not; and

• Municipalities are not locking their adopted budgets or their financial systems at month-end to ensure prudent financial management. To enforce municipalities to lock their budgets and close their financial system at month-end in 2020/21, the Local Government Portal will be locked at the end of each quarter. System  vendors were  also requested to build this functionality into their municipal financial systems.

The actual COVID-19 expenditure reported by municipalities for the first nine months of the 2020/21 municipal financial year is included as a separate Annexure to this publication.

The Section 71 report facilitates transparency, better in-year management as well as the oversight of budgets. This makes these reports management tools and early warning mechanisms for councils, provincial legislatures and officials in order to monitor and improve municipal performance. The improvement of the credibility of the data strings is therefore a priority for national and provincial treasuries.

KEY TRENDS:

Aggregate trends

1. In aggregate, municipalities spent 65.3 per cent or R322.9 billion of the total adjusted expenditure budget of R494.5 billion. In respect of revenue, aggregated billing and other revenue amounted to 73.5 per cent or R358.6 billion of the total adjusted revenue budget of R488 billion.
2. Capital expenditure amounts to R34.6 billion or 48.9 per cent of the adjusted capital budget of R70.8 billion.
3. Municipalities have adjusted the budget for salaries and wages expenditure to R127 billion. This constitutes 30 per cent of their total adjusted operational expenditure budget of R423.7 billion. At 31 March 2020 the total spending is R95.3 billion or 75.0 per cent.
4. Aggregated year-to-date total expenditure for metros amounts to R185.1 billion or 66.5 per cent of their adjusted expenditure budget of R278.4 billion. The lowest spending is reported by eThekwini at 58.8 per cent.
5. When billed revenue is measured against their adjusted budgets, the performance of metros reflects a shortfall on water services for the third quarter of the 2020/21 financial year. This comparison excludes secondary costs incurred or actual revenues collected:
   • Billed water revenue totalled R18.7 billion against expenditure of R20.3 billion (deficit);
   • Billed energy sources revenue totalled R58.3 billion against expenditure of R52.3 billion (surplus);
   • Billed waste water management revenue totalled R5.4 billion against expenditure of R5.2 billion (surplus), and
   • Billed waste management revenue totalled R8 billion against expenditure R6.6 billion (surplus).
6. As at 31 March 2021, aggregated revenue billed for secondary cities is 88.8 per cent or R60.6 billion of their total adjusted revenue budget of R68.2 billion for the 2020/21 financial year.
7. The performance against the adopted budget for the four core services for the secondary cities for the third quarter 2020/21 also shows surpluses against billed revenue without taking into account secondary costs incurred or actual revenues collected:
   • Billed water revenue totalled R9.1 billion against expenditure of R7.9 billion;
   • Billed electricity revenue totalled R20.9 billion against expenditure of R19.1 billion;
   • Billed waste water management revenue totalled R3.1 billion against expenditure of R2.3 billion; and
   • Billed waste management revenue totalled R2.7 billion against expenditure of R1.9 billion.
8. Capital spending levels are at an average of 62.5 per cent or R4.9 billion of the adjusted capital budget of R7.8 billion. It must be noted that sustained low capital spending has potentially serious implications for the government’s ability to meet the targets for expanded access to water, sanitation, electricity and housing, as well as job creation.

21. Indirect infrastructure grants to the amount of R6.8 billion have been allocated to municipalities in the 2020/21 financial year. It should be noted that projects funded through indirect grants are implemented by the respective Transferring Officers on behalf of municipalities. Performance monitoring of these grants are therefore not included as part of the Section 71 publications because municipalities do not receive these allocations directly (allocations in-kind). Reporting on these transfers should be included in  the Section 40 reporting requirements for National Department as articulated in the Public Finance Management Act, 1999 (Act No. 1 of 1999).

2019/20 expenditure on rollover of conditional grants

22. The third quarter publication includes the 2019/20 rollover approvals for municipalities. During the 2019/20 financial year, only R4 billion was approved against an amount of R6.4 billion in rollover request.
23. The Covid-19 pandemic also had an enormous impact on grant performance and municipalities reflected significant under-performance. Municipalities continue to incorrectly include rollover spending as part of the current year’s performance on conditional grants. This distorts the reported performance against rollovers. At the end of the third quarter, only 1.4 per cent expenditure has been reported on rollovers, while municipalities indicated that most of the roll-over projects have already been implemented and expenditure will occur once the rollover application has been approved. Therefore, the analysis of rollover requests must be tightened to ensure that rollover requests are a true reflection of the project status.
24. The general observation is that conditional grant spending is poor. The fact that the pandemic also affected the performance against the approved rollovers suggests that conditional grant performance must be closely monitored as the constrains that were imposed on local government as a result thereof increase the risk factors related to the unauthorized use of grant funding.

A summary of key aggregated information is included in the tables in Annexur

Further details on this report can be accessed on the National Treasury’s website:  www.treasury.gov.za.