Local Government revenue and expenditure: Second Quarter Local Government Section 71 Report for the period: 1 October 2021 – 31 December 2021

National Treasury has released the local government revenue and expenditure report for the second quarter of the 2021/22 financial year. This report covers the performance against the adopted budgets of local government for the second quarter of the municipal financial year ending on 31 December 2021 and includes spending against conditional grant allocations for the same period.

The report was prepared by using figures from the Municipal Standard Chart of Account (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 challenges in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is a concern but is improving as the reform is maturing. 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 and from their core financial systems. Instead, they prepare their budgets and reports on an 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 2021/22, 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 second quarter of the 2021/22 municipal financial year is included as a separate Annexure to this publication.

The Section 71 report facilitates transparency in reporting, better in-year management as well as the oversight of the financial performance of municipalities against their adopted budgets. This report is, therefore, a management tool that serve as an early warning mechanism for councils, provincial legislatures and municipal management to monitor and improve municipal performance timeously. The improvement of the credibility of the data strings is a priority for national and provincial treasuries and the submitted data strings are analysed monthly and errors are communicated to municipalities for correction.

Key trends:

Aggregate trends

1. On aggregate, municipalities spent 45 per cent, or R234.4 billion, of the total adopted expenditure budget of R521.3 billion as at 31 December 2021 (second quarter results for the 2021/22 financial year). In respect of revenue, aggregate billing and other revenue amounted to 48.9 per cent, or R252.8 billion, of the total adopted revenue budget of R516.7 billion.

2. Of the adopted operating expenditure budget amounting to R452.3 billion, R214.1 billion or 47.3 per cent was spent by 31 December 2021.

3. Municipalities have adopted the budget for salaries and wages expenditure at R138 billion (including remuneration of councillors), which is R11.4 billion more than the adopted budget of R126.5 billion reported in the second quarter of the 2021/22 municipal financial year. This constitutes 30.5 per cent of their total adopted operational expenditure budget of R452.3 billion. As at 31 December 2021, spending on salaries and wages is 48.1 per cent, or R66.4 billion.

4. In the period under review, capital expenditure amounted to R20.3 billion, or 29.5 per cent, of the adopted capital budget of R69 billion.

5. Aggregated year-to-date operating expenditure for metros amounts to R130.8 billion, or 48.8 per cent, of their adopted budget expenditure of R268 billion. The aggregated adopted capital budget for metros in the 2021/22 financial year is R34.4 billion, of which 23.5 per cent, or R8.1 billion, has been spent as at 31 December 2021.

6. When billed revenue is measured against their adopted budgets, the performance of metros reflects a surplus for the second quarter of the 2021/22 financial year. This does not take into account the collection rate:

Billed water revenue billed was R15.9 billion against expenditure of R15.8 billion;

Energy sources revenue billed was R47.1 billion against expenditure of R44.8 billion;

The revenue billed for waste water management was R4.8 billion against expenditure of R3.7 billion, and

Levies for waste management billed were R6.2 billion against expenditure R4.9 billion.

7. As at 31 December 2021, aggregated revenue for secondary cities is 51.3 per cent or R37 billion of their total adopted revenue budget of R72 billion for the 2021/22 financial year. A year-on-year comparison shows that the total revenue on average has decreased by 5.2 per cent when compared to the same period in 2020/21. The year-to-date aggregated operating expenditure level of the secondary cities is 52.5 per cent or R38.2 billion of the total adopted operating budget of R72.8 billion for the 2021/22 financial year.

8. The performance against the adopted budget for the three core services for the secondary cities for the second quarter 2021/22 also shows deficit position against billed revenue without taking into account the collection rate:

Water revenue billed was R4.8 billion against expenditure of R7.4 billion;

Energy sources revenue billed was R13.6 billion against expenditure of R12.5 billion;

The revenue billed for waste water management was R1.6 billion against expenditure of R1.7 billion; and

Levies for waste management billed were R1.9 billion against expenditure of R2.2 billion.

9. Capital spending levels are low at an average of 32 per cent or R2.4 billion of the adopted capital budget of R7.5 billion.

10. Aggregate municipal consumer debts amounted to R261.5 billion (compared to R230.5 billion reported in the second quarter of 2020/21) as at 31 December 2021. Government debt accounts for 7.5 per cent, or R19.6 billion (R19.5 billion reported in the first quarter of 2021/22) of the total outstanding debtors. The largest component of this debt relates to households which account for 69.7 per cent or R182.4 billion (70.5 per cent or R186.5 billion in the first quarter of the current financial year).

11. Included in the outstanding debt is an amount of R219.7 billion, which is debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries which may not be realistically collectable by municipalities.

12. If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R41.6 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.

13. Metropolitan municipalities are owed R128.4 billion (R111.2 billion reported in the second quarter of 2020/21) in outstanding debt as of 31 December 2021. The largest contributors were the Cities of Johannesburg at 30.9 per cent, Ekurhuleni at 18.2 per cent, eThekwini at 13.8 per cent, Tshwane at 13.2 per cent and Nelson Mandela Bay at 8.2 per cent.

14. Households in metropolitan areas are reported to account for R95.3 billion or 74.2 per cent of outstanding debt, followed by businesses that account for R27.3 billion or 21.3 per cent. Debt owed by government agencies is at R5.3 billion or 4.1 per cent of the total outstanding debt owed to metros.

15. Secondary cities are owed R52.5 billion (R50.4 billion reported in the second quarter of 2020/21) in outstanding consumer debt. The majority of debt is owed by households, which amount to R35.2 billion, or 67.0 per cent, of the total outstanding debt. An analysis by customer group indicates an amount of R46.1 billion or 87.8 per cent, has been outstanding for more than 90 days.

16. Municipalities owed their creditors R76.6 billion as of 31 December 2021 and provinces with the highest percentage of outstanding municipal creditors in the category greater than 90 days include Free State at 89 per cent, Mpumalanga at 87 per cent, Northern Cape at 86.7 per cent and North West at 83 per cent. An increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges and consequently are delaying the settlement of outstanding debt owed.

17. The total balance on borrowing for all municipalities equates to R69.8 billion as of 31 December 2021. This includes long term loans of R50.6 billion, long term marketable bonds of R10.7 billion, and other long term non-marketable bonds of R5.6 billion. The balance represents other short- and long-term financing instruments.

18. As of 31 December 2021, the total investments made by municipalities equates to R38.6 billion. This is R1 billion more than the R37.6 billion reported in the second quarter of the previous financial year (2020/21). Investments include Bank Deposits of R34.5 billion, guaranteed endowment policies (sinking funds) of R3.5 billion, Listed Corporate Bonds of R256.5 million and other smaller investments.

Conditional Grants

Conditional Grants Expenditure as at 31 December 2021

19. The second quarter performance on conditional grants in terms of section 71 of MFMA looks into the performance of the municipalities against the transferred allocations made in terms of the Division of Revenue Act, 2021 (Act No. 9 of 2021) (DoRA) gazetted on 28 June 2021. This publication also assesses the mid-year performance on grant funding for possible stopping and reallocation on slow or fast spending municipalities.

20. The MFMA Section 71 second quarter performance report was concluded using information as reported by the transferring officers responsible for administering and monitoring various conditional grants and municipalities who are implementing the several grants allocated to them. The reporting by transferring officers and municipalities is done in line with sections 10 and 12 of DoRA respectively.

21. The local government sphere has a total allocation amounting to R130.6 billion for the 2021/22 financial year. This allocation includes unconditional transfers in the form of the Equitable Share (R77.9 billion), direct conditional grants allocated for capacity grants (R2.2 billion), direct conditional grants for infrastructure projects (R43.4 billion) and indirect conditional grants (R7 billion – a slight decrease from the R7.5 billion allocated in 2020/21. These allocations exclude the General fuel levy to metropolitan municipalities to the amount of R14.6 billion.

22. As at 31 December 2021, of the R37 billion allocated to municipalities in direct conditional grants for 2021/22, R19.6 billion or 43.8 per cent was transferred to municipalities. The reported expenditure as at the end of 31 December 2021 by the national transferring officers was R12.6 billion or 33.5 per cent. This is a marginal decline from the 35.9 per cent achieved in the same period in the last financial year. However, it is noted that the reported expenditure by municipalities is significantly low with an eleven per cent difference between what transferring officers have reported and what Municipalities have reported.

23. The eight metropolitan municipalities are the largest contributors to the economy in the country and are allocated R10.8 billion in direct conditional grants. From this allocation R3.8 billion or 35.7 per cent was transferred as of 31 December 2021 and R1.1 billion or 28 per cent of the transferred amount was reported as spent. This performance excludes supplementary grants such as the Urban Settlements Development Grant (USDG) as the grant is reported as part of the overall capital budget of the receiving metropolitan municipalities.

24. The highest performing metro is eThekwini Metropolitan Municipality having reported expenditure of R550 million or 32.4 per cent of the R1.7 billion allocation in direct conditional grants. The City of Tshwane followed second with a reported overall expenditure of R260.7 million or 26.9 per cent on the allocated amount. This expenditure is mainly informed by performance of capital grants excluding USDG.

25. The lowest performing metropolitan municipality (similar to the last quarter publication) was the Nelson Mandela Bay Metropolitan municipality which reported an overall expenditure of R52.9 million which equates to 9.1 per cent of the allocated amount or 29.5 per cent of the transferred amount.

26. The municipalities, in general, are underspending, and possibly COVID-19 continues to affect most of these municipalities in the rollout of services to the communities. In the same breath, we cannot ignore that municipalities had their municipal elections in November 2021 which fell during the second quarter. The anticipated change of leadership might have contributed to the slow spending since our local government systems have not matured to a level that change of leadership does not affect the service delivery of the municipality. Further, municipalities still need to improve their procurement processes in order to ensure spending takes place the moment the municipal financial year starts.

Capacity Building and Other Conditional Grants Expenditure as of 31 December 2021

27. A total of R2.2 billion was allocated to capacity building and other grants which includes unallocated conditional grants such as the Municipal Disaster Grant and the Municipal Emergency Housing Grant. These grants are intended to assist municipalities in the development of their management, planning, technical, budgeting and financial management capabilities in the 2021/22 financial year, whilst the Municipal Disaster Grants are meant to assist municipalities in responding to a declared disaster and mitigating its impact.

28. The highest performing conditional grant under this category at end of the second quarter is the Expanded Public Works Programme (EPWP) with a reported performance of 64 per cent, followed by the Financial Management Grant (FMG) at 39.9 per cent and the Infrastructure Skills Development Grant (ISDG) at 17.9 per cent.

29. The lowest performing grant in the second quarter ended 31 December 2021 is a new grant, namely the Programme and Project Preparation Support Grant (PPPSG) with a reported expenditure performance of less than a per cent. The low expenditure reported on the grant may be as a result of the grant being new and performance is expected to improve as the year progresses.

Infrastructure Conditional Grants Expenditure as at 31 December 2021

30. National transfers allocated to municipalities in order to fund government infrastructure programmes for infrastructure, amounts to R35.5 billion in the 2021/22 financial year. This is a significant increase from the R28.6 billion allocated in the previous financial year. The R35.5 billion excludes indirect or in-kind allocations whereby transferring officers execute specific projects on behalf of municipalities in the municipal area.

31. The highest performing direct infrastructure grant to municipalities during the second quarter is the Municipal Infrastructure Grant (MIG) which reported performance of 46 per cent, followed by the Integrated Urban Development Grant (IUDG) which reported performance of 42.8 per cent, and the Water Services Infrastructure Grant (WSIG) grant with a reported performance of 30.1 per cent.

32. The lowest spending grant under the infrastructure grants during the second quarter is the Informal Settlements Upgrading Partnership Grant (ISUPG) with an expenditure of 6.6 per cent which is equivalent to R259.6 million against the allocation of R3.9 billion.

The second lowest performing grant is the Rural Roads Asset Management Systems (RRAMS) grant. The low levels of expenditure on the infrastructure grants is a concern, especially on the ISUPG which is a grant that is meant for the provision of basic services in informal settlements. However, it should be noted that the grant in question is a new grant and as earlier explained new grants have a slow up take and the transferring officer should give the affected municipalities the support needed.

33. Indirect grants (Infrastructure and capacity) allocated to municipalities increased from R5.8 billion in the 2020/21 financial year to R7 billion in the 2021/22 financial year. Indirect grants are allocations whereby the National Transferring Officers are responsible for the implementation and administration of the grants. Performance monitoring for these grants is 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 the National Department as articulated in the Public Finance Management Act, 1999 (Act No. 1 of 1999). These reports are submitted monthly to the National Treasury’s Public Finance Division.

A summary of key aggregated information is included in the tables in Annexure A.

NOTE TO EDITORS:

This information is published in terms of Sections 71 of the Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (MFMA), and 30(3) of the 2021 Division of Revenue Act. The budgeted figures shown are based on the 2021/22 adopted budgets approved by municipal councils.

In terms of the process, Municipal Managers and Chief Financial Officers were required to sign and submit data to the National Treasury by 28 January 2022. Any queries on the figures in these statements should be referred to the relevant Municipal Manager or Chief Financial Officer. Queries on conditional grants may be referred to the national department responsible for administering the grant.

A municipal budget must be funded in terms of Section 18 of the MFMA before a Municipal Council can adopt that budget for implementation. A funded budget is essentially a budget that is funded by a combination of cash derived either from realistically anticipated revenues to be collected in that year, and cash backed surpluses of previous years. It is a common practice amongst most municipalities, when preparing their annual budgets, to overstate or inflate revenue projections, either to reflect a surplus, or on the surface to show that excess expenditure requirements are adequately covered by revenues to be collected. Therefore, the revenue estimates are seldom underpinned by realistic or realisable revenue assumptions resulting in municipalities not being able to collect this revenue, and as a result finding themselves in cash flow difficulties. Should such situations arise, municipalities must adjust expenditure downwards to ensure that there is sufficient cash to meet these commitments.

This second quarter publication covers 257 municipalities on financial information and conditional grant information.

Structure of information released:

Other information released on National Treasury’s website (www.treasury.gov.za) as part of this process includes the following:

Municipal Budget Statements:

a. Cash Flow closing balances as at 31 December 2021;

b. Covid-19 related expenditure;

c. High-level summary of revenue for 257 municipalities;

d. High-level summary of expenditure for 257 municipalities.

Summary of revenue and expenditure per function (electricity, water, etc):

a. High level summary of revenue per function; and

b. High level summary of expenditure per function.

Consolidation of revenue and expenditure numbers for each municipality in one file.

Detail per province per municipality.

Summary of Conditional Grant (CG) Information for all municipalities and per grant.

CG – Detail per province per Municipality.

Summary of Conditional Grant (CG) information per programme.

Section 71 summary information for the second quarter:

a. Summary of total monthly operating expenditure – 257 municipalities;

b. Summary of total monthly operating revenue – 257 municipalities;

c. Summary of total monthly capital expenditure – 257 municipalities;

d. Summary of total monthly capital revenue – 257 municipalities;

e. Summary – Metros;

f. Conditional Grant summary – Metros;

g. Summary – Top 19 municipalities;

h. Conditional Grant summary – Top 19 municipalities;

i. Summary – Provinces;

j. Conditional Grant summary – Provinces;

k. Analysis of Sources of Revenue – 257 municipalities;

l. Listing of borrowing instruments – 189 municipalities;

m. Listing of investment instruments – 181 municipalities;

n. Monthly repairs and maintenance expenditure – 257 municipalities.

Service delivery information (non-financial performance) for all municipalities.

Non-Compliance:

a. List municipalities not complying with Section 71 of the MFMA.

The section 71 information reported by municipalities to National Treasury is also published on the National Treasury website in the format of Schedule C, which is the format for monthly and quarterly municipal financial statements as prescribed by the Municipal Budget and Reporting Regulations.

Source: Government of South Africa