Implementing Financial Governance

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1 Implementing Financial Governance The Municipal Finance Management Act No. 56 of 2003 as basis for creating a service delivery culture Learner Guide & Reference Source for the MFMA Induction Programme National Treasury UPDATED September 2013 i

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3 Table of contents List of tables... xi List of figures... xii List of legislature... xiii List of abbreviations... xiv Introduction to the Municipal Finance Management Act (MFMA) induction programme... 1 Learning outcomes... 1 Key concepts... 1 Scene-setting questions... 1 Introduction... 2 The what and the how of service delivery... 2 How the MFMA promotes enhanced levels of service delivery... 4 The need for financial management capacity development... 5 The MFMA Induction Programme as part of a comprehensive PFMCDS... 5 Target audience for this MFMA Induction Programme... 8 Goal, objectives and outcomes of the Induction Programme... 8 Summary... 9 PART ONE VISION AND UNDERLYING PRINCIPLES Chapter 1: Roles of national and provincial government Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture National government Provincial government Summary Chapter 2: Legislation and governance frameworks Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture iii

4 2.6. The framework of legislation Provisions concerning municipal service delivery present in the Constitution The MFMA and the Municipal Systems Act as interrelated legislation Summary Chapter 3: Vision of a modernised financial system Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Legislative and policy reforms Approach taken in modernising financial management Summary Chapter 4: Underlying principles supporting sound financial governance Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Promoting sound financial governance by means of clarifying roles A more strategic approach to budgeting Enhancing revenue management and revenue collection Modernisation of financial management Promoting cooperative government Promoting sustainability Summary PART TWO ROLES AND RESPONSIBILITIES IN MUNICIPAL FINANCE Chapter 5: Clarifying roles and responsibilities of the council, the executive and the accounting Learning outcomes Key concepts Scene-setting questions Introduction iv

5 5.5. Where the individual municipal official fits into the picture Role of the council Role of the non-executive councillor Role of the executive mayor or committee Role of the municipal manager (the accounting ) Oversight on performance: agreements, monitoring, evaluation and reporting Combating misconduct, incapacity and unethical conduct Summary Chapter 6: Top management and the delegation of accounting responsibilities Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Delegations and accountability Delegation risks and risk controls Summary Chapter 7: The budget and treasury office (BTO) as a governance structure Learning outcomes Key concepts Introduction Scene-setting questions Where the individual municipal official fits into the picture Areas of responsibility and the organisation of the BTO The chief financial (CFO) The governance responsibilities of the CFO and the BTO Summary PART THREE MUNICIPAL SERVICE DELIVERY PLANNING AND IMPLEMENTATION Chapter 8: Three-year budgeting and planning Learning outcomes Key concepts Scene-setting questions Introduction v

6 8.5. Where the individual municipal official fits into the picture The budget preparation process Role of the budget steering committee Funding the budget Adoption of the annual budget Budgets of municipal entities Budget implementation Variation from budget estimates Revision of budget estimates Unauthorised, irregular, and fruitless and wasteful expenditure Contemporary Issues in municipal budgeting Summary Chapter 9: Costing and capital planning Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Project management as an indispensable way of working Costing Capital planning Summary Chapter 10: Asset management Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Management of assets and the asset register Legislative mandates Financing of assets Utilisation performance of assets Financial performance of assets vi

7 for assets Disposals and transfers of assets Summary PART FOUR SUPPLY CHAIN MANAGEMENT, ALTERNATIVE SERVICE DELIVERY MECHANISMS, AND CONTRACT MANAGEMENT Chapter 11: Supply chain management Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Institutional arrangements and policy provisions for SCM Governance of municipal SCM Legislation and government policies that impact on SCM processes Municipal SCM processes Competitive bids Contemporary issues in municipal SCM Summary Chapter 12: Alternative service delivery mechanisms Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Municipal entities as service delivery mechanism Principles underlying PPPs in municipal service delivery Pros and cons of a PPP Matters to consider when using PPPs Summary Chapter 13: Contract management Learning outcomes Key concepts Scene-setting questions vii

8 13.4. Introduction Where the individual municipal official fits into the picture Contract management in the municipal context Contemporary issues in contract management Summary PART FIVE REPORTING AND CONTROL Chapter 14: In-year reporting Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Reporting in the municipal context The AGSA and other contemporary issues in mid-year reporting Summary Chapter 15: MFMA performance monitoring Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Purpose and structure of the MFMA performance monitoring instrument Reporting Contemporary issues in financial performance management Summary Chapter 16: Annual reports Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Purpose and preparation of the annual report Annual report format viii

9 16.8. Approval and use of completed annual reports Contemporary issues in the production and utilisation of annual reports Summary Chapter 17: Risk management Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Risk and the need for risk management in a municipality Legislation and regulations providing for risk management in municipalities Institutional arrangements for risk management in a municipality The risk management process Contemporary issues in risk management Summary Chapter 18: Internal control processes, audits and audit committees Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture Internal control Internal audit Audit committees Executive oversight Contemporary issues relating to internal control, audits and audit committees Summary Chapter 19: External audit as consolidated and independent finding on performance Learning outcomes Key concepts Scene-setting questions Introduction Where the individual municipal official fits into the picture ix

10 19.6. The difference between an external and an internal audit The role and responsibilities of AGSA Summary Annexure A: MFMA Delegations Framework Annexure B: Relationship between the strategic areas, the outcomes, and the indicators, as well as the source documents to be used in connection therewith Annexure C: Checklist of internal control matters included in the MFMA Annexure D: Information to be included in the audit file List of resources Index of terms x

11 List of tables Table 1: Legislation providing a framework for a modernised financial system Table 2: The linkages and alignment between the Municipal Systems Act and the MFMA Table 3: The financial governance framework Table 4: Simultaneous focus on three different budgets (using the period as an example) Table 5: Roles and responsibilities of the municipal manager in cooperative governance Table 6: Summary of the framework for cooperative government Table 7: Competencies of the CFO Table 8: Typical governance positioning of the Budget and Treasury office Table 9: Key with which to interpret Table Table 10: SCM systems Table 11: Legislation, policies and regulations to be considered in SCM Table 12: SCM requirements for specialised services Table 13: Overview of financial reports Table 14: Summary of the budget and reporting cycle Table 15: MFMA provisions for internal control Table 16: Differences between external and internal auditing xi

12 List of figures Figure 1: MFMA Induction Programme as part of the national Capacity Development Strategy... 7 Figure 2: Vision and underlying principles of the MFMA Figure 3: Municipal finance roles and responsibilities emanating from the MFMA Figure 4: Governance and accountability: oversight, and clear lines of reporting Figure 5: Example of a written delegation Figure 6: Structure of the BTO of a small municipality Figure 7: Structure of the BTO of a medium and large municipality Figure 8: Typical structure of the BTO Figure 9: Municipal service delivery planning and implementation Figure 10: Local government fiscal framework Figure 11: Annual budget preparation cycle Figure 12: Municipal service delivery system Figure 13: The sustainability challenge for municipalities Figure 14: The concepts and functioning of municipal SCM, alternative service delivery mechanisms and contract management Figure 15: SCM model Figure 16: The contract life cycle (Source: CFO s Handbook) Figure 17: Municipal reporting and control Figure 18: Municipal reporting flow chart (National Treasury MFMA Circular No. 63, 2012:4) xii

13 List of legislature Basic Conditions of Employment Act No. 75 of 1997 Broad-Based Black Economic Empowerment Act No. 53 of 2003 Competition Act No. 89 of 1998 Companies Act No. 71 of 2008 The Constitution of the Republic of South Africa, 1996 Consumer Protection Act No. 68 of 2008 Division of Revenue Act (annual) Electricity Regulation Act No. 4 of 2006 Employment Equity Act No. 55 of 1998 Housing Act No. 107 of 1997 Intergovernmental Fiscal Relations Act No. 97 of 1997 Intergovernmental Relations Framework Act No. 13 of 2005 Labour Relations Act No. 66 of 1995 Local Government: Municipal Demarcation Act No. 27 of 1998 (Demarcation Act) Local Government: Municipal Electoral Act No. 27 of 2000 Local Government: Municipal Finance Management Act No. 56 of 2003 (MFMA) Local Government: Municipal Structures Act No. 117 of 1998 (Municipal Structures Act) Local Government: Municipal Systems Act No. 32 of 2000 (Municipal Systems Act) Local Government: Municipal Systems Amendment Act No. 7 of 2011 Local Government: Property Rates Act No. 6 of 2004 (Property Rates Act) Municipal Fiscal Powers and Functions Act No. 12 of 2007 National Land Transport Act No. 5 of 2009 National Small Business Act No. 102 of 1996 National Water Act No. 36 of 1998 Preferential Procurement Policy Framework Act (PPPFA) No. 5 of 2000 Prevention and Combating of Corrupt Activities Act No. 12 of 2004 Promotion of Access to Information Act No. 2 of 2000 (PAIA) Promotion of Administrative Justice Act No. 3 of 2000 (PAJA) Promotion of Equality and Prevention of Unfair Discrimination Act No. 4 of 2000 Public Finance Management Act No. 1 of 1999 (PFMA) Public Finance Management Amendment Act No. 29 of 1999 Public Office-Bearers Act No. 20 of 1998 Remuneration of Public Office Bearers Act No. 20 of 1998 Rental Housing Act No. 50 of 1999 Skills Development Act No. 97 of 1998 South African Qualifications Authority Act No. 58 of 1995 State Information Technology Agency (SITA) Act No. 88 of 1998 Local Government Transition Act No. 209 of 1993 Water Services Act No. 108 of 1997 xiii

14 List of abbreviations ABC activity-based costing AFS annual financial statement AGSA Auditor-General of the Republic of South Africa BTO budget and treasury office CEO chief executive CFO chief financial CIDB Construction Industry Development Board CMFM Certificate in Municipal Financial Management FMIP Financial Management Improvement Programme GRAP Generally Recognised Practice HDI Human Development Index IAS International Audit Standards ICT information and communications technology IDP Integrated Development Plan ILO International Labour Organization IT information technology LGSETA Local Government Sector Education and Training Authority MB&RR Municipal Budget and Reporting Regulations MEC Member of the Executive Council MFIP Municipal Finance Improvement Programme MFMA Municipal Finance Management Act MPAC Municipal Public Accounts Committee MTREF Medium-term Revenue and Expenditure Framework NDP National Development Plan NEPAD New Partnership for Africa s Development NERSA National Energy Regulator of South Africa NSBC National Small Business Council Ntsika Ntsika Enterprise Promotion Agency PAIA Promotion of Access to Information Act No. 2 of 2000 PAJA Promotion of Administrative Justice Act No. 3 of 2000 PFMA Public Finance Management Act PFMAA Public Finance Management Amendment Act PFMCDS Public Financial Management Capacity Development Strategy PMBOK project management body of knowledge PMS performance management system PPP public private partnership PPPFA Preferential Procurement Policy Framework Act RDP Reconstruction and Development Programme SCM supply chain management SDBIP Service Delivery and Budget Implementation Plan SOC state-owned company SITA State Information Technology Agency xiv

15 Introduction to the Municipal Finance Management Act (MFMA) induction programme Learning outcomes Although this introduction to the programme is not part of the content, it serves to set out how public financial capacity supports better service delivery, and how the MFMA, together with other pieces of legislation and regulations, serves to focus attention on what financial capacity is required. After completing this introduction, you should be able to explain the relevance of the MFMA Induction Programme for all new managers of municipalities. Key concepts Public service delivery The services and the products that the government has undertaken to provide, or that communities rightfully expect to be provided with, as well as the protection of individuals and of the public, and what they value, where it is the duty of the government to provide such protection. Ethos An institutional culture, and the attitude of the members of the institution concerned. Ethics The conduct and character of people, as well as their principles and methods of distinguishing right from wrong, and good from bad (see Chapter 5 of this guide as well). Batho Pele The expression means people first, and is the title of the White Paper on Transforming Public Service Delivery (Republic of South Africa, 1997). Public financial management (PFM) PFM refers to financial accounting; management accounting; supply chain management (SCM); asset management; risk management; internal audit; internal control; governance; and transversal information management systems in the national, provincial and local spheres of government. Public Financial Management Capacity Development Strategy (PFMCDS) The National Treasury s comprehensive strategy for addressing PFM capacity constraints. Financial Management Improvement Programmes (FMIP I, II & III) Programmes with particular key result areas geared towards the implementation of the PFMCDS. Scene-setting questions In the interest of setting the scene for the course, please reflect on and discuss the following: 1. Is, in your opinion, your municipality delivering services in line with its constitutional mandate? If not, why not, and what should be done to correct the situation? 2. What is your understanding of a good public service ethos and ethics? 3. What does a good public service ethos and ethics mean in your specific work environment? 1

16 4. Given the most recent Auditor-General of South Africa s (AGSA s) findings and newspaper reports, how would you describe the current general ethos and ethics in the local government sphere in South Africa? 5. How can sound financial management promote the handling of such issues as gender inequality and HIV/AIDS? Introduction As well as being a learner guide for a course about making a positive difference to service delivery, this is also a learner guide and a course for all managers and other officials of municipalities exercising financial management responsibilities. Such individuals must, in terms of section 78 of the Local Government: Municipal Finance Management Act No. 56 of 2003, hereinafter referred to as the MFMA, take all reasonable steps within their respective areas of responsibility to ensure that the machinery of service delivery is functioning as productively as is possible. Although the title of this learner guide and induction programme refers specifically to the MFMA, the point of departure is, in the first place, the consideration of service delivery in a South African context. By service delivery, we mean those services and products that the government undertakes to provide to communities, or with which communities rightfully expect to be provided. Such delivery also refers to the protection of that which is valued by individuals and the public, where it is the duty of the government to provide protection. However, service delivery not only refers to what is provided, but also refers to how those providing the delivery generally act and interact with the recipients and beneficiaries of the services and products involved. In a course unpacking a piece of legislation we have then, secondly, to clarify how the framework of compliance, as defined by various laws and regulations, supports service delivery. In this programme, we, therefore, wish to show how, in particular, the MFMA, together with other laws, regulations and guidelines, promotes the what and the how of service delivery by municipalities and municipal officials. With the above in mind, our approach in this programme is to start with a relatively comprehensive explanation of the what and the how of service delivery. We then clarify how the objective of the MFMA, together with that of other laws and regulations, is the promotion of service delivery. We also explain why public financial capacity development among all officials, and not only among financial specialists, is important for service delivery. Each chapter of this guide specifically shows how the various financial functions under discussion impact on the work of all officials involved with service delivery. The what and the how of service delivery The national, provincial and local spheres of government in South Africa are mandated individually and jointly to deliver public services, or to ensure the delivery of public services. The Constitution of the Republic of South Africa, 1996, hereinafter referred to as the Constitution, sets out the following mandate: Chapter 2, Bill of Rights, explains the rights of all people in the country. These rights reflect that which individuals have a right to value, and which the government has a duty to provide, enable and/or protect. 2

17 Chapter 3, Co-operative Governance, sets out the principles underpinning the joint responsibility of all spheres of government for service delivery. Chapter 4, Parliament, and Chapter 5, The President and National Executive, as well as Schedule 4, explain the functioning of the national legislature and executive in terms of service delivery. Chapter 6, Provinces, and Schedules 4 and 5 explain the functioning of the provincial governments in terms of service delivery. Chapter 7, Local Government, and Schedules 4 and 5 explain the municipal service delivery mandate. A constitutional democracy requires checks and balances, and therefore the Constitution provides for courts and for the administration of justice, as well as for state institutions supporting constitutional democracy in Chapters 8 and 9. The functions of AGSA, as provided for in section 188, are of particular relevance in this programme. Chapter 10, Public Administration, specifically directs what and how service delivery should take place in terms of section 195, Basic values and principles governing public administration. Given that the right to protection is regarded as part of service delivery, the Constitution makes specific provision for security services in Chapter 11. Chapter 12, Traditional Leaders, contributes to institutionalising the South African context in which service delivery must be provided in a culturally sensitive way. Finally, Chapter 13, Finance, is again of particular interest, because the chapter, among others, provides for: equitable shares and allocations of revenue (section 214); budgets for all spheres of government (section 215); treasury control (section 216); and procurement by all spheres of government (section 217). In the light of South African citizens being very much aware of how their rights are protected by the Constitution, they have come publicly to demonstrate their expectations and to protest against poor service delivery performance in no uncertain terms. The pressure for service delivery is, consequently, great, especially as it is heightened even further by a very high expectation of development. Section 195 (1) (c) of the Constitution specifically instructs that public administration must be development-oriented, which means that the lives of those who live under unfavourable conditions must be improved as part of service delivery. The requirement for such delivery exerts an extreme demand for a high level of performance on the service delivery mechanisms of the government, and on the shoulders of all government officials. In order to maximise the provision of public services and products utilising the available resources, abiding by the three principles of efficiency, economy and effectiveness in resource application is essential. The Constitution, accordingly, provides for the promotion of the efficient, economic and effective use of resources (section 195 (1) (b)). However, the maximisation of service delivery through a high level of performance requires the creation of an ethos or culture of service delivery that will enable the public to benefit from each official performing at their utmost best. The cultivation of a favourable ethos is dependent on all officials who deal with the public exhibiting a positive attitude. For this reason, The White Paper on Transforming Public Service Delivery (Republic of South Africa, 3

18 1997), titled Batho Pele (a Sesotho word meaning people first ), was launched with a view to impacting on the skills and attitudes of the officials who are required to develop such a culture. The Batho Pele slogan We belong, we care, we serve, and its eight principles of (1) consultation; (2) known service standards; (3) redress, where these first two principles are not met; (4) equal access; (5) courtesy; (6) information; (7) openness and transparency; and (8) value for money, stipulate how the public should be served (see Chapter 3 of this guide). Specific to local government, Schedules 1 and 2 of the Local Government: Municipal Systems Act No. 32 of 2000, hereinafter referred to as the Municipal Systems Act, provide codes of conduct for municipal councillors and officials, respectively. Apart from contributing to the service delivery ethos or culture mentioned above, said codes of conduct also promote the notion of ethics. A service delivery ethos is based on the conduct and character of people, and on their principles and methods of distinguishing right from wrong, and good from bad. Regardless of differences in social background, culture, religious beliefs, or any other deeply embedded frame of reference of individual officials, ethical norms provide a common universal framework for the practice of acceptable behaviour. If there is a perception among the public that public office-bearers and officials are not adhering to this common universal framework for acceptable behaviour, for example due to their use of public resources for self-enrichment, and/or their due to their abuse of their positions for personal gain, and/or them acting with prejudice (i.e. being corrupt, or allowing corruption to take place, rather than acting with total integrity), the service delivery concerned is likely to be viewed with suspicion. How the MFMA promotes enhanced levels of service delivery The MFMA should certainly not be seen as legislation that was written for such municipal finance specialists as accountants and auditors. The Act should also not be seen as so restrictive that it enforces such an extent of compliance that there is no room for discretion and innovation among managers at any level of a municipality. In the paragraphs above, we alluded to the fact that the recipients and the beneficiaries of public services, especially given the developmental context, expect more services for comparatively less cost. Such expectations can only be met if efficiency, economy and effectiveness in delivery is maximised, and the relevant office-bearers and officials actions bear witness to a serviceoriented ethos and to the highest standards of ethics. The object of the MFMA is to ensure that this expectation is realised, by means of all officials concerned adhering to the set prescripts. In addition, the norms and standards involved should create room for discretion, and, therefore, for innovation, in such a manner that all financial risks are kept under control. In the words of section 2 of the MFMA, [t]he object of this Act is to secure sound and sustainable management of the fiscal and financial affairs of municipalities and municipal entities by establishing norms and standards and other requirements for all financial actions, transactions and other financial matters of municipalities and municipal entities, as well as national and provincial organs of state, to the extent of their financial dealings with municipalities (MFMA, section 3). Chapter 8 of the MFMA deals with the responsibilities of municipal officials. Section 78, in particular, makes better service delivery than was delivered in the past the business of each official who exercises financial responsibilities. It is impossible to separate any form of 4

19 management discretion from the exercising of financial responsibilities, and section 78 will, therefore, be a recurring premise in unpacking the financial functions of all officials who are involved in this programme. It is worthwhile, therefore, to quote section 78 in its entirety: 78 Senior managers and other officials of municipalities (1) Each senior manager of a municipality and each official of a municipality exercising financial management responsibilities must take all reasonable steps within their respective areas of responsibility to ensure (a) that the system of financial management and internal control established for the municipality is carried out diligently; (b) that the financial and other resources of the municipality are utilised effectively, efficiently, economically and transparently; (c) that any unauthorised, irregular or fruitless and wasteful expenditure and any other losses are prevented; (d) that all revenue due to the municipality is collected; (e) that the assets and liabilities of the municipality are managed effectively and that assets are safeguarded and maintained to the extent necessary; (f) that all information required by the accounting for compliance with the provisions of this Act is timeously submitted to the accounting ; and (g) that the provisions of this Act, to the extent applicable to that senior manager or official, including any delegations in terms of section 79, are complied with. The provisions of the MFMA in general, and of section 78 in particular, promote improved service delivery by seeing to the focused and well-controlled application of resources for service delivery, and, for such purpose, seeing that the business of each official concerned should be the exercising of the appropriate form of discretion. The need for financial management capacity development Section 216 of the Constitution and section 5 of the MFMA have assigned the function of supervision, including promoting the objects of the MFMA and taking any appropriate steps to do so, over local government financial matters to the National Treasury. Financial management capacity development is indispensable as one such appropriate step. In this introduction to the programme, the relevance of the MFMA Induction Programme as part of the comprehensive PFMCDS is explained, the target audience identified, and the overarching goal, objectives and outcomes defined. The MFMA Induction Programme as part of a comprehensive PFMCDS The National Treasury has developed a comprehensive PFMCDS in partnership with the relevant stakeholders (National Treasury, 2012). This strategy contains an integrated capacity development framework that is structured to ensure that all capacity development efforts serve a common strategic purpose. The strategy also provides direction for capacity development in the environmental, institutional, organisational, individual and stakeholder dimensions to be interrelated, so as to ensure sustainability. The capacity development initiatives must, therefore, be part of a holistic and integrated strategy, with clarity regarding the interdependence of the key elements concerned. 5

20 Four capacity development pillars, namely institutional, organisational, individual and stakeholder pillars, support the strategy. The strategy, in turn, has four strategic objectives, each with a set of key activities to support them. Although these are not fully explained in this learner guide, Figure 1 depicts the link between the national CDS and the MFMA Induction Programme, as well as other relevant MFMA programmes, and further relevant formal qualifications and continued professional development. The diagram depicts the MFMA Induction Programme as a non-accredited onboarding programme that forms part of the integrated learning matrix. The MFMA Interactive Learning Programme, in turn, is shown on the diagram to be concomitant with the MFMA Induction Programme. The former programme provides the opportunity for municipal officials to enhance their MFMA knowledge, either as groups or individuals, at a pace that is convenient to the group or individual. It is a fully computerised, interactive learning programme, including assessment and certification. 6

21 STRATEGIC OBJECTIVES WITH KEY RESULT AREAS KRA 1: Institutional (enabling environment) KRA 2: Organisational (capacity) KRA 3: Individual (high-performing) KRA 4: Stakeholder (mutually beneficial) KEY ACTIVITIES INCLUDING: KA 1.9 Implementation of integrated learning matrix KA 3.2 Support of non-formal (non-accredited) training KA 3.5 Implementation of onboarding programme KA 1.11 Enhancement of education, training & development KA 3.3 Support of formal education & training programmes COUNCILLOR INDUCTION PROGRAMME MFMA INDUCTION PROGRAMME MUNICIPAL TRAINING PROGRAMMES MFMA INTERACTIVE LEARNING PROGRAMME CMFM (SAQA ID 48965). and other post-specific compulsory competencies prescribed by MFMA Municipal Regulations on Minimum Competency Levels (2007) Further relevant formal qualifications and continued professional development Figure 1: MFMA Induction Programme as part of the national Capacity Development Strategy The Councillor Induction Programme, which is also depicted as being concomitant with the MFMA Interactive Learning Programme, was designed to help executive mayors or committees and non-executive councillors, working together with municipal officials, to implement legislation that would bring about the reform of municipal financial management practices across South Africa. The programme explains how the municipal finance system, and the councillors role within it, works (National Treasury, 2006). The comprehensive Certificate in Municipal Financial Management (CMFM, SAQA ID 48965), supplemented with other compulsory unit standards, is a programme that is intended for municipal accounting s, chief financial s (CFOs), senior managers, other financial officials; heads of SCM and SCM officials, in adherence to the prescriptions of sections 83, 7

22 107 and 119 of the MFMA and of the Municipal Regulations on Minimum Competency Levels (Republic of South Africa, 2007). As the CMFM and other compulsory unit standards are accredited and quality controlled by the Local Government Sector Education and Training Authority (LGSETA), an opportunity for accessing further relevant formal education programmes and continued professional development is provided. Given the time and financial constraints experienced, prospective participants must carefully consider for which unit standards they should enrol, by first prioritising the unit standards that they should obtain in order to attain competence in their particular posts. Target audience for this MFMA Induction Programme The MFMA Induction Programme targets all new managers in the local government sector. The course is aimed at overcoming the existing disjuncture between the understanding and the practices of new entrants in the municipal finance environment, and the ethics and the ethos that is required in public finance. Limited understanding of the roles and responsibilities in terms of, and non-compliance with, the MFMA is exacerbating the problem as it is currently being experienced. The National Treasury wishes the intended course to be compulsory, so that it can follow on within three months of an individual entering the municipal environment and signing the necessary performance agreements. Goal, objectives and outcomes of the Induction Programme The overarching goal of this non-accredited five-day MFMA Induction Course is to provide local government managers with a broad overview and understanding of the public sector ethos and ethics, including the municipal service delivery mandate, as well as the municipal finance environment and MFMA reforms. This understanding should serve as a stepping stone to be crossed in order to gain increased in-depth learning and professionalisation by means of following further accredited training and education programmes. The following five objectives are set, namely for the participants to understand and relate their own position to: the vision and underlying principles of the MFMA; the roles and responsibilities in municipal finance emanating from the MFMA; municipal service delivery planning and implementation; supply-chain management, alternative service delivery mechanisms and contract management; and reporting and control. In the above-mentioned five objectives, the emphasis is placed on the provisions in the MFMA. However, it must be kept in mind that the MFMA forms part of a much more comprehensive framework of legislation, all contributing to ensure enabled, wellcapacitated, high-performing, well-integrated, and sustainable municipal service delivery. Given said five objectives, the following outcomes stand to be achieved: Objective 1 is to show understanding of the vision and the underlying principles of the MFMA, in proof of the attainment of which the participants must be able to explain the concepts of: the roles of national and provincial government in municipal financial management; 8

23 the legislation and governance framework of municipal finance; the vision of a modernised municipal financial system; and the underlying principles of a modernised municipal financial system. Objective 2 is to show understanding of the municipal finance roles and the responsibilities emanating from the MFMA, in proof of the attainment of which the participants must be able to explain the concepts of: the distinctive roles and responsibilities of the council, the executive and the officials; the responsibilities of top management and delegation for the accounting ; and the governance structure for the budget and the treasury. Objective 3 is to show understanding of municipal service delivery planning and implementation, in proof of the attainment of which the participants must be able to explain the concepts of: three-year budgeting and planning; costing and capital planning; and asset management. Objective 4 is to show understanding of supply-chain management, alternative service delivery mechanisms and contract management, participants must be able to explain: o Supply-chain management; o Alternative service delivery mechanisms; o Contract management. Objective 5 is to show understanding of municipal reporting and control, in proof of the attainment of which the participants must be able to explain the functioning of: in-year reporting; MFMA performance monitoring; annual reports; risk management; internal control processes, audits and audit committees; and external audit as consolidated and independent finding on performance. Summary This introduction has served to explain: the what and the how of service delivery; how the MFMA promotes better service delivery; the need for financial management capacity development; how the MFMA Induction Programme fits into the comprehensive PFMCDS; who the target audience is; and what the overarching goal, objectives and outcomes are. 9

24 PART ONE VISION AND UNDERLYING PRINCIPLES In order to show understanding of the vision and the underlying principles of the MFMA as the first objective of this programme, the participants must be able to explain: the roles of national and provincial government in municipal financial management; the legislation and governance framework of municipal finance; the vision of a modernised municipal financial system; and the underlying principles supporting sound financial governance (see Figure 2 below). 1. Roles of national and provincial government 2. Legislation and governance frameworks 3. Vision of a modernised financial system SERVICE DELIVERY ETHOS 4. Underlying principles supporting sound financial governance Figure 2: Vision and underlying principles of the MFMA 10

25 Chapter 1: Roles of national and provincial government 1.1. Learning outcomes After completing this chapter, you should be able to explain: how your own position and responsibilities may be informed and affected by the roles of national and provincial government in PFM; and how your municipality s mandate may be informed and affected by the roles of national and provincial government in financial management Key concepts Cooperative relationship Section 154 of the Constitution determines that national and provincial governments, by legislative and other measures, must support and strengthen the capacity of municipalities. Spheres of government Section 40 of the Constitution determines that the government is constituted as national, provincial and local spheres of government that are distinctive (with each having a specific constitutional and legislative mandate), interdependent (with each sphere depending on the others to fulfil its specific mandate), and interrelated (with the fulfilment of public value outcomes only being able to be achieved by the combined effort of the three spheres). National Treasury Said Treasury was established in terms of section 216 of the Constitution to ensure both transparency and expenditure control in each sphere of the government. Provincial Treasuries Said Treasuries were established in terms of section 17 of the Public Finance Management Act No. 1 of 1999, hereinafter referred to as the PFMA, as amended by the Public Finance Management Amendment Act No. 29 of Division of Revenue Act The Act is an annual Act of Parliament that was promulgated to provide for the equitable division of nationally generated revenue among all spheres of the government, in terms of section 214 of the Constitution. National Treasury Regulations The Regulations are promulgated in terms of section 76 of the PFMA, or in terms of section 168 of the MFMA, which are considered to be part of the two above-mentioned Acts. National Treasury Circulars Guidelines for municipalities, issued from time to time in terms of section 168 of the MFMA Scene-setting questions 1. How does the involvement of national and provincial government in municipal finance affect your own work responsibilities? 2. How do the oversight and support roles of national and provincial government, and related state-owned companies, affect your area of responsibility, with specific 11

26 focus on: planning alignment; funding; service delivery; service standards; and financial reporting? 3. What are the possible challenges in the cooperation actions taken between your municipality and the national and provincial governments regarding financial matters, and how can these be mitigated? 1.4. Introduction The MFMA and the Municipal Systems Act require the maintenance of a close, cooperative relationship within, and between, the different spheres of government, especially in terms of planning, budgeting and financial management, as well as in areas of service delivery. The MFMA provides a role for national and provincial government to support, to build capacity and to monitor municipalities, while providing mechanisms in which such sector-specific regulators as the National Energy Regulator of South Africa (NERSA) and such parastatals as ESKOM, the Land Bank and other public entities are required to engage with municipalities. The roles of national and provincial government in a modernised municipal financial system are highlighted in this chapter Where the individual municipal official fits into the picture As a manager with an area of responsibility somewhere within the line or support services of your municipality, your actions are determined by your own particular field of professional expertise. Said field must inform what and how you directly, or indirectly, contribute to service delivery in the most effective, efficient and economic manner, but subject to the directives of your delegation, or assigned area of responsibility, and within the provisions of the Integrated Development Plan (IDP), as the strategic plan of the municipality. In addition, you must also be aware of the roles that the national and provincial departments and other regulatory authorities and parastatals play with regard to the sector in which you work, and the financial actions that you take National government The National Treasury and various national departments play a role in municipal service delivery in general, and in financial matters in particular. Said Treasury is responsible for prescribing all regulations, frameworks, budget formats, inflation limits, and other information required by the MFMA to ensure uniform norms and standards for implementation. The monitoring and reporting obligations of municipalities allow for providing early warning and efficient responses in the case of municipalities experiencing financial distress, with appropriate interventions being instituted to ensure that the municipalities concerned recover. Formal or informal interventions by the National Treasury are necessary only where all other options have failed. The informal process can take the form of technical support by the National Treasury through the Municipal Finance Improvement Programme (MFIP), and, on request, by the municipality. Said Treasury can also provide support to municipalities that request assistance in developing financial recovery plans, in line with Chapter 13 of the MFMA. 12

27 Formal intervention occurs when municipalities are in material breach of National Treasuryprescribed measures, including section 216 of the Constitution, and section 38 and Chapter 13 of the MFMA, among others. Other national government departments also have a key role to play in policy development and in the execution of programmes in provinces and municipalities. Such national departments as the Department of Cooperative Governance have an overarching responsibility for strengthening cooperative governance, while such departments as those of Water Affairs, Mineral Resources, Energy, Transport and Human Settlements have a direct role to play in monitoring sector-specific outcomes and service delivery. Therefore, the production of relevant documentation addressing the needs of the various sectors progressively serves to make the monitoring of responsibilities less onerous for the municipalities and the departments concerned. In this regard, it is imperative that the municipalities should prepare their capital and operating budgets, in-year reporting, and annual reports with the above factor in mind, and that they should provide information in support of decision-making. A uniform set of data and budget formats is, therefore, required in the MFMA, resulting in the National Treasury issuing regulations to ensure the adequacy of information reported. Municipalities must also be aware of the provisions that are made in the annual Division of Revenue Act, and of the guidance provided in the various National Treasury MFMA circulars Provincial government Section 154 of the Constitution determines that the national and provincial governments, by legislative and other measures, must support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers, and to perform their functions. Section 155 (6) (a) and (b) provide for the monitoring and support of local government in the provinces and promote the development of local government capacity. Section 139 of the Constitution further determines that a provincial executive may intervene if a municipality fails to fulfil an obligation to which they are bound. Such intervention is possible if a municipality fails to approve a budget, or if it fails to approve any revenue-raising measures that are necessary to give effect to the budget. However, such intervention is temporary, and it is aimed at correcting the municipality, and enabling it to exercise its powers and to perform its duties. Provincial treasuries must, among other duties, promote the object of the MFMA within the framework of cooperative government, and they must assist the National Treasury in enforcing compliance with the measures established in terms of section 216 (1) of the Constitution, as well as those that have been established in terms of the MFMA. The MFMA also requires provincial treasuries to monitor municipal compliance of the MFMA, and to assist in preparing the budget. A provincial treasury is required to work closely with other provincial departments, such as Local Government, Human Settlements, and Health, in order to implement the MFMA. 13

28 1.8. Summary The Constitution determines that the government is constituted as national, provincial and local spheres of government that are distinctive, interdependent and interrelated. The Constitution also determines that national and provincial governments, by legislative and other measures, must support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers, and to perform their functions The National Treasury is responsible for prescribing all regulations, frameworks, budget formats, inflation limits, and other information to ensure uniform norms and standards for implementation, and to institute appropriate interventions where municipalities experience financial distress. Formal or informal interventions by the National Treasury are necessary only where all other options have failed. A provincial executive may intervene if a municipality fails to fulfil an obligation, including where it fails to approve a budget or any revenue-raising measures that are necessary to give effect to the budget. Provincial treasuries must promote the object of the MFMA within the framework of cooperative government, and they must assist the National Treasury in enforcing compliance with the measures established in terms of section 216 (1) of the Constitution, as well as those that are established in terms of the MFMA. 14

29 Chapter 2: Legislation and governance frameworks 2.1. Learning outcomes After completing this chapter, you should be able to explain: how your own area of responsibility is affected by the framework of legislation; the enabling nature of the framework of legislation in municipal service delivery; the nature of provisions in the Constitution for municipal service delivery; and the specific relevance of interrelated matters between the MFMA and the Municipal Systems Act directed at municipal service delivery Key concepts Enabling legislation Legislation by which the legislature grants authority to take certain actions. Integrated development planning Municipal strategic planning, as prescribed in Chapter 5 of the Municipal Systems Act. Corporate performance management system (PMS) A system that is established and implemented as prescribed in Chapter 6 of the Municipal Systems Act Scene-setting questions 1. Select three pieces of legislation that are relevant to your position from Table 1, and explain how each directly and/or indirectly impacts on your work. 2. What impact do the principles of cooperative government and intergovernmental relations, as provided for in the Constitution, make on your area of responsibility? 3. How do the MFMA and the Municipal Systems Act, as interrelated pieces of legislation, facilitate and assist you in fulfilling your responsibilities in the workplace? 2.4. Introduction The municipal financial management system is framed, supported and enabled by a variety of laws and regulations that municipalities must consider in their day-to-day activities. This chapter provides a list of some of the applicable pieces of legislation, as well as an explanation of the nature of provisions in the Constitution for municipal service delivery. It also explains and illustrates how the MFMA and the Municipal Systems Act are interrelated to enable municipal service delivery Where the individual municipal official fits into the picture As manager with an area of responsibility somewhere within the line or support services of your municipality, your actions are determined by means of legislation, regulations and professional codes relating to your own profession and/or field of professional expertise that must inform the manner in which you operate within your assigned area of responsibility. However, you also have to fulfil such obligations within the framework of legislation that is 15

30 specific to local government, as well as being able to interpret the various pieces of legislation as interrelated parts of the same picture The framework of legislation Table 1 below lists and explains the legislation and its nature and purpose relating to the provision of a framework for a modernised municipal financial system. The financial implications of this framework can be derived from the nature and purpose of the legislation, which is explained in the second column of said table. The specific unit that is stated in the third column of the table serves to identify the unit that is primarily affected, or which is involved by way of input/output. The stipulated units are, however, not exclusively affected or involved. In fact, each position in a municipality is directly or indirectly affected by the legislation enumerated. Table 1: Legislation providing a framework for a modernised financial system Legislation Nature and purpose of the legislation Specific unit(s) affected/involved The Constitution of the Republic of South Africa, 1996 Labour Relations Act No. 66 of 1995 National Small Business Act No. 102 of 1996 Basic Conditions of Employment Act No. 75 of 1997 The Constitution is the supreme law of the Republic; law or conduct inconsistent with it is invalid, and the obligations imposed by it must be fulfilled. The nature and purpose of the Act is to: give effect to, and to regulate, constitutional labour rights; give effect to South Africa s obligations as a member of the International Labour Organization (ILO); provide a framework within which trade unions, employer s organisations, and employers can bargain collectively; and promote collective bargaining, employee participation in decision-making, and the resolution of labour disputes. The nature and purpose of the Act is to: provide for the establishment of the National Small Business Council and the Ntsika Enterprise Promotion Agency; and provide guidelines for the organs of state, in order to promote small business in the Republic. The nature and purpose of the Act is to: give effect to the right to fair labour practices referred to in section 23 (1) of the Constitution, by establishing and making provision for the regulation of basic conditions of employment; and 16 All units Human resources unit Local economic development unit Human resources unit

31 ensure compliance with the obligations of the Republic as a member state of the International Labour Organisation. Intergovernmental Fiscal Relations Act No. 97 of 1997 Housing Act No. 107 of 1997 Water Services Act No. 108 of 1997 Remuneration of Public Office Bearers Act No. 20 of 1998 The nature and purpose of the Act is to: promote cooperation between the national, provincial and local spheres of government on fiscal, budgetary and financial matters; and prescribe a process for the determination of an equitable sharing and allocation of revenue raised nationally. The nature and purpose of the Act is to: provide for the facilitation of a sustainable housing development process; lay down general principles that are applicable to housing development in all spheres of government; define the functions of national, provincial and local governments, in respect of housing development; provide for the establishment of a South African Housing Development Board, for the continued existence of provincial boards under the name of provincial housing development boards, and for the financing of national housing programmes. The nature and purpose of the Act is to: provide a framework for the provision of water supply and sanitation services to households in South Africa; set the standards for the local and provincial agencies, and establishes the norms and standards for tariffs; and set out the rights and duties of the State and of water services providers in monitoring water services, and promotes effective water resource management. The nature and purpose of the Act is to: provide for a framework for determining the salaries and allowances of the President, members of the National Assembly, permanent delegates to the National Council of Provinces, Deputy President, Ministers, Deputy Ministers, traditional leaders, members of provincial Houses of Traditional Leaders, and members of 17 Office of the Municipal Manager Housing unit Water unit Office of the Municipal Manager

32 Local Government: Municipal Demarcation Act No. 27 of 1998 (Demarcation Act) National Water Act No. 36 of 1998 Employment Equity Act No. 55 of 1998 State Information Technology Agency (SITA) Act No. 88 of 1998 Local Government: Municipal Structures Act No. 117 of 1998 (Municipal Structures Act) the Council of Traditional Leaders; provide for a framework for determining the upper limit of salaries and allowances of Premiers, members of Executive Councils, members of provincial legislatures and members of Municipal Councils; and provide for a framework for determining pension and medical aid benefits of officebearers. The nature and purpose of the Act is to provide for criteria and procedures for the determination of municipal boundaries by an independent authority. The nature and purpose of the Act is to provide for the fundamental reform of the law relating to water resources. The nature and purpose of the Act is to: promote the constitutional right of equality and the exercise of true democracy; eliminate unfair discrimination in employment; ensure the implementation of employment equity to redress the effects of discrimination; achieve a diverse workforce that is broadly representative of our people; promote economic development and efficiency in the workforce; and give effect to the obligations of the Republic as a member of the International Labour Organisation. The nature and purpose of the Act is to establish a company that is responsible for the provision of information technology services to the public administration. The nature and purpose of the Act is to: provide for the establishment of municipalities, in accordance with the requirements relating to the categories and types of municipality; establish criteria for determining the category of municipality to be established in a specific area; define the types of municipality that may be established within each category; provide for an appropriate division of functions 18 Office of the Municipal Manager Water unit Human resources unit Office of the Municipal Manager Office of the Municipal Manager

33 Skills Development Act No. 97 of 1998 Rental Housing Act No. 50 of 1999 Local Government: Municipal Systems Act No. 32 of 2000 (Municipal Systems Act) and powers between categories of municipality; regulate the internal systems, structures and office-bearers of municipalities; and provide for appropriate electoral systems. The nature and purpose of the Act is to: provide an institutional framework to devise and implement national, sector and workplace strategies to develop and improve the skills of the South African workforce; integrate those strategies within the National Qualifications Framework contemplated in the South African Qualifications Authority Act No. 58 of 1995; provide for learnerships that lead to recognised occupational qualifications; provide for the financing of skills development by means of a levy-financing scheme and a National Skills Fund; and provide for, and regulate, employment services. The nature and purpose of the Act is to: define the responsibility of the government, in respect of rental housing property; create mechanisms to promote the provision of rental housing property; promote access to adequate housing, by means of creating mechanisms to ensure the proper functioning of the rental housing market; make provision for the establishment of rental housing tribunals; define the functions, powers and duties of such tribunals; lay down general principles governing conflict resolution in the rental housing sector; and provide for the facilitation of sound relations between tenants and landlords, and, for this purpose, to lay down general requirements relating to leases. The nature and purpose of the Act is to: provide for the core principles, mechanisms and processes that are necessary to enable municipalities to move progressively towards the social and economic upliftment of local communities, and to ensure universal access to essential services that are affordable to all; 19 Human resources unit Housing unit Office of the Municipal Manager

34 Promotion of Access to Information Act No. 2 of 2000 (PAIA) Promotion of Administrative Justice Act No. 3 of 2000 (PAJA) define the legal nature of a municipality as including the local community within the municipal area, working in partnership with the municipality s political and administrative structures; provide for the manner in which municipal powers and functions are exercised and performed; provide for community participation; establish a simple and enabling framework for the core processes of planning, performance management, resource mobilisation, and organisational change that underpin the notion of developmental local government; provide a framework for local public administration and human resource development; empower the poor, and ensure that municipalities put in place service tariffs and credit control policies that take their needs into account by providing a framework for the provision of services, service delivery agreements, and municipal service districts; provide for credit control and debt collection; establish a framework for support, monitoring and standard setting by other spheres of government in order to progressively build local government into an efficient frontline development agency that is capable of integrating the activities of all spheres of government for the overall social and economic upliftment of communities, in harmony with their local natural environment; and provide for legal matters pertaining to local government. The nature and purpose of the Act is to give effect to the constitutional right of access to any information held by the State, and to any information that is held by another person, and that is required for the exercise or protection of any right(s). The nature and purpose of the Act is to give effect to the right to administrative action that is lawful, reasonable and procedurally fair, and to the right to written reasons for administrative action, as Office of the Municipal Manager Office of the Municipal Manager 20

35 Promotion of Equality and Prevention of Unfair Discrimination Act No. 4 of 2000 Local Government: Municipal Electoral Act No. 27 of 2000 Municipal Performance Management Regulations, 2001 Broad-Based Black Economic Empowerment Act, No. 53 of 2003 Local Government: Municipal Finance Management Act No. 56 of 2003 (MFMA) Division of Revenue Act (annual) Local Government: Property Rates Act contemplated in section 33 of the Constitution The nature and purpose of the Act is to: give effect to section 9, read with item 23 (1) of Schedule 6 of the Constitution, so as to prevent and prohibit unfair discrimination and harassment; promote equality and eliminate unfair discrimination; and prevent and prohibit hate speech. The nature and purpose of the Act is to regulate all municipal elections held after the date determined in terms of section 93 (3) of the Municipal Structures Act. The purpose of the Regulations is to set out in detail the requirements for municipal PMSs. The regulations must entail a framework that describes and represents how the municipality s cycle and process of performance management, including measurement, review, reporting and improvement, will be conducted. The nature and purpose of the Act is to: establish a legislative framework for the promotion of black economic empowerment; empower the Minister to issue codes of good practice and publish transformation charters; and establish the Black Economic Empowerment Advisory Council. The nature and purpose of the Act is to: secure sound and sustainable management of the financial affairs of municipalities and other institutions in the local sphere of government; and establish treasury norms and standards for the local sphere of government. The nature and purpose of the Act is to provide for the equitable division of revenue raised nationally among the national, provincial and local spheres of government for the 20xx/xx financial year, and for the responsibilities of all three spheres pursuant to such division. The nature and purpose of the Act is to: regulate the power of a municipality to impose rates on property; Human resources unit Office of the Municipal Manager Office of the Municipal Manager Finance unit Office of the Municipal Manager (as Office) Finance unit Office of the Municipal Manager (as Office) Finance unit Planning unit 21

36 No. 6 of 2004 (Property Rates Act) Prevention and Combating of Corrupt Activities Act No. 12 of 2004 Intergovernmental Relations Framework Act No. 13 of 2005 Electricity Regulation Act No. 4 of 2006 exclude certain properties from rating in the national interest; make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through their rating policies; make provision for fair and equitable valuation methods of properties; make provision for an objections and appeals process; and amend the Municipal Systems Act, so as to make further provision for the serving of documents by municipalities. The nature and purpose of the Act is to: provide for the strengthening of measures to prevent and combat corruption and corrupt activities; provide for the offence of corruption and offences relating to corrupt activities; provide for investigative measures in respect of corruption and related corrupt activities; provide for the establishment and endorsement of a Register in order to place certain restrictions on persons and enterprises convicted of corrupt activities relating to tenders and contracts; place a duty on certain persons holding a position of authority to report certain corrupt transactions; provide for extraterritorial jurisdiction in respect of the offence of corruption and offences relating to corrupt activities. The nature and purpose of the Act is to: establish a framework for the national government, provincial governments and local governments, to promote and facilitate intergovernmental relations; and provide for mechanisms and procedures to facilitate the settlement of intergovernmental disputes. The nature and purpose of the Act is to: establish a national regulatory framework for the electricity supply industry; to make NERSA the custodian and enforcer of the national electricity regulatory framework; 22 Office of the Municipal Manager Office of the Municipal Manager Electricity unit

37 Local Government: Municipal Performance Regulations for Municipal Managers and Managers Directly Accountable to Municipal Managers, 2006 Municipal Fiscal Powers and Functions Act No. 12 of 2007 National Land Transport Act No.5 of 2009 Local Government: Municipal Systems Amendment Act No. 7 of 2011 to provide for licences and registration as the manner in which generation, transmission, distribution, reticulation, trading, and the import and export of electricity are regulated; and to regulate the reticulation of electricity by municipalities. The purpose of the Regulations is to seek to set out how the performance of municipal managers will be uniformly directed, monitored and improved. The Regulations address both the employment contract of a municipal manager and of those managers who are directly accountable to municipal managers, as well as the performance agreement that is entered into between respective municipalities, municipal managers and managers who are directly accountable to municipal managers. The nature and purpose of the Act is to: regulate the exercise by municipalities of their power to impose surcharges on fees for services provided under section 229 (l) (a) of the Constitution; and provide for the authorisation of taxes, levies and duties that municipalities may impose under section 229 (l) (b) of the Constitution. The nature and purpose of the Act is to: further the process of transformation and restructuring the national land transport system initiated by the Local Government Transition Act No. 209 of 1993; to give effect to national policy; prescribe national principles, requirements, guidelines, frameworks and national norms and standards that must be applied uniformly in the provinces, and other matters contemplated in section 146 (2) of the Constitution; and consolidate land transport functions and locate them in the appropriate sphere of government. The nature and purpose of the Act is to: amend the Municipal Systems Act; make further provision for the appointment of municipal managers and managers directly accountable to municipal managers; provide for procedures and competency criteria 23 Office of the Municipal Manager Human resources unit Finance unit Transport and roads unit Office of the Municipal Manager Human resources unit

38 for such appointments, and for the consequences of appointments made otherwise than in accordance with such procedures and criteria; determine timeframes within which performance agreements of municipal managers and managers directly accountable to municipal managers must be concluded; make further provision for the evaluation of the performance of municipal managers and managers who are directly accountable to municipal managers; require employment contracts and performance agreements of municipal managers and managers who are directly accountable to municipal managers to be consistent with the Act; require all staff systems and procedures of a municipality to be consistent with uniform standards determined by the Minister by regulation; bar municipal managers and managers who are directly accountable to municipal managers from holding political office in political parties; regulate the employment of dismissed municipal employees; provide for the Minister to make regulations relating to the duties, remuneration, benefits and other terms and conditions of' employment of municipal managers and managers directly accountable to municipal managers; provide for the approval of staff establishments of municipalities by the respective municipal councils; prohibit the employment of a person in a municipality if the post to which he or she is appointed is not provided for in the staff establishment of that municipality; enable the Minister to prescribe frameworks to regulate human resource management systems for local government, and mandates for organised local government; extend the Minister's powers to make regulations relating to municipal staff matters; and 24

39 make a consequential amendment to the Municipal Structures Act, by deleting the provision dealing with the appointment of municipal managers Provisions concerning municipal service delivery present in the Constitution Given the focus of this course, the MFMA must be read with other national legislation, but, most notably, primarily with the Constitution. Section 40 (1) of the Constitution provides that the substance of the government is constituted as national, provincial and local spheres of government that are distinctive, interdependent and interrelated. This means that the three spheres of government have original powers, which are derived from the Constitution, with no sphere of government being subordinate to another. The Constitution deals with intergovernmental relations in Chapter 3, titled Co-operative Government, and in section 41, titled Principles of Cooperative Government and Intergovernmental Relations. The following is a brief explanation of the three principles (distinct, interdependent and interrelated see Key concepts in Chapter 1 of this guide) that seek to strengthen intergovernmental relations across the three spheres of government. The Constitution and the MFMA give national and provincial governments the legislative and executive authority to see the effective performance by municipalities of their functions in respect of matters listed in Schedules 4, Part B, and 5, Part B, of the Constitution. Specific provisions are included in the Constitution to assist in coordinating the three spheres of government. In this regard, section 139 of the Constitution provides for provincial government intervention in local government, in the same way that the national government is permitted to intervene in the provincial government (in terms of section 100 of the Constitution). The reasons for the possible intervention are spelt out in sections 44 (2) and 139 of the Constitution, namely to: maintain national security, economic unity and essential national standards; prevent a municipality from taking unreasonable action that could be prejudicial to the interests of the province or to the interests of any other municipality; and maintain minimum standards required for the rendering of services The MFMA and the Municipal Systems Act as interrelated legislation Section 3 (2) of the MFMA determines that, in the event of any inconsistency between a provision of MFMA and any other legislation that is in force when the MFMA takes effect, and which regulates any aspect of the fiscal and financial affairs of municipalities or municipal entities, the provision of the MFMA prevails. This provision will only apply in circumstances where there are inconsistencies between the MFMA and other relevant legislation, in relation to the fiscal and financial affairs of a municipality. In the event of the latter, the common law provisions, presumptions, interpretation of statutes and sections 146 to 150 of the Constitution are to apply. However, in the case where similar provisions in the 25

40 MFMA are also reflected in the Municipal Systems Act, said Acts are regarded as being complementary to each other, and should, therefore, be read together. For example, Chapter 5 of the Municipal Systems Act deals with IDPs and their preparatory process, while Chapter 4 of the MFMA deals with budgets and their preparatory process. These two processes are, however, seen and treated by the government as ONE process, and not as two separate, or inconsistent, processes, as the IDP and the budget must be fully aligned and consistent with each other, with the Service Delivery and Budget Implementation Plans (SDBIPs) clearly articulating the linkage concerned. SDBIPs are further discussed in the following chapters, with Chapter 3 specifically drawing attention to the linkages between the MFMA and other legislation that set the foundation of the system and the structure of local government. Of additional importance is the sectorspecific focus in other different legislation, including the legislation that is referred to in Table 2 below and their supporting regulations. Below, we discuss only some of the main areas of linkages and alignment between the MFMA and the Municipal Systems Act that require consideration. Table 2 below serves to summarise such linkages and their alignment. Table 2: The linkages and alignment between the Municipal Systems Act and the MFMA Linkage/Alignment Municipal Systems Act MFMA Municipal matters dealt with Definitions of aspects of municipal services, service delivery agreements, and the local community Internal processes; consultative processes; performance systems; & reporting & accountability mechanisms Similar to those in the MFMA Internal processes; consultative processes; performance systems; & reporting & accountability mechanisms Similar to those in the Municipal Systems Act, with crossreferencing IDP and the budget Prescribes the IDP Prescribes budgeting as a process covered by the IDP Performance management Annual performance agreement Annual Report Procurement Municipal entities Prescribes the adoption and the development of the system concerned Prescribes the agreement between the executive and the municipal manager in section 57 Prescribes non-financial performance Prescribes outsourcing and the employment of staff Process of setting up; types of entities; governance arrangements Prescribes the performance targets and the measurable objectives Prescribes the agreement between the executive and the municipal manager in sections 53 and 69 Prescribes financial performance and the Report outline Prescribes procurement as an element of SCM Process of setting up; types of entities; governance arrangements 26

41 Linkage/Alignment Municipal Systems Act MFMA Community participation Publishing of documentation Conduct of public office- bearers and municipal officials Cooperative governance Development of culture of participation; mechanisms, processes and procedures for participation and communication (Chapter 4) Communications to local community (section 21); display of municipal publications in head office and satellites; online publication Code of conduct for officials and councillors (Schedules 1 and 2) Municipalities must exercise authority within the constitutional system of cooperative government. National and provincial spheres of government must exercise their executive and legislative authority in a manner that neither compromises nor impedes a municipality s ability or right to exercise its executive and legislative authority. Municipalities must develop common approaches for local government as a distinct sphere of the government, as well as enhance cooperation, mutual assistance and the sharing of resources among municipalities (section 3). Consultation and communication processes during the budget cycle Information to be placed on the websites of municipalities (section 75) Financial misconduct for municipal officials (Chapter 13) Capacity building; promotion of cooperative government by national and provincial institutions; national and provincial allocations to municipalities; promotion of cooperative government by municipalities; stopping of funds to municipalities; stopping of equitable share allocations to municipalities; stopping of other allocations to municipalities; monitoring of prices and payments for bulk resources; price increases of bulk resources for the provision of municipal services; applicability of tax and tariff capping on municipalities; disputes between organs of state Chapter 5) Both the MFMA and the Municipal Systems Act deal with the internal and consultative processes, the performance systems, and the reporting and accountability mechanisms within a municipality. IDP and budgets: Mention has already been made of the need to see the process of annual revision of the IDP as the same process as that which is undertaken for preparing the next budget. This will ensure that the planning and budgeting processes are integrated as ONE process. For the same reason, the process leading to the adoption of the budget and of the IDP should be incorporated into one process, together with the process for approving or revising taxes, levies and user charges, and property rates and taxes, as well as the budget- 27

42 related policies. Doing so should help to ensure the implementability of credible plans and budgets. Further to the above, the MFMA and the Municipal Systems Act also contain more practical synergies that relate to good governance, consultation and accountability issues. A direct interrelationship exists when a municipality contemplates its processes with regard to planning and budgeting. It follows that, in practice, the planning and budgeting processes will commence together at least 10 months before the start of the municipal financial year, when the mayor announces the process for revising the IDP and for the preparation of the budget. Also, the alignment of policies through the adoption of the budget and other related policies, such as the levying of fees for municipal services, is made more explicit at the time of drafting and adopting the budget. Both the MFMA and the Municipal Systems Act are based on the adoption by the municipality of a corporate PMS that cascades down into an individual PMS. The budget of the municipality must contain performance targets and measurable objectives, which are set out at the beginning of the financial year. Chapter 4 of the MFMA provides the necessary guidance in this regard. Linked to these performance targets are the adoption of the annual SDBIP and the annual performance agreement between the mayor (or executive committee) and the municipal manager (according to section 57 of the Municipal Systems Act, and sections 53 and 69 of the MFMA). At the end of the financial year, the municipality must publish an annual report, reporting on both its financial and non-financial performance. While the MFMA focuses on financial performance (Chapter 12), the Systems Act focuses on non-financial performance (in section 46 of the Act, as well as the related regulations). The annual report is considered by the municipal council using the process outlined in Chapter 12 of the MFMA ( Financial Reporting and Auditing ). All due processes must be followed in procurement, as outlined in both the MFMA and the Municipal Systems Act. While it is the MFMA that deals with the procurement of goods and services (procurement), the Municipal Systems Act is relevant when such procurement involves outsourcing of a municipal service to an external service provider. The MFMA modernises procurement practices within the framework of the broader concept of SCM. The effectiveness of the MFMA has been enhanced with the publication of: the related regulations on SCM; the Broad-Based Black Economic Empowerment Act, No. 53 of 2003; the Municipal Public Private Partnership Regulations (MFMA Circular No. 37); and various MFMA circulars issued by the National Treasury. Both the Municipal Systems Act (section 82) and the MFMA (Chapter 10 Municipal Entities ) deal with the process of setting up municipal entities, the type of entities involved, and the governance arrangements for such entities. It is, therefore, important that municipalities not only comply with both Acts when setting up or governing municipal entities, but that both Acts are seen to refer to a single process for their establishment, and to a single system of governance. Both the Municipal Systems Act and the MFMA require extensive consultation with the local community in important decision-making, such as that relating to budgets, borrowing, IDPs, performance systems, and annual reports. The process of consultation is set out in the 28

43 Municipal Systems Act (Chapter 4 Community Participation ). To facilitate such consultation, municipalities are encouraged to set up websites, and to post all key documents on their websites. The provisions of the MFMA, section 75, and the Municipal Systems Act, section 21, are closely linked with regard to the publishing of documentation. Publications must be displayed in the municipal head office, in satellite offices and in libraries. With technological advances, the information is also required to be published on an official municipal website. MFMA Circular No. 28 also requires that the full IDP, as referenced by the budget documentation, must be made publicly available on the website, in the Council offices. Close attention must be paid to the Municipal Budget and Reporting Regulations to ensure compliance with the requirements. Both the Municipal Systems Act and the MFMA make common assumptions about the roles and responsibilities of various stakeholders in the municipality. Such roles also inform the code of conduct for councillors and officials, as set out in Schedules 1 and 2 of the Municipal Systems Act. In addition, if there are financial transgressions, financial misconduct provisions and criminal sanctions apply in terms of Chapter 15 of the MFMA ( Financial Misconduct ). Where councillors or officials transgress their role or code of conduct, strict provisions apply. Cooperation between governments is strengthened through these Acts, and when there is an assignment of a function or power to a municipality, comment must be provided by the Financial and Fiscal Commission, and consultation must take place with the Minister of Finance on the assignment, including any possible liabilities involved. This aspect strengthens cooperative government and links with Chapter 5 of the MFMA, as well as directly impacting on the annual Division of Revenue Act. The other area of cooperation relates to the provision of services through service delivery agreements and the use of external mechanisms. An important area of alignment relates to the process of establishing an external mechanism to provide municipal services. The community consultation, assessments, capacity, feasibility studies, value for money, measurement of risk, projected borrowing, and fiscal implications are all linked to the IDP and budgetary process Summary Municipal services cover a wide spectrum, ranging from highly technical engineering services to more abstract human development services. As such, a broad framework of legislation is provided to guide service delivery. However, the MFMA and Municipal Systems Act are highly interrelated pieces of legislation that work in synergy to organise the internal and consultative processes, the performance systems, and the reporting and accountability mechanisms within a municipality. Although the discussion in this chapter should not be considered as exhaustive, it does highlight the linkages and synergies between the various acts and related regulations, as well as the need for proper planning. All of these issues can be seen as being encapsulated in the Batho Pele ( people first ) principles that will be discussed in Chapter 3. 29

44 Chapter 3: Vision of a modernised financial system 3.1. Learning outcomes After completing this chapter, you should be able to explain: the approach followed in modernising financial management; how to maximise service delivery and ensure continuous improvement; and how improvement in skills and qualifications will contribute to the modernisation of financial management Key concepts Modernising financial management Globally, in terms of public management reform theory, the concept of modernisation is related to enhanced sophistication of systems and to the professionalising of the service through skills development and professional qualifications Scene-setting questions 1. What can you can do in your area of responsibility to maximise service delivery? 2. What is currently being, and what more can be, done to maximise service delivery in your municipality? 3.4. Introduction The purpose of this chapter is to explain how the vision of a modernised financial system has been emerging through legislative and policy reforms, and the introduction of new practices. The purpose of a modernised system and of the introduction of new practices is to maximise service delivery and to enable the adoption of a culture of continuous improvement and skills development Where the individual municipal official fits into the picture This chapter is basically about helping to ensure that the local government machine runs more efficiently than it has done in the past. Just as technological breakthroughs and advances enabled vehicle manufacturers to build new vehicles that are substantively more efficient, economical and effective than their preceding models were only a decade ago, it is possible to modernise the systems of local government to perform better and to keep on improving on performance by means of the inculcation of a culture of continuous learning for improvement. The running of a modernised financial system might be compared with the operation of the multipart machinery of a vehicle that ensures that relatively little fuel is consumed, but that, without improved usage, cannot attain the anticipated results. Each municipal official must make it their personal business to perform better than they did in the past, by coming to understand how to operate the modernised system, and by learning how to strive for continuous improvement through skills development. 30

45 3.6. Legislative and policy reforms Section 152 of the Constitution sets out the objects of local government as being to: provide democratic and accountable government for local communities; ensure the provision of services to communities in a sustainable manner; promote social and economic development; promote a safe and healthy environment; and encourage the involvement of communities and community organisations in the matters of local government. Section 152 then states that a municipality must strive, within its financial and administrative capacity, to achieve the[se] objects.... The White Paper on Local Government (Republic of South Africa, 1998) marked the end of transitional local government, and, through a range of legislation promulgated thereafter, established a new, democratic, non-racial and non-sexist government system for the three spheres of government. The legislation provided the framework in terms of which municipalities would structure their political and administrative functions with particular emphasis on the developmental mandate ( duties ) that municipalities have been assigned in terms of section 153 of the Constitution, read together with Part B of Schedule 4 and Part B of Schedule 5 of the Constitution on the functional areas of competence of local government. A variety of legislation and regulations exist that municipalities must consider in their day-today activities, as has been explained in Chapter 2 of this learner guide. The aim of the legislation and the various regulations is to maximise the capacity of the municipalities to deliver services to all their residents, customers and users. They give effect to the principle of transparency, as required by sections 215 and 216 of the Constitution, among others. However, capacity cannot be ensured through legislation alone Approach taken in modernising financial management The MFMA aims to modernise budgetary and financial management practices in municipalities in order to maximise the capacity of municipalities to deliver on their constitutional mandate. It also aims to put in place a sound financial governance framework, by clarifying and separating the roles and responsibilities of the executive mayor or committee, the non-executive councillors and the officials. The MFMA affirms performancebased systems, focusing on outputs and measurable objectives, to enable municipalities to maximise their capacity for service delivery to their residents, customers and users. It further aims to improve financial affairs in local government and to develop a more strategic approach to local service delivery. The MFMA establishes requirements for municipalities to consult effectively with their local communities, to work with other spheres of government (as required by the Constitution Chapter 3: Co-operative Government ), and to focus on more sustainable means of delivering services. Section 2 (b) of the Municipal Systems Act states that a municipality comprises the political structures and administration of the municipality and the community of the municipality. The MFMA then expands on this aspect by empowering councillors to play their constitutional role as politically elected representatives of the community and residents by 31

46 approving policies and budgets proposed by the executive mayor or committee, and by then overseeing the performance of the municipality in implementing these policies and budgets. For this reason, the Municipal Systems Act assumes a separation between councillors serving on the executive (i.e. the mayor or executive committee) and non-executive councillors. The executive mayor or executive committee are expected to provide the municipality with political leadership, by proposing policies, budgets and performance targets for the municipality and its officials. The MFMA also differentiates between the role of executive councillors and their officials by making the executive mayor or committee responsible for policy and outcomes (the impact), and the municipal manager and other senior managers for implementation and outputs (the tangible deliverable). The executive mayor or committee is expected to oversee the performance of its officials, using the SDBIP, and monitoring performance through regular reporting, as required by legislation and regulation. On the basis of such reports, the nonexecutive councillors are expected to hold both the executive mayor or committee and the officials accountable for their performance. This separation of responsibilities ( powers ) between the executive councillors, the nonexecutive councillors, and the officials is important for good governance, and is in line with modern practices of effective public management. The aim of the MFMA is to allow managers to manage the affairs of the municipality, but also to make them more accountable to the council and the community. The MFMA recognises that the fulfilling of the various roles and responsibilities is only possible because of the reporting requirements of the Act, and because of the provision of quality and timely management information. Such information, which must be both credible and reliable, allows the management of the municipality to be proactive, and to identify and solve problems as they arise. The challenge facing all stakeholders is their capacity to use the information produced in terms of the Act to improve the efficiency and effectiveness of the service delivery of the municipality. The notion of Maximising service delivery, also calls for continuous improvement and skills development. The MFMA aims to assist municipalities to maximise their capacity to deliver services by, as set out in section 2 of the Act ( Object of the Act ), securing sound and sustainable management of the fiscal and financial affairs of municipalities and municipal entities by establishing norms and standards. The Act is a powerful tool for assisting the executive mayor or committee, the municipal manager and senior managers to achieve this objective. Many finance officials, however, lack the relatively broad skills required to implement the MFMA fully. The Minister of Finance has encouraged treasury and finance officials to exceed the requirement of narrow qualifications, to embrace the principles of Batho Pele, and to commit to selfless service delivery to the public. The MFMA aims to assist municipalities to maximise their capacity to deliver services by, as set out in section 2 of the Act ( Object of the Act ), securing sound and sustainable management of the fiscal and financial affairs of municipalities and municipal entities by establishing norms and standards. The Act is a powerful tool for assisting the executive mayor or committee, the municipal manager and senior managers to achieve this objective. Many finance officials, however, lack the relatively broad skills required to implement the 32

47 MFMA fully. The Minister of Finance has encouraged treasury and finance officials to exceed the requirement of narrow qualifications, to embrace the principles of Batho Pele, and to commit to selfless service delivery to the public. As is explained in the introduction to this programme, Batho Pele, being the White Paper on Transforming Public Service Delivery (Republic of South Africa, 1997), is intended to impact on the skills and attitudes of officials to meet the developmental challenges facing the country under the slogan of We belong, we care, we serve. A slightly more detailed explanation of the eight Batho Pele principles than is provided in the introduction is provided here to reiterate the service delivery culture that must be developed through the actions of everyone involved: Consultation: The public should be consulted about their needs. Standards: The public should know what service to expect. Redress: The public should be offered an apology and solution to the problem when standards are not met. Access: The public should have equal access to services. Courtesy: The public should be treated courteously. Information: The public are entitled to full, accurate information. Openness and transparency: The public should know how decisions are made and departments are run. Value for money: All services provided should offer value for money. The National Treasury and the LGSETA have introduced a Competency-based Programme for the training and development of a wide range of municipal officials. This programme is intended for municipal accounting s; CFOs; senior managers; other financial officials; heads of SCM and SCM officials in adherence to the prescriptions of sections 83, 107 and 119 of the MFMA. The issued Municipal Regulations on Minimum Competency Levels (Republic of South Africa, 2007) give effect to the above-mentioned prescripts. The objective of the programme is to enable participants to apply strategic-level financial management competencies that will ensure effective, efficient and economical utilisation of public funds and resources at local government level, as intended by the above-mentioned directives, among others Summary Although a comprehensive framework of legislation, as discussed in Chapter 2, is extremely relevant for improving service delivery and for modernising financial management, further steps need to be taken to attain such improvement and modernisation. Accordingly, in this chapter, the focus shifted to the modernisation of financial management practices, and to the establishment of a sound financial governance framework. This is mainly done by clarifying the roles of the various stakeholders in financial management. In addition, continuous improvement in following the Batho Pele principles, as well as skills development, received some attention. The aim is to modernise financial management practices in the local government sphere, by placing municipal finances on a sustainable footing in order for municipalities to be able to deliver basic services effectively. 33

48 Chapter 4: Underlying principles supporting sound financial governance 4.1. Learning outcomes After completing this chapter, you should be able to explain the six underlying principles for supporting sound financial management, namely: the promotion of sound financial governance by means of clarifying roles; the adoption of a strategic approach to budgeting and financial management; the enhancement of revenue management and revenue collection; the modernisation of financial management; the promotion of cooperative government; and the promotion of sustainability Key concepts Financial governance Good public financial governance equates with the responsive, prudent, effective, transparent and accountable management of public financial resources. Medium-term Revenue and Expenditure Framework (MTREF) The framework for threeyear budgeting, in adherence to section 18 of the MFMA. Service Delivery and Budget Implementation Plan (SDBIP) This is a plan drafted by a department or functional area regarding how the budget for the particular functional area will be implemented. Revenue management A fundamental and routine financial management function of the municipality s revenue-generating business. Revenue enhancement Increasing the value of revenue generated (MFMA Circular 64, 2012) Scene-setting questions 1. How can you promote good financial governance in your municipality? 2. How should sound financial governance be promoted in your municipality? 3. To what extent is a strategic approach to budgeting and financial management followed in your municipality? 4. How can a more strategic focus on budgeting and financial management be developed in your municipality? 5. What is currently being, and what can further be, done to enhance revenue management and revenue collection in your municipality? 6. What does the modernisation of financial management imply for your municipality? 7. What does the promotion of cooperative government mean for your municipality? 8. What does promoting sustainability imply in your municipality? 34

49 4.4. Introduction Six underlying principles to support the modernisation of local government finance are set out in the MFMA, as well as being consistently echoed in other legislation on local government. These principles encourage a strong, well-managed and accountable local government sphere, which is suitably placed to meet the emerging demands and the new challenges of the different communities that it serves in a more consistent and sustainable manner than at present. These principles are: promoting sound financial governance by clarifying roles; adopting a strategic approach to budgeting and financial management; enhancing revenue management and revenue collection; modernising financial management; promoting cooperative government; and promoting sustainability. The purpose of this chapter is to explore the implications of these six principles further. As the premise and context of the discussion, it must be stated that the MFMA gives effect to the constitutional principle (the Constitution section 40 (1)) that recognises that the local sphere of government is distinctive and interdependent, with the power to determine its own budget and policies. It also recognises the approval and oversight role of the municipal council, as a legislature in its own right. Being a distinctive sphere of government, each municipality has the right to determine its own budget with its own priorities, and to collect property taxes, municipal levies and user charges. Given that the three spheres of government are also interrelated, the provincial or national sphere can, in terms of section 139 of the Constitution, intervene in a municipality only when there is an executive failure, or a budget or financial crisis. The MFMA requires extensive accountability to the municipal council and to the local community from the councillors and the officials Where the individual municipal official fits into the picture The six principles discussed in this chapter signal that the responsive, prudent, effective, transparent, and accountable management of public financial resources requires a high degree of meticulousness about even the smallest detail to ensure the overall smooth running of the organisation. Even if your role is not specifically mentioned in this chapter, section 78 (g) of the MFMA determines that you should consider yourself the accounting in your area of responsibility in terms of the requirement that you ensure compliance with the provisions of the MFMA, to the extent that they are applicable to you. Each of the six principles discussed below are capable of causing ripple effects that will, in some or other way, reach your area of responsibility, so that it remains crucial for you to assume responsibility for seeing that good governance is your concern. In illustration of the importance of the above requirement with regard to one of the six principles discussed below, National Treasury s MFMA Circular 64 states that revenue generation is everyone s responsibility, not just that of the revenue management unit. Municipalities must effectively manage all functions that impact protecting and growing their revenue base. The implementation of internal controls along the revenue value chain will aid effective data handovers; utilising system data validation mechanisms and ensuring that service level 35

50 standards are fundamental to ensuring the integrity of billing data. The concept of a value chain links the six principles to the areas of responsibility of all officials Promoting sound financial governance by means of clarifying roles At the core of financial governance is the requirement that all financial processes are managed according to a stringent set of rules and regulations, which are backed up by accurate reporting capabilities. Practices for improving financial governance include improving fiscal transparency, strengthening oversight institutions, and formalising public financial governance practices. Such practices start with clarifying roles in financial governance. The MFMA and the Municipal Systems Act are central to developing the governance framework within a municipality, to clarifying and separating the roles of the mayor, councillors and officials, and to seeing that the system of accountability and oversight runs smoothly. The objective of developing sound financial governance within every municipality means developing a comprehensive system clarifying (and separating) the responsibilities of the mayor, the councillors and the officials. This framework is built up around the responsibilities of accountability and oversight, which are, in turn, possible only if there is a culture of transparency and regular reporting in the municipality concerned. Confusing or duplicating responsibilities tends to weaken accountability and oversight mechanisms, hence the need for separating the various wide-ranging responsibilities. The executive mayor or committee is responsible for providing the municipality with political leadership, for proposing policy, and for overseeing its implementation. The council retains responsibility for approving policy and for exercising oversight over the mayor, with the administration being accountable to the council via the mayor. Officials are responsible for the implementation of the policy, and for providing the executive mayor or committee with professional advice. The council holds the mayor responsible for attaining the promised outcomes, and the municipal manager responsible for attaining the specific outputs. The mayor is expected to oversee and to manage the municipal manager so as to ensure delivery on the agreed outputs, with the council having to exercise oversight over the executive mayor and/or committee to ensure they fulfil this responsibility of oversight. The mayor must ensure that such outputs form part of the municipal manager s performance agreement, which must be revised at the start of the financial year so as to be consistent with the SDBIP. It is important to note that the municipal manager has significant powers conferred by legislation, and is permitted to delegate such powers under prescribed circumstances. Delegation by the municipal manager features prominently in two pieces of legislation concerning local government. The Municipal Systems Act permits a municipal manager to delegate any of his or her powers to a member of staff, with the approval of the council. The MFMA, section 79, also allows for the delegation of powers, but is less restrictive, as it does not require prior council approval. Other legislation that confers powers on the municipal manager must be scrutinised to determine whether delegation is permissible. An example of the latter point is that, in terms 36

51 of the promotion of the Local Government: Municipal Performance Regulations for Municipal Managers and Managers Directly Accountable to Municipal Managers, 2006, which deals with municipal managers and managers who are directly accountable to the municipal manager (who are colloquially known as section 57 [of the Municipal Systems Act] managers ), an obligation is placed on the council or on the executive mayor, as the employer, to delegate the powers reasonably required by the relative manager, to enable him or her to meet the performance objectives and targets laid down in his/her/their performance agreement(s). Legislative requirements: Section 57 of the Municipal Systems Act states that a person to be appointed as the municipal manager of a municipality and a person to be appointed as a manager directly accountable to the municipal manager may be appointed to that position only in terms of a written employment contract with the municipality, complying with the provisions of the section, and subject to a separate performance agreement that is concluded annually. The performance agreement must be concluded within a reasonable time period after a person has been appointed as the municipal manager, or as a manager directly accountable to the municipal manager, and thereafter within one month after the beginning of the financial year of the municipality. The employment contract must include, subject to applicable labour legislation, details of duties, remuneration, benefits, and other terms and conditions of employment, and the performance agreement must include: performance objectives and targets reflected in the annual performance plan that forms an annexure to the performance agreement that must be met; time frames within which those performance objectives and targets must be met; performance objectives and targets that must be practical, measurable, and based on the key performance indicators set out in the municipality s integrated development plan; standards and procedures for evaluating performance, and intervals for evaluation; and the consequences of substandard performance. The employment contract for a municipal manager must: be for a fixed term of employment, not exceeding a period ending two years after the election of the next council of the municipality; include a provision for the cancellation of the contract, in the case of non-compliance with the employment contract, or, where applicable, the performance agreement; stipulate the terms of the renewal of the employment contract, but only by agreement between the parties; and reflect the values and principles referred to in section 50, the Code of Conduct set out in Schedule 2, and the management standards and practices contained in section 51 of the Act. For the above-mentioned reasons, the various local government Acts stipulate certain procedures and assign specific responsibilities to the council, the mayor, the councillors, and the municipal officials, in particular the municipal manager and the CFO. The financial governance framework demarcated by these procedures and responsibilities is set out in Table 3. 37

52 Table 3: The financial governance framework Entity Responsible for Oversight over Accountable to Council Mayor Municipal manager Approving policy and budget Policy, budgets, outcomes, management of / oversight over municipal manager Outputs and implementation Mayor Municipal manager Administration Community Council and public Mayor, council, public Chief financial Outputs Financial management Municipal manager 4.7. A more strategic approach to budgeting The MFMA requires all councils to adopt approaches to budget preparation, monitoring and implementation that are considered in conjunction with the provisions of the Municipal Systems Act and the Local Government: Property Rates Act No. 6 of 2004, hereinafter referred to as the Property Rates Act, as the budget and the IDP must be aligned every year, and all taxes and revenues must be adopted with the budget. By adopting three-year budgets linked to longer-term IDPs, municipalities can be more forward-looking and better informed, and capable of making better judgements about the future priorities for capital development and service delivery in their communities than they might otherwise have been. The medium-term aspect of a municipal budget facilitates a more strategic and sustainable result than might else have been achieved. It serves to communicate to all stakeholders clarity, certainty and predictability regarding the strategic direction to be taken for sustainable service delivery. Though not legislated as a requirement, municipalities should strive to prepare a long-term ten- to twenty-year vision, and prepare an IDP covering at least five years, which should further enhance planning for sustainability. Such a long-term vision and IDP must be based on realistically projected revenue, with the IDP being revised every year, so that both the vision and the plan are consistent with each other. In developing a long-term vision and in determining what the future priorities are to be, municipalities must neither neglect, nor underestimate, the cost of current services and priorities, unless specific services or priorities are explicitly terminated. In the municipal context, a budget is an MTREF covering at least seven years: three years of audited history, the current year being implemented, the budget year, and two outer year forecasts. As with the national and provincial governments, municipalities table three-year budgets, by vote or function, namely electricity, water, waste and other services, subdivided into programmes or sub-functions, and manage their finances across a three-year timeframe, through a continuous cycle of forecasting, implementation and review. Municipalities, thereby, focus on three different budgets covering five years, as are illustrated in Table 4 below. This is because the municipality prepares the budget for the next three years; it is still implementing the current year s budget; and it is also closing off and preparing financial 38

53 statements and annual reports for the previous financial year. This approach promotes a performance management culture, together with the SDBIP, that ensures accountable and performance-driven service delivery. Table 4: Simultaneous focus on three different budgets (using the period as an example) Budget preparation process Budget implementation process Budget evaluation process 2008/09 budget 1 Aug 07 May 08 2 Jul 08 Jun 09 3 Jul 09 Mar /10 budget 1 Aug 08 May 09 2 Jul 09 Jun 10 3 Jul 10 Mar /11 budget 1 Aug 09 May 10 2 Jul 10 Jun 11 3 Jul 11 Mar 12 Documents and reporting IDP / SP / MTREF / MBPS / Schedule Key / Deadlines AB / MBS / QPR / MBPA AFS / AR / OR / BEC 4.8. Enhancing revenue management and revenue collection Revenue refers to the gross inflows of economic benefits, or the service potential received or receivable by the municipality, on its own account. Section 64 (1) and (2) of the MFMA legally assigns the responsibility of revenue management to the accounting, although it is delegated to the CFO in practice. Apart from revenue management being akin to expenditure management, it is also a fundamental and routine financial management function of the municipality s revenue-generating business that encompasses billing and collection activities in respect of trading services and property rates levied (MFMA Circular 64, 2012). In terms of the MFMA, revenue management requires the following actions: The municipality should have effective revenue collection systems. The revenue due should be calculated on a monthly basis. Accounts for municipal tax and charges for municipal services should be prepared monthly, or less often where monthly accounts are uneconomical. All money received should promptly be deposited in the municipal bank accounts. The municipality should maintain a management, accounting and information system that recognises revenue when earned, accounts for debtors, and accounts for the receipt of revenue. The municipality should also maintain a system of internal control for debtors and revenue. Interest should be charged on arrears, except where the council has granted exemption in accordance with policies, and within the prescribed framework. All revenue received should be reconciled on at least a weekly basis. A municipality cannot become financially sustainable if it does not manage its revenue rigorously. Own revenue sources, such as service charges and tariffs, goods sold, property taxes, including collection charges, and interest on arrears and fines, levies, interests, 39

54 royalties, and dividends, together with government and other grants, require active management within a framework of municipal policies, strategies, and the application of best practices. A Credit Control and Debt Collection Policy, an Investment Policy, together with deliberately defined strategies on working capital financing and investment strategies, cash management, SCM, and other forms of expenditure management must be drafted and applied for sustainability within the particular socio-economic circumstances of the municipal task environment. Such a rigorous process relates to the notion of revenue enhancement, which may be associated with increasing the value of revenue generated, either through national policy developments that give rise to additional sources of revenue for local government, or through the ability of the municipality to grow its own revenue base. The following aspects are, however, fundamental to maximising the potential of existing revenue sources (MFMA, Circular 64, 2012): The billing system must correctly reflect all billing data and customer data that are required to issue an accurate invoice on time to the relevant customer. The indigent register must be updated regularly. The billing cycle must be reduced by enforcing the policies relating to debtor management. All properties within the municipality s area of jurisdiction must be correctly valued, whether in the General Valuation Roll or in Supplementary Valuation Rolls, and the billing system must be updated with any change in property ownership. This is necessary to grow and protect the municipality s property rates base. Effective business processes should ensure that new property development and improvements to existing properties are valued as required, and that billing records are updated accordingly. Doing so requires good working relations between the municipality s town planning, valuations, and revenue management functions. Correct categorisation of properties in terms of the Municipal Property Rates Policy impacts the usage and property rates tariffs applied to the properties. Property usage must be correctly recorded, so that the relevant property rates tariff can be applied to the property. Changes to property usage must also be communicated to the revenue function to allow for the updating of the billing system. Water and electricity meter numbers must be recorded correctly, and linked to the corresponding property on the billing system. Water and electricity meters must be adequately maintained to minimise losses due to leakages or incorrectly measured consumption. Water and electricity meters must be read with regularity and accuracy, so that the correct consumption information is recorded on the billing system. Meter reading estimates must be minimised, or, at least, undertaken in accordance with the municipality s Credit Control Policy prescriptions. Refuse and sanitation service charges must be included in the billing records. Such services are often neglected as a source of revenue; in fact, some municipalities operate refuse removal services at a loss. 40

55 Billing records must be routinely reconciled to the source of the billing data and customer data. Billing queries must be resolved within reasonable timeframes. Municipal functions must be adequately staffed with competently skilled individuals who understand the job requirements and how to deliver on them Modernisation of financial management This section is a continuation of the contents conveyed in Chapter 3. The MFMA recognises that financial management systems, processes and policies in local government must be modernised to help strengthen the municipality s ability to function effectively, efficiently, economically, and equitably. Financial management system improvements contribute to the maintenance of trust and accountability. In order to render the best practices in the public sector in all three spheres of government, sound and orderly financial management must form the cornerstone of the creation of an environment of trust and accountability. Accountability can be regarded as one of the fundamental principles of democratic governance. In addition, it is also necessary to establish fundamental best practice management principles (i.e. the norms and standards required by the Constitution). The MFMA, in turn, sets norms and standards for the local government or municipalities. This approach is similar to that which is taken in the King Reports (I, II and III) on Corporate Governance, hereinafter referred to as the King Reports. The main issues raised in the three reports are as follows: King I (1994) upholds an integrated approach to the good governance in the interests of a wide range of stakeholders. King II (2002) upholds a move to the triple bottom line, embracing the economic, environmental and social aspects. King III (2009) upholds a core philosophy revolving around leadership, sustainability and corporate citizenship. Given the precepts of the King Reports, mayors and managers are expected to take the national norms and standards into account when setting up internal procedures, processes and mechanisms. These standards help to facilitate better performance, measurable outcomes, reformed accounting practices, improved disclosure and reporting, and best practice management techniques, as well as prescribing certain actions for the prudent management of a municipality s assets and liabilities, and other initiatives, as set out in the MFMA. 41

56 Legislative requirements: The main objective of the Municipal Budget and Reporting Regulations is to formalise norms and standards which, when applied, will improve the credibility, sustainability, transparency, accuracy, and reliability of municipal budgets. Budget schedules, supporting tables, and associated charts were developed to translate the budget regulation requirements into practical outcomes. In this regard, refer to sections 71 and 72 of the MFMA (Monthly budget statements and Mid-year budget and performance assessment), to sections 52 to 54 (General responsibilities, Budget processes and related matters and Budgetary control and early identification of financial problems), the Municipal Budget and Reporting Regulations of 2008 and the MFMA Budget Formats Guide of The National Treasury website ( and relevant and appropriate National Treasury Circulars should also be consulted. The overall objective of the legislation and related documentation is to focus on three key issues, namely: to encourage a disciplined approach to financial management and service delivery; to assign resources in line with strategic priorities, linking plans and budgets to long-term goals, and providing a process that allows resources to be reallocated as policy objectives change; and to encourage operational efficiency where managers are given the authority to run their operations, subject to clear statements of procedure and strategy, and clarity of roles, and are also held accountable for the outputs and outcomes Promoting cooperative government The Constitution firmly sets out the principles, processes and procedures for cooperative governance between the national, provincial and local spheres of government, which, together with the private sector and the communities, play a role in service delivery. It is, therefore, important that a good working relationship exists between the three spheres of government, as cooperative government accepts the distinctiveness, interdependency and interrelatedness of the three spheres of government (section 40 of the Constitution). The White Paper on Local Government (Republic of South Africa, 1998) proposed a system of intergovernmental relations, with the following aims: to promote and facilitate cooperative decision-making; to coordinate and align priorities, budgets, policies, and activities across interrelated functions and sectors; to ensure a smooth flow on information within the government, and between the government and communities, with a view to enhancing the implementation of policy and programmes, and the prevention and resolution of conflicts and disputes. 42

57 The above leads to a variety of legislation (see Chapter 3), as well as systems and structures, all of which are in place to facilitate access to effective service delivery that provides value for money. Table 5 below provides a short overview of some of the roles and responsibilities of the municipal manager that are assumed in interacting with other spheres of government. Table 5: Roles and responsibilities of the municipal manager in cooperative governance Duties and responsibilities Covered in legislation Submission of the budget to national and provincial structures MFMA section 22 Informing the provincial and national structures of unauthorised, irregular, or fruitless and wasteful expenditure Solicitation of views from the National and Provincial Treasuries on contracts having future budgetary implications Submission (in the capacity of accounting ) of details of the bank account to the National and Provincial Treasuries Submission (in the capacity of accounting ) of information, returns, documents, explanations, and motivations, as prescribed, or required, to the National and Provincial Treasuries, and to other national and provincial structures Notification (in the capacity of accounting ) of the National and Provincial Treasuries and of other national and provincial structures MFMA section 32 MFMA section 33 MFMA section 86 MFMA section 104 MFMA section 114 Chapter 5 of the MFMA ( Co-operative Government ) seeks to promote cooperative approaches to fiscal and financial management within sectors, as well as to forge links with other spheres of government and organs of state. Sections 41 to 43 deal with the requirement that bulk providers of services must consult on pricing policies that impact on municipal services, and also, in section 44, sets a procedural framework for resolving financial disputes between organs of state. As regards working together (i.e. working with other sectors of governments in the three spheres), the MFMA fosters a greater level of cooperation across (and within) the different spheres of government, based on systems of mutual support, information sharing, and communication and coordination of activities, than in the past. Each sphere aims to add value to the others constitutional responsibilities, with a view to improving the outcomes for all. National, provincial and local government, together with other organs of state, must promote cooperative government, as set out in Chapter 3 of the Constitution. The following two pieces of legislation speak to the issues of cooperative government: The Intergovernmental Fiscal Relations Act No. 97 of 1997 promotes cooperation between the national, provincial and local spheres of government on fiscal, budgetary and financial matters. The Act regulates and directs the process of revenue sharing of the revenue that is generated nationally among the different spheres of the government, the division of the provincial share among the 43

58 provinces, and any allocation of money to the provincial governments and the local government /municipalities. The Intergovernmental Relations Framework Act No. 13 of 2005 provides a legal framework for intergovernmental relations among the three spheres of government. The Act also acknowledges the fact that cooperation and the coordination of the activities of the three spheres of government is of primary importance. The Act has the following objectives, namely to: o provide a framework for intergovernmental relations, within the principles of cooperative government set out in Chapter 3 of the Constitution; o provide a framework for the national government, the provincial governments and the local authorities; and o facilitate coordination in the implementation of policy and legislation, including: coherent government; the effective provision of services; monitoring; the implementation of policy and legislation; and the realisation of national policies. The Act also requires the mayor to report to the national and provincial government any instance of noncompliance of the municipality with the stipulations of the Act. It describes the consultative processes required by municipalities in relation to various financial matters, and lays out the process for provincial interventions to resolve financial problems. A summary of the framework for cooperative government is provided in Table 6 below. Table 6: Summary of the framework for cooperative government NATIONAL GOVERNMENT Assists and supports municipalities with compliance where appropriate; assists in building capacity by providing financial or technical assistance; issues guides, manuals and regulations; and provides three-year grant allocation details PROVINCIAL GOVERNMENT Plays a coordinating role in the rollout of the MFMA; assists and supports municipalities where appropriate; intervenes when financial problems become evident in the municipalities LOCAL GOVERNMENT Provides the other spheres of government with appropriate financial and service delivery information; liaises with other municipalities and districts on strategic budget issues; provides the provincial and national government with budgetary and financial information Promoting sustainability Sustainable local government is built on the basis of sustainable financial management, or of sustainable management of the fiscal and financial affairs of municipalities. Municipalities have to take full responsibility for their actions, and should not expect either the national or the provincial government to bail them out if they are badly managed. Prioritising the level of service delivery, and ensuring that costs are affordable to ratepayers, as well as the continuation of routine maintenance, is bound to guarantee the sustainability of the service offered by the municipality. 44

59 In this regard, it is important to be aware of the provisions and the requirements of MFMA Circular No. 58, which provides further guidance to municipalities and municipal entities for the preparation of their 2013/14 Budgets and the MTREF. Said Circular refers to the fact that, over the medium term, a municipality should budget for a moderate surplus on its Budgeted Statement of Financial Performance, so as to be able to contribute to the funding of the Capital Budget. If the municipality s operating budget shows a deficit, it is indicative that there are financial imbalances that require addressing (refer to MFMA Circular 55). A circular of this nature, with specific information and pertinent guidelines, is issued each year to assist municipalities and municipal entities with the preparation of their annual budgets. The purpose of the MFMA is to establish the basis for improved financial management, which is essential to improving service delivery and sustaining municipal services into the future. The Act fosters a greater level of cooperation across and within the different spheres of government than is evident at present, based on: a system of mutual support; information sharing and communication; and the coordination of activities. Only municipalities that fail to fulfil their executive obligations (section 139 of the Constitution), that are in material breach of National Treasury-prescribed measures (section 216 of the Constitution), or that experience financial problems (section 38 and Chapter 13 of the MFMA) that place them in a financial crisis will face intervention from the provincial or the national government. Without compromising or impeding a municipality s right to exercise its powers, or to perform its constitutional functions, the MFMA regulates matters in a manner that promotes a sustainable local government sphere. Municipalities must pass budgets that are fully funded, and must borrow only for capital expenditure. Municipalities will, therefore, be allowed to spend only the money that they have collected, as borrowing for current expenditure is only for bridging purposes, and no borrowing to cover current or operational expenditure may be carried over to the next financial year. The issues of further strengthening accountability, oversight, transparency, clarity regarding roles and responsibilities, and communication and empowerment remain central to the legislation. In the interest of providing for an early warning system, the MFMA requires regular and accurate financial reporting to the council in order to facilitate an environment in which potential or actual financial problems are reported in a timely and appropriate manner that will allow the council to remedy the situation (see section 54 [Budgetary control and early identification of financial problems] and sections 71 and 72 [Monthly budget statements and Mid-year budget and performance assessment]). The municipal manager must now submit monthly budget progress reports to the mayor and provincial treasury, and a mid-year budget report and performance assessment to the mayor, the Provincial Treasury and the National Treasury by 25 January each year. The mayor must table the quarterly reports to council and the mid-year budget and performance review report (see section 72 of the MFMA) by 31 January each year, in accordance with the requirements of section 54 (1) (f) of the MFMA. 45

60 The municipal manager must also report to council on the prescribed withdrawals made from bank accounts each quarter, and on unforeseen, or unavoidable, expenditure, or expenditure that is deemed to be unauthorised, irregular, or fruitless and wasteful (see section 32 [Unauthorised, irregular or fruitless and wasteful expenditure] and section 70 [Impending shortfalls, overspending and overdrafts]). It must be emphasised that an accounting or a councillor of a municipality commits an act of financial misconduct if he or she deliberately or negligently contravenes the provisions of the MFMA by: failing to comply with a duty imposed by the provisions of the Act; making, instructing or permitting another official to make an unauthorised, irregular, fruitless or wasteful expenditure; and providing incorrect information in any document. The above-mentioned contraventions will be dealt with under the provisions of Chapter 13 of the MFMA ( Resolution of Financial Problems ), which identifies the criteria to be adopted, and the processes to be followed, for dealing with financial problems in a municipality, and for the preparation of a financial recovery plan. In order to enable analysis of the financial implications of decisions, councils must adopt credible budgets, with realistic revenue and expenditure estimates. Such budgets must include the necessary tax and tariff revenue-raising proposals, and the related realistically anticipated revenue that could be collected thereby. Deficit budgets are not permitted, and the budgets must accommodate all operational and maintenance costs anticipated by the municipality. Capital projects must be budgeted for, and must be evaluated with due consideration of their projected and future operational costs (see section 19 of the MFMA and Municipal Circular 26). Long-term borrowing or debt must be more closely examined than in the past, together with contracts that exceed three years in duration, and with proposals to participate in a municipal entity or PPP (see section 46 of the MFMA and Municipal Circular 26). Municipalities must put in place robust systems of internal control, and they must actively review their financial management systems, so as to improve the efficiency and effectiveness of their processes. The legislative framework of local government acknowledges two types of auditing, namely internal auditing and external auditing. Internal auditing is necessary for the daily checking of all financial transactions. Without this safeguard, any system of financial control would be incomplete. Section 165 of the MFMA requires each municipality and municipal entity to have an internal audit unit. Said unit must: prepare a risk-based plan; advise the accounting and report to the audit committee on matters relating to: o internal controls; o accounting procedures and practices; o performance management; o risk management; and 46

61 o loss control. In the interest of financial accountability, councillors now have a greater responsibility of oversight over municipal finances than they had in the past, and they are, therefore, required to exercise greater diligence in the financial affairs of the municipality by means of the production of quarterly monitoring and annual reports. A more disciplined role than was previously fulfilled is to be played by all councillors in future as regards their accounting to their communities for service delivery and financial performance. It is important to recognise the fact that a municipality has a separate legal personality, which allows it to sue, or to be sued by, other natural or legal persons. The legal personality of a municipality excludes liability on the part of its community for its actions. However, it is important to note that, although such is the case, said exclusion has not been given either to the political structures or to the administration component of a municipality. The MFMA extends the liability to the: municipal managers; councillors; municipal officials; mayors; and directors of municipal entities. The MFMA provides for significant responsibilities, in terms of the political and administrative structures of a municipality, not excluding liability on the part of its officials and political office-bearers. Confirmation of this provision is, again, in compliance with the constitutional foundation of a government, based on the values of accountability, responsiveness and openness. The extent of the liability of the municipal officials and political office-bearers is clearly captured in sections 171 to 176 of the Act. These sections deal, inter alia, with: financial misconduct by municipal officials; financial misconduct by officials of municipal entities; offences committed by the accounting ; penalties and imprisonment; regulations on financial misconduct procedures and criminal proceedings; and liabilities of the functionaries involved Summary The six underlying principles of the MFMA set the strategic focus of municipal financial management, and are consistent with the other legislation that is applicable to local government. These underlying principles are intended to encourage a vigorous, accountable and well-managed sphere of local government, which is focused on meeting the emerging demands and challenges of the diverse communities present within its ambit. 47

62 PART TWO ROLES AND RESPONSIBILITIES IN MUNICIPAL FINANCE In order to show understanding of municipal finance roles and responsibilities emanating from the MFMA, as the second objective of this programme, participants must be able to explain: the distinctive roles and responsibilities of council, the executive and the officials; the responsibilities of top management, and the delegations assigned by the accounting ; and the Budget and Treasury Office as governance structure (see Figure 3 below). 5: Clarifying roles & responsibilities of the council, the executive & the officials SERVICE DELIVERY ETHOS 6: Top management & delegation of the accounting s responsibilities 7: Budget and Treasury Office (BTO) as governance structure Figure 3: Municipal finance roles and responsibilities emanating from the MFMA 48

63 Chapter 5: Clarifying roles and responsibilities of the council, the executive and the accounting 5.1. Learning outcomes After completing this chapter, you should be able to explain what role you play in sound financial management, and how your own position in the municipality is impacted upon by the municipal financial governance roles and responsibilities of the council, the nonexecutive councillors, the executive mayor or committee, and the municipal manager or accounting. You should also be able to explain the meaning and the implications of good financial conduct, capacity and ethical conduct, as opposed to financial misconduct, incapacity and unethical conduct Key concepts Accountability In a public sector context, accountability refers to the obligations of persons or entities that are entrusted with public resources to be answerable for the fiscal, managerial and programme responsibilities conferred on them, and to report to those that have conferred such responsibilities. Delegation Delegation refers to the entrusting of another with part of the responsibilities entrusted to themselves or to their position. The delegation of authority entails subdividing and suballocating powers to subordinates in order that they might achieve effective results, although the accountability for the exercising of such powers still rests with the person having the utmost authority. Oversight Oversight entails supervising and, in the context of legislative oversight, holding the executive accountable. Cost centres A department or other division for which there is separate accounting in order clearly to determine all costs related to the existence, and to the products or services, of that division. Cost centre managers The managers who are directly responsible for costs in the cost centre, and who must take immediate responsibility for cost growth and credit for cost reductions, while still delivering the required items, in a way that promotes efficiency. Ring-fencing When a portion of a municipality s or entity s assets are financially separated without necessarily being operated as a separate entity for regulatory reasons, creating asset protection with respect to financing arrangements, or segregating into separate income streams. Performance agreement The primary oversight mechanism for a mayor to ensure that the council s requirements are being met by the municipal manager, in terms of the municipal manager s annual performance agreement, as detailed in section 57 of the Municipal Systems Act. Misconduct Grossly negligent or wilful transgression(s). 49

64 Incapacity Poor work performance, due to inadequate skills, knowledge or competencies to meet the employer s standards. Unethical conduct Compromising, or acting contrary to, the principles (values), the guiding standards and the sustained institutional efforts to guide behaviour in respect of what is right, good and proper, and which will best serve the public and their interests Scene-setting questions 1. What role do you play in sound financial management? 2. What impact do the financial governance roles and responsibilities of the council, the non-executive councillors, the executive mayor or committee, and the municipal manager or the accounting have on your responsibilities? 3. Why is it not permissible for councillors to serve on boards of entities, audit committees, or tender or bid committees? 4. What is the main reason for a council to consider portfolio committees? 5. What is a Municipal Public Accounts Committee (MPAC), how is it constituted, and what benefits can it have for the municipality? 6. What are the accounting s main responsibilities? 7. What does oversight on performance entail in your municipality? 8. What is the benefit of actively combating misconduct, incapacity and unethical conduct? 9. How are misconduct, incapacity and unethical conduct prevented, and good conduct, capacity and ethical conduct promoted, in your municipality? 10. How is unethical conduct being dealt with in your municipality? 5.4. Introduction In Part 1 of this guide, the vision and the underlying principles were explored, and the clarification of roles and responsibilities was identified as one of the underlying principles supporting sound financial governance. In Part 2, the roles and the responsibilities receive a more in-depth focus. The MFMA, together with the Municipal Systems Act and the Municipal Structures Act, provides clear guidance on the roles and responsibilities of councillors and officials. This chapter expounds on these roles and responsibilities, and on the political and administrative structures that are required for the effective fulfilment of the condition of accountability. Figure 4 illustrates certain aspects of governance and accountability, and of the political and administrative structures that are required for accountability. In accordance with the financial governance principles discussed, the MFMA clearly establishes a separation of roles and responsibilities between the mayor and the council, and between the mayor and the municipal manager, and other senior officials. The Act, thus, creates a clearer and more direct line of authority between the council, which must approve council policy; the mayor, who must provide political leadership and manage the implementation of the policy; and the municipal manager, who is accountable to both the mayor and the council for implementing those policies. However, a focus on sound financial governance should start with all the officials concerned having financial responsibilities. The clarification of roles and responsibilities in this chapter, therefore, begins with those of the individual municipal official. Then, the roles of the 50

65 Policy direction council, the non-executive councillors, the executive mayor or committee, and the accounting are discussed. A special focus on the oversight of performance is also provided. Finally, the principles and the responsibilities relating to the promotion of good conduct, capacity and ethical conduct, and to the prevention of misconduct, incapacity and unethical conduct are explained. Political and administrative structures Community Municipal Council Council Committees Executive Mayor / Committee Municipal Manager Advisory Committees Accountability Administration Figure 4: Governance and accountability: oversight, and clear lines of reporting 5.5. Where the individual municipal official fits into the picture As was mentioned in Chapter 4, even if your role is not mentioned specifically in this chapter, section 78 (g) of the MFMA determines that you should consider yourself the accounting in your area of responsibility by ensuring that the provisions of the MFMA, to the extent that they are applicable to you, are complied with. Of special relevance to the issue of roles in ensuring better performance is section 78 (b) of the MFMA. Said section determines that each official of a municipality exercising financial management responsibilities must take all reasonable steps within their respective areas of responsibility to ensure that the financial and other resources of the municipality are utilised effectively, efficiently, economically and transparently. The performance agreement between the mayor and the municipal manager contains key strategic and delivery outcomes that are translated into clear outputs. These also cascade into the performance agreements of the top management team in the first instance, and also flow into the operational plans and agreements of other managers and staff. The SDBIP (which is to be further expanded upon in Chapter 8) contains details regarding the execution of the budget, and includes information on the relevant programmes and projects, broken down by ward. The Plan provides commencement, phases and completion dates, and details of revenue and expenditure, as well as quarterly service delivery targets and performance indicators. Moreover, regular reporting of progress on the programme or projects is to take 51

66 place to assist in facilitating improved non-financial and financial reporting. All of these agreements relate to the roles and responsibilities of all officials and their contributions to greater effectiveness, efficiency and economy. Staff members across all levels need to understand the importance of the role that they play in budget management. Rather than being the responsibility of a few, it is the responsibility of all in a municipality to contribute to the financial prudence and good governance of the organisation as a whole. Section 78 (a) and (c) of the MFMA determines that each official of a municipality exercising financial management responsibilities must take all reasonable steps within their respective areas of responsibility to ensure that the system of financial management and internal control established for the municipality is carried out diligently, and that any unauthorised, irregular, or fruitless and wasteful expenditure, as well as any other losses, are prevented. Financial misconduct, incapacity and unethical conduct negatively impacting on the responsibilities within your area of responsibility are, therefore, your responsibility to eradicate actively. Section 78 (f) of the MFMA also determines that all information that is required by the accounting for compliance with the provisions of the Act must be timeously submitted to the accounting. None of the role-players discussed here can fulfil their financial governance responsibilities in respect of the information generated where the work that is executed is not accurately and timeously generated, captured, consolidated, interpreted, and appropriately disseminated. Finally in this section, the practices that are aimed at creating greater visibility in respect of the financial responsibility of all officials within their areas of responsibility deserve some attention. Currently, officials with financial responsibilities are confronted with approaches to improve their management of costs and revenues. Many municipalities and municipal entities favour the creation of cost centres, which enable more accurate costing (see Chapter 9) and management towards greater efficiency than there might otherwise be. The reason for this is that, with such centres, the managers are held accountable for the costs involved, and are confronted both internally by other cost centre managers depending on their products or services, and externally by beneficiaries, if their products or services prove not to be cost-effectively provided. A profit centre manager is held accountable for both the costs and the revenues concerned. What this means, in terms of managerial responsibilities, is that the manager has to drive the sales revenue-generating activities leading to cash inflows, and, simultaneously, control the cost-causing (in terms of cash outflows) activities. This makes profit centre management more challenging than cost centre management Role of the council The MFMA recognises the municipal council as the highest authority in the municipality. Both the Municipal Systems Act and the Municipal Structures Act serve to strengthen the authority of the council, by vesting it with significant powers of both approval and oversight. A council delegates its executive authority to the executive mayor or committee, but does not delegate its legislative powers. It also retains its power/authority to approve the policy and the budgets, as well as to exercise oversight over the mayor in the implementation of policy, budgets and by-laws. As the representative body of the residents that it serves, it 52

67 remains accountable both to residents and to other stakeholders, such as businesses, customers and users of its services Role of the non-executive councillor Apart from the Speaker, non-executive councillors generally function in a part-time capacity, and are expected to play a political role in representing residents and other stakeholders in the municipality. Councillors provide the critical political linkage between the executive (in the form of the mayor or the executive committee) and the community. Councillors can, therefore, facilitate the consultative processes envisaged in both the MFMA and the Municipal Systems Act, particularly with regard to: budgets; IDPs; budget-related policies; tariff-setting for services; indigence policies; long-term borrowing; and contracts. The Municipal Systems Act and the MFMA also provide non-executive councillors with important recommendation and approval roles, in terms of which they are expected to review, to debate, to modify, and to approve the policies recommended by the executive (comprising the mayor or the committee, as has previously been noted). Such policies include the by-laws and the policies on priorities that impact on council service delivery. Both the Municipal Systems Act and the MFMA also expand the role of councillors to include an oversight role that is fulfilled by means of council (or committee) meetings. Councillors help to ensure the establishment of effective operational and financial policies and procedures that are aimed at producing desired outcomes. To be effective in their role, councillors need to understand their oversight responsibilities fully. As overseers, they must refrain from becoming involved in the implementation of policies, procedures and directions that they have determined are necessary for the community. Councillors cannot play an operational role, as doing so would interfere with the role of the executive (i.e. the mayor or the committee), and also weaken the accountability of officials to the council (since councillors cannot be both players and referees). The above is in line with the role of elected representatives in Parliament and in the provincial legislatures, who do not become involved in the day-to-day activities of the executive. The oversight role of councillors might be summarised as: setting the direction for municipal activities; setting policy parameters to guide such activities; setting strategic objectives and priorities stating what outcomes and outputs are to be achieved; monitoring the implementation of policies and priorities by evaluating reports of outputs and outcomes; ensuring that corrective action is taken where outputs deviate from plans; and accounting back to the community for performance in terms of objectives. Given the importance of said oversight role, both the Municipal Systems Act and the MFMA protect the councillors policy-making role by separating it from the implementation role played by the officials concerned. Councillors are, therefore, not allowed to be members of the boards of entities (according to section 93F of the Municipal Systems Act), of audit committees (according to section 166 (5) of the MFMA), or of tender or bid committees (according to section 117 of the MFMA). 53

68 The MFMA also anticipates that each municipal council will strengthen its oversight role by having portfolio committees within the council facilitating the oversight role that councillors can play through such committees. The Municipal Structures Act can be utilised in this respect, by means of the provisions that are made in sections 79 and 80, which allow a council to form a budget and finance committee, a public accounts committee, and a municipal services committee (to cover water, electricity, and refuse removal). Most municipalities have now established the MPAC, in line with the issued guidelines that can be found at Plans are under way to provide further capacity-building requirements for said structures Role of the executive mayor or committee As the executive authority of the council, the executive mayor or committee must provide political guidance over the policy, budget and financial affairs of the municipality, as well as ensure that the municipality complies with its obligations under the set legislation. The key tools for doing so are the annual SDBIP and the performance agreements of the relevant managers, with their clear financial management targets and measurable outputs. The mayor remains accountable to the council for proposing and implementing the policy, and for overseeing the implementation of this policy by the administration. More detail on the mayoral responsibilities is provided in the section on budgeting. The approach of the MFMA is also consistent with the Code of Conduct set out in Schedule 1 of the Municipal Systems Act, which clearly requires councillor disclosure of conflicts of interest, and which prohibits councillor involvement in tender processes, or on the boards of municipal entities Role of the municipal manager (the accounting ) The municipal manager, who is both the accounting (MFMA, section 60) and the administrative authority for the municipality, is responsible for the implementation of approved council policy and for the achievement of the objectives set out by the mayor. In the first instance, the municipal manager is accountable to the mayor for the implementation of specific agreed outputs. In the second instance, the municipal manager is accountable to the council for the overall administration of the municipality. The municipal manager is, therefore, the key responsible to the mayor and to the council for the successful implementation of the legislation. In this capacity, the municipal manager must be fully aware of the reforms that are required in order to provide the mayor, the councillors, the senior officials, and the municipal entities with the appropriate guidance and advice on financial and budget issues. While the municipal manager may delegate many tasks to the CFO or to other senior officials, such delegation must be done carefully to ensure that all the tasks concerned are completed appropriately. The municipal manager must project manage at the highest level the change management process, establishing appropriate objectives for senior staff, as well as project milestones, timeframes and responsibilities, while managing those outputs effectively and regularly reporting back to the mayor and council on the progress achieved. A skilled and wellrounded senior management, complemented with some financial management background 54

69 and knowledge, is desirable, since their roles and responsibilities, depending on the extent of delegation by the municipal manager, will greatly support the expeditious implementation of good financial management and governance. Having the CFO regularly update senior management on finance-related policies and areas of relevance is also appropriate. The delegation of financial management tasks to junior officials without supervision should be avoided. The municipal manager is required to take on a number of specific responsibilities, including certifying the correctness of the reports, under the MFMA. The responsibilities to be assumed include, but are not limited to, the following: the budget preparation role; assisting the mayor in preparing the budget; assisting with the conducting of community participation meetings; making public the draft budget; assisting the mayor in preparing the adjustment budget; assisting in the preparation of budget-related policies; fulfilling budget implementation and other administrative roles; making public the approved budget; implementing the approved budget; developing, and submitting, the SDBIP; ensuring that revenue collection and expenditure is performed in line with the budget; certifying, where necessary, the shifting of funds across budget years; administering of all municipal bank accounts; submitting of annual performance agreements for all senior managers; developing and implementing an SCM policy; providing an assessment of municipal performance for inclusion in the annual report; fulfilling a reporting and publishing role; reporting unauthorised, irregular, or fruitless and wasteful expenditure; reporting impending shortfalls or overspending, and any overdraft position; reporting on monthly and mid-year budget progress; reporting other matters as prescribed, including staff expenditure; making public, and inviting comment on, draft contracts with a term longer than three years; ensuring that information is supplied both to the council and to the public on debt proposals; making public any proposal to establish, or to participate in, a municipal entity; preparing the annual financial statements for audit, and verifying salaries and benefits paid; making public the annual report and the council s oversight report; and monitoring entities to ensure that their reporting obligations are met. 55

70 The systems of delegation are set to assign the above-mentioned responsibility to various officials to ensure that the roles and responsibilities are fulfilled. Section 79 of the MFMA refers to the delegation concerned, with the accountability remaining with the accounting. The municipal manager is responsible for the financial management of the municipality, ultimately ensuring that all financial management systems are in place and are properly maintained Oversight on performance: agreements, monitoring, evaluation and reporting Although more will be said in Chapter 8 on the SDBIP as a budget implementation tool, the SDBIP is also one of the tools to measure the performance of senior managers. The SDBIP is drafted and adopted together with the multi-year budget, and made public by the mayor no later than 14 days after its approval. The intention of the SDBIP includes empowering councillors to perform their oversight responsibilities more effectively than they did previously. (The SDBIP guidelines are available on the NT website.) In addition, the Municipal Systems Amendment Act contains relevant sections addressing performance management and related matters. The MFMA (section 74) determines that the prescribed and required information, returns, documents, explanations, and motivations be submitted to the National Treasury, the provincial treasury, the provincial department for local government, and AGSA. The MFMA (section 75) also prescribes that certain documents, as listed in section 21A of the Municipal Systems Act, must be published on the municipality s website. The documents include: a) The annual and adjustments budgets, and all budget-related documents; b) all budget-related policies; c) the annual report; d) all performance agreements required in terms of section 57(1)(b) of the Municipal Systems Act; e) all service delivery agreements; f) all long-term borrowing contracts; g) all supply chain management contracts above a prescribed value; h) an information statement containing a list of assets over a prescribed value that have been disposed of in terms of section 14(2) or (4) during the previous quarter; i) contracts to which subsection (1) of section 33 apply, subject to subsection (3) of that section; j) public private partnership agreements referred to in section 120; k) all quarterly reports tabled in the council in terms of section 52(d); and l) any other documents that must be placed on the website in terms of this Act or any other applicable legislation, or as may be prescribed. m) A document referred to in subsection (1) must be placed on the website not later than five days after its tabling in the council or on the date on which it must be made public, whichever occurs first. 56

71 The primary oversight mechanism for a mayor to ensure that the council s requirements are being met by the municipal manager is the municipal manager s annual performance agreement, of which the details are provided in section 57 of the Municipal Systems Act. Councils must recognise the importance of the performance-based management process in managing their affairs. Individual employee performance contracts should be based on measurable outputs and relate to achieving certain objectives and outcomes set by the council. Role-players in the development of individual performance agreements might need to consider extending, or including, such competencies in agreements as people and relationship management, as an indicator of performance. It is expected that Human Resources will play a deciding role in such development Combating misconduct, incapacity and unethical conduct Municipalities are requested to operate in an accountable and transparent manner. This learner guide, and the course that it informs, serve to promote good conduct, financial capacity and ethical conduct, by explaining the purpose and mechanisms of financial compliance requirements in terms of the bigger picture of a service delivery ethos. On the one hand, each and every manager has the responsibility of fostering such good conduct, financial compliance, and service delivery capacity and ethical conduct in order to promote an ethos of service delivery. On the other hand, any form of conduct that would be likely to threaten the best possible efforts in service delivery constitutes poor governance, and must, therefore, be dealt with decisively. The introduction and maintenance of necessary control systems to prevent, and to reveal, such conduct is not only the responsibility of the accounting, but it is also the responsibility of each official to ensure that it is applied within his or her area of responsibility. If such conduct is discovered, disciplinary action should be taken. Good governance requires that any municipal council or manager instituting disciplinary action should follow the legal prescripts in spirit, and to the letter. In this section, the focus is on dealing with misconduct, incapacity and unethical conduct Combating misconduct Misconduct is defined as grossly negligent or wilful transgression. In order to prove misconduct, the employer must firstly prove that the employee contravened a rule; secondly, that s/he was aware of, or could reasonably have been expected to be aware, of said rule; and, thirdly, that the rule was valid and applied consistently, meaning with substantive fairness. Fourthly, the employer is required to give the employee an opportunity to respond to the allegations levelled against them, ensuring procedural fairness (Maserumule, 2009). Hence, in order to ensure the appropriate applicability of Chapter 15 on financial misconduct in the MFMA, it is recommended that any action undertaken should clearly correspond with such grossly negligent or wilful transgressions, and the National Treasury should be consulted with respect to any action that is taken in this regard. The Municipal Systems Amendment Act should also be considered when matters of misconduct arise. This Amendment Act regulates the employment of municipal employees who have been dismissed, as well as related matters. Schedule 2 of the Municipal Systems Act outlines the Code of Conduct of municipal officials. The Code of Conduct deals, inter alia, 57

72 with the commitment to serve public interests, the disclosure of benefits, and the unauthorised disclosure of information and disciplinary steps. The implications of the Draft Financial Management Misconduct Regulations should be considered as well. The process that needs to be followed in the case of misconduct requires that the accounting and other officials, such as HR officials, play a particular role, as is stated in policy and statute. The System of Delegations requires officials to carry out their delegated duties and associated responsibilities. The fact that responsibility, but not accountability, is delegated entails that senior officials will be held accountable for any misconduct that might result from the actions of a delegatee. The delegator, or assigner, of responsibility must, therefore, ensure that the municipal control measures for preventing and revealing misconduct are operational in their area of responsibility. They must also act promptly and decisively when misconduct is discovered Combating incapacity Incapacity differs from misconduct, in the sense that it is not grossly negligent or wilful transgression, but, rather, persistent failure to meet predetermined performance standards, despite capacity development, directing, support and evaluation by the employer. In such a case, the employee potentially continues to lack the skills, knowledge or competencies to meet the employer s standards, regardless of the efforts exerted for their improvement in this regard by the employer. Incapacity, therefore, refers to the lack of aptitude, and not attitude. It is something that the particular employee has no control over. In order to fairly dismiss an employee based on incapacity, the employer is required to prove substantive fairness by firstly proving that the employee did not meet existing and known performance standards; secondly, that the underperformance is serious; and, thirdly, that the employee was given adequate time, training, support, guidance, or counselling for improvement. Proof of instances of underperformance is essential, and it is vital for the employer to demonstrate that the underperformance is due to the employee s inability, and not to some extraneous factor that cannot be laid at the employee s door, and over which the employee has no control, such as market fluctuations. Dismissal for poor performance must also be procedurally fair (Maserumule, 2009). In relating incapacity to the fact that responsibility is delegated, but accountability is not, the responsibility of the senior who appoints an employee is to show due diligence to ensure that the employee has the required capacity. This holds true especially with regard to those appointments that are made on the basis of professional qualifications and accreditation, where the lack of delivery, or the losses incurred, due to incapacity is the fault of the employee having misled the employer about his or her capacity during the employment process. Incapacity in such a context then becomes an act of misconduct on the side of the employee and should be treated as such as grounds for dismissal. The serious allegations of mismanagement and corruption that are levelled at the government require of local government to be vigilant in its measures to stamp out any action compromising service delivery Combating unethical conduct In the introduction to this guide, we argued that a service delivery ethos is based on the conduct and the character of people, and their principles and methods of distinguishing right 58

73 from wrong, and good from bad. Regardless of differences in social background, culture, religious beliefs, or any other deeply embedded frame of reference of individual officials, ethical norms provide a common universal framework for acceptable behaviour. If there is a perception among the public that public office-bearers and officials are not adhering to this common universal framework for acceptable behaviour, for example by the latter using public resources for self-enrichment and/or abusing their positions for personal gain, or acting with prejudice, meaning being corrupt, or allowing corruption to take place, rather than acting with total integrity, service delivery is likely to be viewed with suspicion. A heightened awareness of ethical issues and debates is an important contributor to improving ethical behaviour, both at an individual and at an organisational level. Although unethical conduct might include acts that can be treated as criminal, such as fraud and corruption, or as misconduct, it ranges from actions that can lead to dismissal to small deeds or omissions that might reduce efficiency. In contrast to the above, we define unethical conduct as deeds or omissions compromising: the principles (values) that guide behaviour in respect of what is right, what is good, and what is proper; the standards that help to guide us in achieving that which is right, good and proper; and the sustained efforts that compel us, and the institutions in which we work, to employ those sound principles and standards that best serve the public and their interests. In a typical government institution, unethical behaviour tends to shows itself in various ways, and in various situations. The instances of misconduct that are most frequent in the public sector, and which we should, therefore, most readily respond to when seeking to establish an acceptable level of ethics in municipalities, include: behaviour concerning a lack of diligence and integrity, including: laziness; carelessness; waste of the organisation s resources; abuse of the organisation s assets; and disrespect for the public and their interests. behaviour concerning dishonesty for purposes of self-interest, including: corruption; theft; graft and fraud; use of insider knowledge and influence; selfdealing; making personal use of government property; and unauthorised outside employment. Maintaining high ethical standards is a constant challenge, for which leadership is critical. The ethical standards that are adhered to by the leadership in an organisation tend to have a profound impact on the ethical standards of the organisation as a whole. Good leadership can profoundly improve ethical standards in an organisation, while unethical leadership can rapidly destroy it. Past unethical conduct and behaviour has led to an increased awareness of which responses are suitable, from the range of responses that have been developed from considerable international experience. Said responses concern the introduction and maintenance of: relevant laws; regulations; standards of conduct; 59

74 cultivated and imbued corporate values; control arrangements; management and governance systems; and a sanctions regime. From the early 1990s onwards, a new emphasis has been placed globally on corporate governance within the private sector. South Africa contributed significantly to this new approach with the publication, in 1994, of the groundbreaking King Reports, as was previously explained. Many of the principles of corporate governance applying to the private sector are fully relevant to the public sector. However, in many respects, King was attempting to incorporate thinking that emerged from the domain of the public sector into the private sector, which was typified by its concerns for the public good, rather than for private profit. The King III (2009) Report addresses principles that are made suitably relevant both to the government and to the private sector Summary This chapter has expounded on the roles and responsibilities of officials and politicians in local government. The primary issues highlighted refer to the governance and the accountability of council, the non-executive councillors, the executive mayor (or committee) and the accounting. The need for such mechanisms as portfolio committees and MPAC to ensure oversight is confirmed, and the separation of duties and powers is contextualised. Oversight of performance has also been discussed in terms of agreements, the monitoring of evaluation, and reporting. The combating of financial misconduct, incapacity and unethical conduct, and the need for promoting an ethical organisation and leadership is discussed in this chapter as well. The topic of ethics has been broached with a view to urging the adoption of a culture of zero tolerance to fraud and corruption, and to creating municipalities that continuously aspire to be ethical organisations. 60

75 Chapter 6: Top management and the delegation of accounting responsibilities 6.1. Learning outcomes After completing this chapter, you should be able to explain: delegation and its relevance in your work environment; performance and the SDBIP and its relevance in your work environment; and monitoring, reporting and staff performance agreements, and their relevance to your work environment Key concepts Delegation The assignment of powers and/or duties to a subordinate, thereby authorising him/her to exercise his/her delegated authority. (See also the definition provided in Chapter 5.) Delegator The body or person who assigns powers and/or duties to a subordinate, but who remains accountable for such powers and duties. Delegatee The subordinate to whom powers and/or duties are assigned, and who is held responsible for the way in which he/she exercises his/her delegated authority Scene-setting questions 1. How are delegations directly or indirectly impacting on your own work responsibilities? 2. How should the system of delegation in your municipality enhance service delivery (e.g. how can you best deal with the situation where a contractor must be paid, and only the municipal manager can approve the payment?). What are the risks in the system, and how do you suggest that they can be mitigated? 6.4. Introduction As was explained in Chapter 5, the MFMA establishes a major role for the municipal manager, who is the accounting of the municipality. Chapter 8 of the MFMA spells out the accounting s fiduciary and other responsibilities. These responsibilities are additional to all the other management responsibilities that are expected of the municipal manager as head of the administration, including the responsibilities that are outlined in the Municipal Systems Act. However, as accounting, the municipal manager cannot perform all the work of the municipality, but must ensure that he/she delegates responsibilities, while still being aware of his/her accountability for the performance concerned. These matters are discussed in this chapter. 61

76 6.5. Where the individual municipal official fits into the picture In the strictest sense of the word, in any democratic government, only the voters have power. The word democracy is derived from the Greek words demos meaning nation and kratos meaning power. By means of the election process, the nation assigns original authority to the legislature, namely the municipal council in a municipal context. As is discussed below, the council may delegate certain responsibilities to the executive, namely the executive mayor or committee. The executive, in turn, delegates certain authority and responsibilities to the accounting, who, in turn, delegates further. Both the Municipal Systems Act (sections 59 to 63) and the MFMA (sections 79, 81 and 82) refer to this assignment of authority as the delegation of powers and duties. The municipal manager, as accounting, has statutory functions and powers in terms of section 60 of the MFMA, and must perform all the functions as determined by the Act, which may be sub-delegated, as determined by the MFMA, section 79. The municipal manager may delegate tasks, allocated to him/her under the MFMA, to the CFO and to other senior managers. The CFO may, in turn, in terms of section 82 of the MFMA, sub-delegate certain tasks to other officials and even to other people contracted by the municipality. Municipal officials other than the municipal manager or CFO can, therefore, either be delegatees who have received formal written delegations in terms of section 79 of the MFMA, or who have designated areas of responsibility that form part of the system of delegations, sub-delegations, job descriptions, performance agreements, and contracts of the municipality, in order to execute its strategic intent and service mandate. The performance agreement between the mayor and the municipal manager contains key strategic and delivery outcomes that are translated into clear outputs. The outcomes also cascade into the performance agreements of the top management team in the first instance, and flow into the operational plans and agreements of other managers and staff via the SDBIP (see Chapter 8). Where an accounting delegates any of his/her powers and duties to such senior managers, and where they are properly qualified AND have the necessary experience to play this role, senior managers will be held primarily accountable for any transgressions in exercising said accounting s responsibilities. A system of delegations is born out of operational and legislative necessity. Responsibility in the context of delegation implies that the decision to delegate must be taken with caution and after careful consideration, so as not to abdicate the very responsibilities that are conferred upon a party. The delegator should, therefore, consider the delegatee s seniority, experience and competence, as well as which power to delegate. The benefit of effective delegations is that senior staff members are then able to focus on strategic matters, while more junior members are empowered to carry out operational matters. It would be impractical to have an accounting sign off on every document created in the process of service delivery in a municipality. Examples of typical delegations would be to allow staff in the reporting line certain signing authority, to speed up the delivery of service. Delegations should, therefore, be very specific in terms of limits and scope, as well as regarding who the assigned authority is, as is illustrated in Figure 5. When executed, the power of delegation must be restrictively interpreted, meaning that only that 62

77 which is explicitly delegated must be done by the delegatee concerned. Approval in respect of erection of buildings To, after having considered a recommendation by a building control, grant approval or refuse to grant approval for the erection of any building in respect of which plans and specifications are to be drawn and submitted in terms of section 7 of the National Building Regulations and Building Standards Act, Act No. 103 of Delegator:.. Delegatee:.. Date: 03 March 201x Figure 5: Example of a written delegation Even though the delegator or assigner of responsibility remains accountable, it is the duty of each delegatee or official with an assigned area of responsibility to ensure that he/she applies due diligence in the execution of his/her authority. If not, such official may be liable for a charge of misconduct. Due diligence means that the official receiving authority and discretion through delegation or the assignment of responsibilities must understand the scope and restrictions of the delegation, apply his/her mind before making a decision, and clarify in writing upon what/whose authority the decision is taken. In applying his/her mind, the official must ensure that All relevant and permissible facts and circumstances were taken into consideration; All prescripts, limits and conditions are adhered to; The decision is within ambit of delegation; The result of the action/decision will serve a legal permissible purpose; The result falls within the ambit of the budget, the budget description and the objectives of the IDP. The supporting annexure provides a detailed schedule of the responsibilities that may be delegated by the municipal manager to other senior officials (Annexure A). The document, which is known as the MFMA framework for delegations, contains sections addressing the council, the mayor, the accounting, and other officials. The complete document can be downloaded from the National Treasury s MFMA website Delegations and accountability Apart from the definitions of delegation provided above and in Chapter 5 of this learner guide, the MFMA, the Municipal Systems Act, and the Municipal Structures Act also refer to delegation as an instruction to perform a duty. Delegation is, therefore, the transfer of powers that are conferred upon the municipality by legislation, to a body (a political structure) or a person (a political office-bearer or official) other than the council of the local authority. The powers are transferred by the municipal council (the delegator) to another person or body (the delegatee), who then exercises that delegated power in the name of, and instead of, the delegator. The delegation remains at the discretion of the delegator. The Constitution and other legislation, however, excludes certain delegations, meaning that a council may not delegate certain decision-making functions, but the council itself must, in these circumstances, take or make the necessary decisions. 63

78 (For instance, budget approval and the making of by-laws accords with section 160 of the Constitution). The council, in terms of the Constitution, has inherent or original powers, and may, in terms of other legislation, also acquire delegated or statutory powers. The council derives its powers and functions mainly from the Constitution, the Municipal Structures Act, the Municipal Systems Act, and the MFMA. The council may delegate (decision-making) authority to the committees/councillors/officials involved, and, in terms of section 59 of the Systems Act, must delegate powers to the committees/officials concerned. The main reason for delegation relates to the sheer magnitude of responsibilities that rest with a council, and the inability of any one council to exercise all those conferred responsibilities on their own. The practical reasons are, therefore, work pressure, the expediting of the execution of decisions and the implementing of decisions, practical considerations, and the broad demands of the government. The principle issues that are related to delegations are: They must be made in writing. They are subject to such limitations and conditions as the accounting may impose in a specific case. They may either be made to a specific individual, or they may be made to the holder of a specific post in the municipality. They may, in the case of a delegation to a member of the municipality s top management, authorise the member concerned to sub-delegate the delegated power or duty to an official or to the holder of a specific post in said member s area of responsibility. They do not divest the accounting of any responsibility concerning the exercise of the delegated power, or the performance of the delegated duty. The system of delegations must be reviewed on an annual basis, and tabled to council at the onset of each financial year (MFMA, section 79). The general principles that apply to delegation include: Delegations must comply with section 59 (2) of the Systems Act, and with sections 59 and 79 (2), 82 (3) and 106 (2) of the MFMA. No delegation may be in conflict with, or in contravention of, a council resolution or provision that is embodied in a municipal policy document, by-law or other document, or in the legislation. Any delegated powers or duties, and their execution by a delegatee, must comply with the council's policies at all times, and must, when exercised, be reported to council in terms of section 63 of the Municipal Systems Act. Any person who is properly appointed in writing to act in the place of the holder of delegated powers (in the form of an acting appointment) may exercise the particular delegated powers concerned. (Please note that only the council can appoint acting municipal managers, and acting heads of department /managers, except if the council specifically delegates such powers to the mayor, or to the municipal manager, in the case of managers (in terms of section 82 of the Municipal Structures Act and section 56 of the Municipal Systems Act). 64

79 A municipal council must develop a system of delegation for maximising efficiency, while it still contains the necessary checks and balances. The council can only delegate to the mayor through the executive committee or through the municipal manager who, in turn, may sub-delegate such powers if he/she is allowed to do so by the council, or where the council has created a committee (apart from a standing committee) to deal with a specific issue on its behalf. All delegated powers that are executed must be reported to the council, for it to note at the next council meeting, after the delegated power has been exercised. Delegations, where they are assigned to a particular position, and not to a specific person, nevertheless still imply that the holder of the position is held responsible for the duties involved. Delegated responsibility cannot be shared between two or more people, meaning that, even if the person holding the delegated power consults with someone else, he/she alone must apply his/her mind, and make the necessary decision for which he/she takes the responsibility. Committees with delegated responsibility, however, must apply their minds to a problem, with the majority decision taken (provided that a quorum is present), being the decision of the committee. In the case where any expenditure (i.e. payment) is incurred in accordance with the exercise of a delegation, the delegatee s signing powers, and/or the budgeted amount, and/or the amount fixed by the council, may not be exceeded. In most cases, and in particular cases of personnel-related matters, the audi alteram partem rule (i.e. hear the other party ) must be observed, before the delegated powers are exercised Delegation risks and risk controls Delegation risk for the delegator relates to the fact that accountability cannot be delegated. Section 62 of the MFMA sets out the general financial management responsibilities of the accounting. It requires of the accounting to take all reasonable steps to ensure that municipal resources are used effectively, efficiently and economically; that full and proper records are kept of financial affairs; that the municipality has, and maintains, appropriate systems of financial and risk management, internal control and audit, prevention of unauthorised, irregular and fruitless and wasteful expenditure and other losses; and that disciplinary actions are taken and criminal proceedings instituted, where appropriate, when financial misconduct is discovered. The above-mentioned provisions, together with the system of delegation that is introduced and maintained in terms of section 79 (1) (a) of the MFMA, contribute to the ability of the accounting to reduce and to mitigate risks relating to delegation, and to the ability of other members of top management relating to sub-delegation. Section 79 (1) (b) provides for another element of risk reduction, namely that the accounting has discretion in a decision to delegate. Said discretion should be exercised with the necessary care, to ensure that delegatees have the required capacity to execute the responsibilities and authorities delegated, in terms of the expectations involved. Section 79 (1) (c) also requires of the accounting to regularly review, to amend, and to withdraw delegations. 65

80 Section 79 (2), (3) and (4) makes further provision for risk reduction and mitigation in delegation. The section prohibits delegation to political structures and to political officebearers; determines that the delegation must be in writing and that it is subject to the set limitations; and provides that the accounting may vary or may revoke any decision taken as the consequence of a delegation or sub-delegation, although not to the extent that any rights accrued from the decision may detract from it. Clearly, the accounting and other senior managers exercising the discretion to delegate and sub-delegate should be aware of their accountability. They should keep on applying their minds to ensure that they can uphold the integrity of the systems of delegation, and risk reduction and mitigation Summary Delegation forms an indispensable part of the process of accountability for service delivery. The council, the executive, the accounting, all senior managers, and, ultimately, all officials receive delegations, either directly and formally, or indirectly, in the form of job descriptions and performance agreements, to ensure that the system of accountability is maintained. Each delegator must be aware of his/her accountability, and keep on applying his/her mind to ensure that he/she can uphold the integrity of the systems of delegation and of delegation risk reduction and mitigation. 66

81 Chapter 7: The budget and treasury office (BTO) as a governance structure 7.1. Learning outcomes After completing this chapter, you should be able to explain: the areas of responsibility of the BTO; the profile of a CFO; and the typical structure and functioning of a BTO Key concepts The budget and treasury office (BTO) The BTO, established in terms of section 80 of the MFMA, and consisting of: the CFO, designated by the accounting of the municipality; officials of the municipality allocated by the accounting to the CFO; and any other persons contracted by the municipality for the work of the office Introduction One of the key institutional and organisational reforms required by the MFMA is the establishment of a BTO, and the appointment of a CFO to head the BTO. This organisational reform must be seen as part of the creation of a top management team, in terms of section 77 of the Act. This chapter reviews the areas of responsibility of the BTO; how to go about setting up the BTO and appointing an appropriately qualified CFO; as well as how this arrangement links up with the senior management team of the municipality Scene-setting questions 1. How is your area of responsibility in the municipality affected by the CFO and the BTO as a governance structure? 2. How do you benefit from having a CFO and BTO when executing your responsibilities? 7.5. Where the individual municipal official fits into the picture This chapter focuses on the BTO and the CFO, setting out the areas of responsibility of both. The BTO maintains various systems, and generates data that affect the day-to-day functioning of each official in the municipality. No senior manager or official with financial responsibilities can fulfil his/her responsibilities as described in section 78 of the MFMA without interacting with the BTO, and without engaging in a two-way exchange of information. The CFO, as head of the BTO, assists the municipal manager to carry out his/her financial management responsibilities in areas ranging from budget preparation to financial reporting, and the development and maintenance of internal control procedures. The individual official must, in terms of section 78 (a) of the MFMA, ensure that these systems and procedures are carried out diligently in his/her area of responsibility. The CFO also plays a central role in implementing financial reforms, and in ensuring that the staff members concerned are appropriately capacitated. The MFMA Municipal Regulations 67

82 on Minimum Competency Levels (RSA, Government Gazette 29967, 2007) cover not only the CFO and BTO staff, but also senior managers, as well as other managers with financial responsibilities. Individual officials must comply with the competency requirements, as set out in said regulations, and as implemented in the municipality under the guidance of the CFO. It is also imperative that each official takes ownership of their own personal development and needs Areas of responsibility and the organisation of the BTO The BTO has been made responsible for contributing to, or for contributing, various functions within a municipality. The BTO must be designed by the CFO to achieve sound financial planning, effective budget implementation and reporting, while taking into consideration internal controls and the related segregation of duties, to minimise the potential for fraud and corruption. The exact organogram involved would depend on the size of the municipality, on the centralisation or the level of decentralisation of financial functions, as well as on the respective job descriptions drafted, and on the overall volume and scope of tasks to be performed. Irrespective of size, the following three distinct focus areas of the BTO can be identified to deal with the nature of the different tasks assigned to the BTO: Financial policies and financial planning This focus area includes the following functions: integrated development planning and long-term financial planning, including the MTREF and financial risk management and mitigation; the development and review of budget policy, budget-related policies and other financial policies; costing; budget compilation: o the capital budget, o the capital funding requirements, o the operating budget, and o the tariff determination and setting processes; community participation and stakeholder consultation management; oversight/development of SDBIPs; the secretariat to the budget committee; virement management; compilation of the adjustments budget and related processes; internship management; and the financial management and MFMA steering committee Budget implementation This focus area includes the following functions: The function of SCM includes: o the maintenance and updating of the supplier database; o management of the tender demand schedule; 68

83 o o o o o o o o o o the assistance of the bid specifications committee with tender specifications/support; management of tender advertisements, the allocation of tender boxes, and the determination of closing dates; the recording of bids submitted; the support of the bid evaluation committee; secretariat to the bid adjudication committee; the management of the disposal of goods; the placing of orders, and logistics management; stores and inventory management; SCM risk and performance management, and the implementation and maintenance of ethical standards; and contract development, implementation and management. The function of revenue management includes: o grant receipting; o meter reading; o the preparation of monthly debtor accounts and customer billings; o call centre and related customer care management; o revenue collection (cash office management, cash management); o credit control and debt collection; and o revenue reporting, the management of banking accounts, fidelity insurance, and related revenue administration. The function of expenditure management includes: o payroll disbursements; o operational expenditure and cash flow management; o capital expenditure and grant management; o creditor management, statistics and related reporting, and MFMA bank withdrawal reporting. The other functions are: entity and external service delivery mechanisms management; and systems accounting and information technology (IT) Financial reporting This focus area includes the following functions: The function of budget performance reporting includes: o monthly section 71 reporting; o quarterly reporting (in terms of section 52 (d)); and o mid-year assessment (in terms of section 72). The function of asset management includes: o asset register updates; o asset acquisition and sales; o asset valuations and impairments; o asset repair and maintenance registration; o insurance; and o investment and cash flow management. 69

84 The function of financial statements includes: o monthly, quarterly and half-yearly financial management reporting; o VAT returns; and o interaction with the external auditor (in the form of AGSA). The function of external reporting includes the development of annual reports. The above three focus areas (i.e. financial policies and financial planning; budget Implementation; and financial reporting) may indicate a structure, but a specific structure was proposed by the Provincial Treasury of the Western Cape government. Depending on the size of the municipality, the BTO may be structured as is indicated in Figure 6 below (for a small municipality) or in Figure 7 below (for a medium/large municipality). CFO Expenditure & SCM Revenue Services Figure 6: Structure of the BTO of a small municipality CFO Financial Planning & Reporting Revenue Management Expenditure Management SCM Figure 7: Structure of the BTO of a medium and large municipality 7.7. The chief financial (CFO) The CFO is the administrative head of the BTO. The CFO has an essential function in assisting the municipal manager to carry out his/her financial management responsibilities, in areas ranging from budget preparation to financial reporting, and the development and maintenance of internal control procedures. The CFO plays a central role in implementing the financial reforms at the direction of the municipal manager, with the assistance of appropriately skilled finance staff The CFO profile The CFO must be a professional with strong management and leadership skills. The CFO must provide leadership for the municipality s strategic planning and budget process, which requires additional skills to accounting. See table 7 below for a summary of the competencies of the CFO. 70

85 Table 7: Competencies of the CFO The competencies include strategic leadership and management; strategic financial management; operational financial management; governance; ethics and values in financial management; financial and performance reporting; risk and change management; project management; legislation, policy and implementation; stakeholder relations; SCM; audit and assurance; leadership ability and managerial experience; and audit and risk management experience. Key focus performance areas Financial management system Financial management support IDP & SDBIP Finance & performance monitoring & reporting Resource management Performance indicators The implementation of an effective financial management system that is inclusive of, but that is not limited to: the implementation of financial management policies and procedures; the implementation of an effective SCM system; the implementation of internal control mechanisms and anticorruption measures; the implementation of approved and signed delegations of authority; and the ensuring of compliance with the municipal legislative framework. Support including: the provision of timely and relevant financial management reports to all stakeholders; and the provision of sound financial management advice to the accounting, and to the senior line managers, in terms of their financial management responsibilities and delegated authority. Implementation of effective processes, support and coordination for the compilation of the IDP & SDBIP. Note that the IDP process might not be driven by the CFO; however, the CFO s support and input is required. This may vary across the different categories of municipality. The compilation and timely submission of accurate information, in accordance with prescribed standards and formats. Inclusive of: the effective, efficient and economical use of financial and other resources; the prevention of unauthorised, irregular, and fruitless and wasteful expenditure; the maintenance of high levels of revenue collection; the safeguarding of assets; and the effective management of liabilities. 71

86 Performance management Risk management Inclusive of: staff management and the administration of the PMS in respect of all direct reporting to the CFO; the assumption of responsibility for the execution and timely delivery of outputs required in terms of the CFO s signed performance contract; and accountability to the accounting. Inclusive of: the undertaking of a risk assessment, and the implementation and the maintenance of an effective risk management strategy; and strategic engagement with auditors, and the provision of appropriate and timely responses to audit queries. Additional requirements The CFO, as a member of the municipality s senior management team, may be assigned additional responsibilities, over and above the core requirements of the CFO s job description. The CFO may, from time to time, be requested to act on behalf of the accounting or another senior manager when they are unable to fulfil their responsibilities, due to absence as a result of illness, suspension, termination or resignation. Such acting responsibilities should not be for unreasonable lengths of time, and should not interfere with the CFO s financial managerial responsibilities. Similarly, when the CFO is unable to fulfil his/her responsibilities, the accounting may designate another senior manager to temporarily act as CFO. The CFO should ensure adequate planning of leave, so that neither the CFO, nor the key finance staff from the BTO, should be on annual leave at critical times during the budget cycle. The CFO profile that is described above consists of the minimum requirements for the role, which may differ across the various categories of municipality. However, the MFMA must be fully implemented in its totality The governance responsibilities of the CFO and the BTO The CFO, who is an integral member of the top management team of a municipality, heads the BTO. Section 80 of the MFMA requires every municipality to have a BTO. Figure 8 shows how the BTO reports to the CFO and provides support to all senior managers. Municipalities should see the establishment of a BTO as a strategic approach to managing their financial affairs. The BTO serves in a strategic advisory role to the accounting and other senior officials, with the role concerned being one that is forward-looking and one that requires the BTO taking the lead in budgeting and planning processes. The BTO is also expected to take on both a management (rather than an administrative) role and an oversight role. The BTO has a critical function to play in producing monthly management information for the municipal manager and mayor. The BTO responsibilities go beyond such traditional accounting or treasury functions as: the operating of bank accounts; cash management; the collecting of revenue, or the overseeing of revenue collection; the authorising, or the making of, payments; and the preparing of financial statements. 72

87 The CFO forms part of the top management team under the municipal manager, together with all the other senior managers who are heads of department (and who are responsible for key budget programmes, or for votes regarding water and electricity matters), in terms of section 77 of the MFMA. Although Chapter 8 of the MFMA and Chapter 7 of the Municipal Systems Act vests responsibilities in the municipal manager as the accounting, the MFMA and the Municipal Systems Act anticipate that such responsibilities will be shared with the top management team. The CFO, therefore, has to be a professional, with strong management and leadership skills. Municipal Manager ( Officer) Senior Manager Senior Manager Chief Financial Officer (CFO) Senior Manager Senior Manager Top Management Budget and Treasury Office (BTO) Reports to the CFO, as well as supporting all other departments / senior managers Officials allocated by the Officer to the CFO MFMA sections Figure 8: Typical structure of the BTO Section 83 of the MFMA requires the CFO and other financial officials to meet the competency levels that are prescribed for the respective positions in line with the budget thresholds. The Minimum Competency Level Regulations, Gazette of 15 June 2007, contain all the required details concerned. A municipality may face a number of risks in not meeting the prescribed competency levels. The risks, among others, include: The compliance with competency levels will be audited, and, where lacking, it will be highlighted as audit opinion. A possible audit implication exists from fruitless and wasteful expenditure on personnel payments and benefits accruing to officials not meeting the required competency levels. Given the high incidence of reporting on municipal incapacity, the non-compliance of municipalities with the Minimum Competency Level Regulations and with government action and enforcement remains a matter of interest for the media. 73

88 Such lobby groups as ratepayers associations may initiate legal processes to enforce the set requirements. A highly skilled workforce contributes to the broader mandate of a municipality to meet its constitutional mandate. Every aspect that impacts on efficient service delivery requires reviewing, including the system of delegations, the PMSs, the vote and organisational structures, and the operational aspects that might impinge on the constitutional mandate of a municipality. As municipal officials, we need to be mindful of the fact that it the public s money with which we are entrusted to manage as effectively, efficiently and economically as we can Summary This chapter explored the profile of a CFO and the composition of the BTO. The CFO is the administrative head of the BTO, and has an essential function to fulfil in assisting the municipal manager to carry out his/her financial management responsibilities. The CFO also plays a central role in implementing the financial reforms at the direction of the municipal manager, with the assistance of appropriately skilled finance staff. The CFO must therefore be a professional with strong management and leadership skills. The BTO reports to the CFO, and provides support to all the senior managers. The BTO serves in a forward-looking strategic advisory role to the accounting and other senior officials, and takes the lead in budgeting and planning processes. The office is also expected to take on both a management (rather than an administrative) role and an oversight role. In order to fulfil these challenging functions, the CFO and the other financial officials must meet the competency levels prescribed for their positions. 74

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90 PART THREE MUNICIPAL SERVICE DELIVERY PLANNING AND IMPLEMENTATION In order to show their understanding of municipal service delivery planning and implementation, the participants must be able to explain the processes involved in threeyear budgeting and planning, costing and capital planning, and asset management. 8: Three-year budgeting and planning SERVICE DELIVERY ETHOS 9: Costing and capital planning 10: Asset management Figure 9: Municipal service delivery planning and implementation 76

91 Chapter 8: Three-year budgeting and planning 8.1. Learning outcomes After completing this chapter, you should be able to explain and understand the implications of: the budget preparation process; the role of the budget steering committee; funding the budget; adopting the budget; the budgets of municipal entities; budget implementation; dealing with variation from budget estimates; and the revision of budget estimates Key concepts Budget preparation process Section 21 of the MFMA determines the process, and that the mayor of a municipality must coordinate the processes. The process starts at least ten months prior to the start of the financial year. The budget steering committee Established by the mayor in terms of section 4 of the Municipal Budget and Reporting Regulations (MB&RR), to provide technical assistance to the mayor in discharging his/her responsibilities that are set out in section 53 of the MFMA. The adjustment budget A revision of the approved annual budget, through adjustments to accommodate actual collections, to authorise unforeseeable and unavoidable expenditure recommended by the mayor, to utilise projected savings in one vote towards spending under another vote, and to spend funds that were unspent at the end of the past financial year, and correct errors in the annual budget. Unauthorised expenditure Any expenditure incurred by a municipality other than in accordance with section 15 or 11 (3) of the MFMA. Irregular expenditure Incurred in contravention of, or not in accordance with, a requirement of the relevant Acts, or a requirement of the SCM policy of the municipality or entity, or any of the by-laws giving effect to such policy, and which has not been condoned in terms of such policy or by-law. Fruitless and wasteful expenditure Expenditure that was made in vain, and which could have been avoided, had reasonable care been exercised. 77

92 8.3. Scene-setting questions 1. What is your own direct, or indirect, involvement in the budget process of your municipality? 2. What are the challenges faced by managers during the budget cycle, and how should they be mitigated? 3. How should your municipality combat unauthorised, irregular, or fruitless and wasteful expenditure? 8.4. Introduction We started exploring a more strategic approach to budgeting than that which is taken at present as one of the five principles underlying a modernised financial system in Chapter 4. In this chapter, we take an in-depth look at the phases of the budget cycle. The MFMA requires a council to adopt capital and operating budgets, for up to three financial years, that take into account, and that are linked to, the municipality s current and future development priorities (as contained in the IDP) and other finance-related policies (such as those relating to free basic service provision). A budget is a holistic financial plan by means of which a municipality can achieve the objectives of the IDP and the SMART (specific, measurable, achievable, realistic, time-bound) indicators for performance measurement that cover the needs of the community. Being aligned with the IDP in this way, the planned expenditure can be estimated and budgeted for in terms of each vote (per department or sector). Through setting cost-effective tariffs for services, and a credible rate in terms of the Rand for rates income, the realistically expected income can be established, to ensure coverage of the estimated costs. Capital expenditure is funded out of borrowed funds or out of cash-backed reserves, but the implications of servicing the loans must be taken into consideration in the long-term financial planning process that is known as the MTREF. This chapter explains the budget preparation and adoption processes (including that of municipal entities), as well as the budget implementation, the management of implementation, and dealing with variations and revisions. It also defines and describes procedures for dealing with unauthorised, irregular, and fruitless and wasteful expenditure Where the individual municipal official fits into the picture The administration must implement the vision of the IDP over the five-year period of the elected political oversight. The budget is the mechanism for the implementation of this vision. It must be very carefully considered, to ensure that the vision is achieved in an affordable and economical way, recognising the ability of the community to pay for the development and services provided. However, this consideration of affordability must not only be for the five-year period of the IDP, but it must also take into consideration the longer term loan repayments involved, as well as the operating costs of day-to-day running and maintenance. Thus, every municipal employee contributes to the sustainability of the municipality, and must account for the economical and efficient use of all of its resources. Every aspect of every municipal function has an impact on the budget. The meticulous application of all resources, from the realistic assignment of responsibilities to staff members who are adequately skilled and trained, and provided with the equipment and materials that 78

93 will ensure that they can perform their allocated tasks, to the effective management of all assets, is reflected in the budget, and in its demands on municipal revenue sources. Even the cost of governance and of oversight has a bearing on the budget, and must be taken into consideration when considering the cost of services and the calculation of cost-reflective tariffs. It is, therefore, clear that every municipal official operating at the expected levels of performance has an influence on the budget and on the budgetary parameters The budget preparation process Overview The budget must clearly set out revenue by source and expenditure by vote over a period of three years. It must be accompanied by performance objectives for revenue and expenditure, a cash flow statement, and particulars on borrowing, investments, municipal entities and service delivery agreements, grant allocations, and the details of employment costs. Figure 10: Local government fiscal framework The operating budget may be funded only from reasonable estimates of revenue and cashbacked surplus funds from the previous year, whereas the capital budget may be funded from cash-backed surplus funds that are present in the Capital Replacement Reserve, as well as from borrowings. Figure 10 above (which is taken from National Treasury MFMA Circular 64) illustrates the local government s fiscal framework The budget cycle The annual municipal budget cycle starts in August of the year before its implementation, with the granting of the approval of the budget preparation timetable by council. The approval phase then ends in May of the next year, when the council approves the budget. After the approval has been granted, a process is followed of advertising the approved tariffs. The actual budget implementation starts in July. 79

94 Figure 11 illustrates the budget cycle, as will be discussed in more detail below. July - implement approved budget August Council Approval of the Budget Preparation Timetable June - advertise approved tariffs End of May - Council approval of budget influenced by community participation Annual Budget Preparation Cycle August to November - Review and development of IDP December/January 3-year high-level capital budget proposals; budget-related policies and funding & reserves policy April - community participation procedures End of March - table draft budget in Council January to March community input & setting of measurable objectives Figure 11: Annual budget preparation cycle Budget preparation timetable The first step in the budget preparation process is to develop a timetable scheduling all key deadlines relating to the budget process, which starts with the review of the municipality s IDP and budget-related policies. The budget preparation timetable should be prepared by senior management and tabled by the mayor for council adoption by 31 August (ten months prior to the commencement of the next budget year), as per section 21 of the MFMA Review of the IDP, budget-related policies and budget preparation The mayor must coordinate the review of the council s IDP and budget-related policies, and the budget preparation process, with the assistance of the municipal manager, in accordance with the requirements of Chapter 5 of the Municipal Systems Act. The sector-related strategic plans must be carefully considered to test for relevance, as well as to consider the impact of new legislation or changes in national policies. 80

95 The mayor must ensure that the IDP review forms an integral part of the budget process, and that any changes to strategic priorities, as contained in the IDP document, have realistic projections of revenue and expenditure. In developing the budget, the management must take into account national and provincial budgets, the national fiscal and macroeconomic policy, and other relevant agreements, or Acts of Parliament. The mayor must consult with the relevant district council and all other local municipalities in that district, as well as with the relevant provincial treasury and the National Treasury when preparing the budget. In addition, the mayor must provide the National Treasury and other government departments with certain information on request. This process of development should, ideally, occur between August and November of the same year, so that the draft IDP amendments, the consolidated three-year high-level capital budget proposals, and the budget-related policies, as well as the Funding and Reserves Policy (see Regulations 7 and 8) can be made available during December and January. This allows enough time from January through to March for preliminary consultation and discussion on the draft budget. Community participation on the development of the IDP and the IDP review is essential to guide the prioritisation of new budget programmes, and to determine the measurable objectives that will be reported on at the end of the financial year for which the preparation is undertaken. All community participation must be conducted in accordance with Chapter 4 of the Municipal Systems Act Role of the budget steering committee The mayor must establish a budget steering committee to assist him/her in executing the budgeting responsibilities, as set out in section 53 of the MFMA, and to provide technical assistance. These responsibilities include providing political guidance in relation to the IDP and the budget processes, as well as in relation to the priorities that must guide the preparation of the budget. In addition, the responsibilities include ensuring that the budget is approved before 1 July; that an SDBIP is produced; and that senior managers annual performance contracts are signed, submitted to council, and made public on time. The prescribed membership of the committee emphasises the technical nature and the role of the committee. It includes all senior managers within the municipality that need to be involved in the IDP and budget processes, to ensure that they are aligned and that they relate directly to the service responsibilities of the municipality. The members of the committee are also ultimately held accountable for the implementation of the IDP and budget, through the SDBIP and their annual performance agreements. The councillor who is responsible for financial matters is a member of the committee, and is also responsible for representing the mayor, and for providing political guidance. The committee should be chaired by the CFO, or, alternatively, by the municipal manager. The budget steering committee is not a committee of council, or a subcommittee of the mayor s executive committee. The council may decide to establish a separate council committee to exercise oversight of the IDP and the budget, and the mayor may decide to establish a separate subcommittee of the executive committee to provide political guidance regarding the IDP and budget processes. Said committees would need to work closely with the budget steering committee. 81

96 8.8. Funding the budget A budget must be fully funded for it to be credible. This requires that the operating budget must be funded from realistically expected revenue that will be collected through effective billing, based on service charges, rates income, the operating of grant funding, and the local government equitable share. The equitable share is effectively the national government s contribution towards the provision of free basic services. Tariffs for such economic services as electricity, water, sanitation and refuse collection must reflect the costs involved. These tariffs, which may differentiate between categories of customers, must align with national government policies regarding the provision of free basic services. An operating budget may not be funded by means of loans. Any bridging finance that may be required to cover a short period of cash flow deficit must be repaid by the end of the financial year, in accordance with the requirements of the Constitution and section 45 of the MFMA. All capital budget items must be funded. The main funding sources for the capital budget are grants, cash-backed retained surpluses that have been appropriated to the Capital Replacement Reserve (CRR), or long-term loans. Any long-term debt must be raised in accordance with the requirements, as outlined in Section 46, and in compliance with sections 47 to 51 of the MFMA. To comply with the requirements of section 19, the council must approve all large capital projects individually, where the size of these large capital projects is found in Regulation 13 of the MB&RR. If any capital project, or a contractual obligation, will impose financial obligations on the municipality beyond the three years covered in the annual budget for said financial year, the procedure that is outlined in section 33 of the MFMA must be followed. The MFMA Funding Compliance Guidelines must also be followed refer to: A%20Funding%20compliance%20guideline%20-%2010%20March% pdf The Municipal Budget Format Guide and Formats, as well as the Dummy Budget Guide, should also be consulted. These can be found on the National Treasury website: As is shown in these guidelines, the budgetary provisions allow for a three-year budgetary cycle, with the operating budget showing the realistically expected revenue to cover the expenditure for the year ahead, and indicative values of income and expenditure for the two financial years following the budget year. Whereas many municipalities simply approve a budget for a single year, the expenditure on capital projects should be approved for the duration of the project, to accommodate the expenditure involved (see section 30 of the MFMA). If that project extends beyond the three-year budgetary cycle, it is important that the longer term financial implications are understood. The related process is outlined in section 33 of the MFMA. 82

97 8.9. Adoption of the annual budget Tabling of the draft budget The initial draft budget must be tabled by the mayor before council, for review by 30 March. The supporting information for the budget, as contained in section 17 of the MFMA, must be tabled with the annual budget Publication of the draft budget Once tabled at council, the municipal manager must make public the appropriate budget documentation, and submit it to both the National Treasury and the relevant provincial treasury, as well as to any other government departments, as required. At this time, the local community must be invited to submit representations on what is contained in the budget Opportunity to comment on the draft budget Once the draft budget is tabled, it must be made public. The council must allow for the local community, the National Treasury, the relevant provincial treasury, and other municipalities and government departments to make submissions on the budget. Thus, following the tabling of the draft budget at the end of March, the months of April and May should be used to accommodate public and government comment, and to make any revisions that might be necessary. This may take the form of public hearings at ward, or some other reasonable geographic, level, as well as council debates and formal submissions. Where necessary, even formal or informal delegations to the National Treasury, the provincial treasury and other municipalities, may be undertaken. Any other consultative forums that are designed to address stakeholder priorities may also be held. The draft budget has to be made public, as outlined in the MB&RR (Regulation 15) and in accordance with section 21A of the Municipal Systems Act Opportunity for revising the draft budget After considering all views and submissions, the council must provide an opportunity for the mayor to respond to the submissions received, and, if necessary, to revise the budget and to table amendments for the council s consideration Adoption of the budget The council must then consider the approval of the budget by 1 June, and must formally adopt the budget by 30 June. This provides a 30-day window for the council to revise the budget several times before its final approval. If the council fails to approve its budget at its first meeting, it must reconsider it, or an amended draft, again within seven days, and it must continue to do so until it is finally approved, all of which must be done before 1 July. When considering approval, the council must consider: the local community s views on the budget; the comments from the national and the provincial treasury, and from any organ of state or affected municipality; and any other submission or representations made on the budget from any other stakeholders. The council must also consider the full implications, financial or otherwise, of the annual budget, and supporting documentation, before approving the budget. The council must adopt the minimum number of the prescribed resolutions, as contemplated in terms of section 24 (2) (c) of the MFMA. 83

98 Within ten days of approval, the municipal manager must place the budget on the municipality s website, in terms of Regulation 18 of the Municipal Budgeting and Reporting Regulations. The process of adoption of the budget is outlined in MFMA Circular 31, which can be obtained from the following link: %20The%20Oversight%20Report%20-%2015%20March% pdf Once the budget has been approved, the necessary steps can be taken to ensure that the new tariffs are input into the billing system, for implementation from 1 July. Staff can be trained on the changes made to the policies, with the necessary adjustments being made to operating procedures, so that the newly adjusted policies can be implemented from the start of the new financial year Budgets of municipal entities As was outlined in the introduction, the municipalities may provide services through internal or external mechanisms, with the latter possibly taking the form of municipal entities. A municipal entity may be a private company that is established in terms of the Companies Act, or it may be a service utility or multi-jurisdictional service utility established in terms of municipal by-laws. Municipal entities have a board that exercises oversight authority over the implementation of the board-approved strategy, the business plan, the budget, and all the administrative policies. The chief executive (CEO) of a municipal entity is the accounting for the entity, just as the municipal manager is the accounting of the municipality. Municipal entities are established by municipalities in compliance with the Municipal Systems Act, and must comply with the MFMA, and, if a private company, with the Companies Act. The board of directors of a municipal entity must submit a proposed budget to the municipality by 31 January, or earlier, if so agreed. The municipal entity must comply with Chapter 10 of the MFMA, as well as with Parts 1 to 3 of Chapter 3 of the Municipal Budgeting and Reporting Regulations. The municipality must consider the budget, and return any recommendations to the board of directors. Said board may submit a revised budget not later than the middle of March, in order that the entity budget can be consolidated and tabled with the municipal budget, as well as be made available for public consultation Entity budgets to be considered together with municipal budgets The revised budget must then be tabled by the mayor, at the same time as the municipal budget is tabled. The municipality should table a municipal budget, as well as a consolidated budget that includes the municipal entity budget Approval of the municipal entity budget The board of directors must approve the budget by 1 June, and it must then be made public. The board of directors may revise the budget with the approval of the mayor. 84

99 8.11. Budget implementation Implementation management the SDBIP Considering all the different budgetary approaches only makes sense if a budget is correctly implemented and monitored, so as to ensure that the objectives of the functional area, project or programme are being achieved. The SDBIP is defined in Chapter 4 as a plan that is drafted by a department or functional area on how the budget for the particular functional area will be implemented. The plan effectively becomes the contract of service delivery between the administration and the community. The municipal manager must, within fourteen days of the approval of the annual budget (i.e. by 14 July at the latest), submit to the mayor for approval a draft SDBIP and draft annual performance agreements for all pertinent senior staff. An SDBIP is a detailed plan for implementing the delivery of municipal services contemplated in the annual budget. It should indicate monthly revenue and expenditure projections, as well as quarterly service delivery targets and performance indicators. In order to ensure that the correct degree of accountability is maintained between the administration, which is responsible for the implementation of the budget, and the council, which is responsible for the adoption of the budget, the SDBIPs must be approved by the mayor within 28 days of approval of the budget. Guidance on preparing the SDBIPs is provided by the National Treasury in Circular 13 of 31 January In essence, an SDBIP is a plan that is drafted by a department or functional area on how the budget for the particular functional area will be implemented. Such a functional area is also known as a vote which, in terms of the MFMA, is one of the main segments into which a budget of a municipality is divided for appropriating funds for the different departments or functional areas of the municipality. The SDBIP effectively becomes the contract of service delivery between the administration and the community, and the tool by which the community holds the municipality accountable for the use of public funds. Three principles of public expenditure management are: Aggregate fiscal discipline: Expenditure budgets to deliver services are funded by realistic revenue budgets over the medium term. Allocational efficiency: Service delivery and spending is allocated according to the needs of the community, taking into account national and provincial, as well as local, priorities. Operational efficiency: Spending should deliver the intended services, and their related outcomes, at the least cost. Thus, for the sake of completeness, the SDBIP becomes a contract between the owner of the vote(s) and the community. It should include the information indicated below in the executive summary (as per Circular 13, issued by National Treasury in January 2005, and required in terms of the Municipal Budgeting and Reporting Regulations) Purpose (i.e. outcomes) Define the service(s). Define the customer(s). 85

100 Show how the service is linked to the IDP (i.e. outcomes) Service delivery description (i.e. outputs) Define the level of service planned for each customer group (i.e. outputs). Describe the improvements in service levels and standards planned over the medium term. Provide a review of past year s performance, and how such performance impacts on future plans. To emphasise the linkage with the IDP list, the measurable performance objectives for the current year, the budget year, and at least two future years, include quarterly projections of service delivery targets and other performance indicators, in the same format as that which is required for the municipality s SDBIP. Give a brief narrative of the departmental capital programme, as it relates to the overall capital programme and to the IDP for the municipality Resources utilised (i.e. inputs) Provide a description of the senior management capability and structure. Give a summary of the revenue per source, and of the operating and capital expenditure by type. Provide a summary of the risks to achieving revenue projections, any expected shortfalls or potential shifts in revenue patterns and planned alternative sources of revenue. Describe the major features of expenditure, including highlighting discretionary and non-discretionary expenditure. Not all of the above-mentioned components may be required for each and every SDBIP, but each component should be reconsidered each year, to ensure that nothing has been left out or changed with the passing of time. The mayor must approve the draft SDBIP within 28 days of the approval of the annual budget (i.e. by 28 July at the latest). The actual amount of progress that is made in terms of the SDBIP must be monitored by the mayor, and the progress achieved must be reported on to council on a regular basis. For more details on the SDBIP, refer to MFMA Circular No. 13 Service Delivery & Budget Implementation Plan 31 January Also note the Municipal Budgeting and Reporting Regulations, Regulation 19 and Schedule A, Regulations The municipal manager is responsible for the implementation of the budget. He/she must take steps to ensure that all spending is in accordance with the budget, and that the revenue and the expenditure are properly monitored. Further discussion of the associated reporting requirements is to be found in the following chapters Variation from budget estimates Generally, a council may incur expenditure only if it is in terms of the budget and within the limits of the amounts appropriated against each budget vote. Capital expenditure may only be incurred if the council has approved the project. Any expenditure that is incurred outside the above-mentioned parameters may be considered to be unauthorised, or, in certain cases, irregular, or fruitless and wasteful. 86

101 Unauthorised expenditure must be reported, and may result in criminal proceedings. National Treasury has released the comprehensive Circular 68 on the recognition and treatment of unauthorised, irregular, and fruitless and wasteful expenditure. The circular can be accessed by way of the following link: Revision of budget estimates The adjustments budget It may be necessary, on occasion, for a council to consider a revision of its original budget, owing to material and significant changes in revenue collections, expenditure patterns, or forecasts thereof for the remainder of the financial year. In such cases a municipality may adopt an adjustments budget, prepared by the municipal manager, and submitted to the mayor for consideration and for tabling at council, for purpose of adoption. The adjustments budget must contain certain prescribed information. It may not result in further increases in taxes and tariffs, and it must contain appropriate justifications and supporting material when it is approved by council. The requirements of the Municipal Budgeting and Reporting Regulations, Part 4 of Chapter 2, as well as Schedule B, must be taken into consideration, as well as must the guidance that is provided in circulars and guidelines. Very specific circumstances and time frames are set for the preparation and approval of the adjustments budget. The knock-on effect of the budget adjustments on the SDBIPs must be taken into consideration, along with the necessary adjustments in the SDBIPs being served before council for approval too Municipal entity adjustments budget The board of directors may revise the budget of the municipal entity only with the approval of the mayor. The requirements of section 87 (6) of the MFMA, as well as of Part 4 of Chapter 3, and of Schedule E of the Municipal Budgeting and Reporting Regulations, must be taken into consideration Unauthorised, irregular, and fruitless and wasteful expenditure Given the need for maximising service delivery, and given the authority and credibility of the budget, each council has a duty to introduce and to adopt policies and processes to prevent, to identify, and to investigate unauthorised, irregular, and fruitless and wasteful expenditure, and to address instances of unauthorised, irregular, or fruitless and wasteful expenditure conclusively (National Treasury MFMA Circular No. 68, 2013). Unauthorised expenditure in a municipality or municipal entity means any expenditure that is incurred by a municipality other than in accordance with section 15 or 11 (3) of the MFMA, meaning not in terms, or within the limits, of appropriated amounts of the approved budget. Such expenditure might also consist of withdrawals from municipal bank accounts other than as stipulated in section 11 (1) of the MFMA. Section 1 of the MFMA also provides a comprehensive list of expenditures that are considered unauthorised, and National Treasury MFMA Circular No. 68 details expenditures that are not classified as unauthorised, given the MFMA classification. 87

102 Irregular expenditure by a municipality or municipal entity is incurred in contravention of, or not in accordance with, a requirement of the MFMA or the Municipal Systems Act. Such expenditure will not have been condoned in terms of these Acts, or in terms of the Public Office-Bearers Act No. 20 of It will also not have been condoned in terms of a requirement of the SCM policy of the municipality or entity, or in terms of any of the by-laws giving effect to such policy. The concept of fruitless and wasteful expenditure is founded on public accountability principles that are aimed at promoting the efficient, economic and effective use of resources, and at the attainment of value for money. The council, the mayor and the accounting have a fiduciary responsibility to ensure that municipal resources are used in the best interests of the municipality and of the local community. The concept broadly refers to processes that must be followed and to transactions with service providers or suppliers, as well as to the use of other resources belonging to the municipality. The phrase made in vain indicates that the municipality derived no value for money from the expenditure, or from the use of other resources. Fruitless and wasteful expenditure must fulfil both the conditions in the definition, namely that the expenditure was made in vain, and that it could have been avoided, had reasonable care been exercised (National Treasury, MFMA Circular No. 68). After consideration of the grounds for the authorisation of unauthorised expenditure by the council, and unless authorised in an adjustments budget, all instances of unauthorised expenditure must be recovered from the official or political office-bearer liable. The accounting must, in writing, request that the liable person pay the amount back within 30 days, or in reasonable instalments. If the person fails to comply with the request, the matter must be handed to the municipality s legal division for the recovery of the debt through the normal debt collection process. With regards to irregular expenditure, none of the Acts mentioned above provides for a municipal council to condone such expenditure. A council may condone a contravention of the council-approved SCM policy or of a by-law giving effect to such policy, provided that the contravention is not also a contravention of the MFMA or the SCM regulations, in which case only the National Treasury can condone a contravention of the SCM regulations. Once the accounting or council becomes aware of any allegation of irregular expenditure, such allegation may be referred to the municipality s own internal audit unit, or to any other appropriate investigative body for investigation, to determine whether or not grounds exist for a charge of financial misconduct to be laid against the official who is liable for the expenditure. If, after a proper investigation, the council concludes that the person responsible for making, permitting or authorising irregular expenditure did not act in good faith, or acted deliberately or negligently, the municipality must consider instituting disciplinary action and/or criminal charges against the liable person. All instances of irregular expenditure must be recovered from the liable person, unless the expenditure is certified by the municipal council, after investigation by a council committee, as irrecoverable, and is written off by the council. The processes involved in responding appropriately to instances of fruitless and wasteful expenditure are similar to the processes that are outlined for irregular expenditure. Said processes include disciplinary charges, criminal charges, and recovery of the fruitless and wasteful expenditure from the liable persons. The description of the categories of irregular 88

103 expenditure can be applied directly to fruitless and wasteful expenditure. The difference is that fruitless and wasteful expenditure can arise in any circumstance, and is not dependent on non-compliance with any legislation. See the National Treasury MFMA Circular No. 68 for a more comprehensive description of the steps to be taken, as well as of the guidelines for keeping a register, in a transparent manner, to assist municipalities in recording, keeping track, and managing the abovementioned categories of expenditure. The register should be a central source of information concerning this type of expenditure for both the council and for relevant external stakeholders. In it, a clear record should be kept of the details of the transaction, of the type of expenditure involved, of the person liable for the expenditure, and of what measures were taken by the municipality to address the matter Contemporary Issues in municipal budgeting Currently, the following aspects regarding municipal budgeting require special reference: The latest standards of Generally Recognised Practice (GRAP) call for the annual financial statements (AFSs) to be presented as the actual performance against the approved budget. The budget that is presented to the council is a consolidated budget, including the municipal entity budgets where municipal entities have been established. A budget must be fully funded or balanced. An operating budget should not be funded out of accumulated surpluses, as doing so would mean that the past tariffs were probably set too high, and that the future tariffs are set too low, in which case both sets of tariffs would not be cost-reflective, as required by legislation. Budgets are required to be supported by a number of policies that should be reviewed every year, even if no change is required Summary In this chapter, we took an in-depth look at the different phases of the budget cycle. The chapter, as a whole, serves to highlight the importance of the budget as a meticulous and credible process. During the budget preparation, a timetable is followed, starting approximately 10 months before the commencement of the budget year. The process includes a review of the IDP and other related policies. A budget steering committee supports the mayor in his/her budgeting responsibilities, and provides the necessary technical input. As part of the preparation process, funding sources are considered to ensure that a fully funded, credible budget is tabled. The adoption of the budget follows a process of tabling the draft budget, publishing the draft budget, and creating opportunity for comment. After completing the required revisions, the budget is finally adopted. The budgets of municipal entities must be tabled by the mayor, together with the municipal budget. Budget implementation, which requires implementation management by means of the SDBIP, requires control over variations to prevent unauthorised expenditure. Budget estimates may be revised by means of an adjustments budget. The performance reports forming part of budget implementation will be discussed in more detail in following chapters. 89

104 Given the need for maximising service delivery, and the authority and credibility of the budget, each council has a duty to introduce and adopt policies and processes to prevent, to identify, and to investigate unauthorised, irregular, and fruitless and wasteful expenditure, and to deal with it conclusively. Note that each year the National Treasury publishes one or more circulars on the budgetary requirement for the financial years ahead. These circulars can be accessed on the Treasury website: 90

105 Chapter 9: Costing and capital planning 9.1. Learning outcomes After completing this chapter, you should be able to explain: how your own work responsibilities relate to project management, costing and capital planning; the process and practices of costing in a municipality; and the concept of capital planning in a municipality Key concepts Costing A process of collecting cost data in some organised way by means of an accounting system, and then of assigning these costs to the particular cost objects for which costing is done, for the purpose of accurately pricing goods and services. Activity-based costing (ABC) A sophisticated system of tracing and allocating indirect costs more precisely, in terms of the activities for which they are incurred, in order to assign indirect costs and to price goods and services accurately. Capital planning A process for deriving long-term investment needs for new or replacement buildings, infrastructure, plants, machinery, and equipment from the strategic objectives of the municipality. Project management A meticulous process that is based on internationally acknowledged practices and techniques, whereby objectives are achieved, with a trade-off between desired quality and scope, within certain cost and time constraints Scene-setting questions 1. Is project management institutionalised in your municipality? If not, what would be the benefits of institutionalising such management? What prevents it from happening? 2. Why, in your opinion, are so many municipalities unable to deliver their mandate from a costing point of view? 3. Discuss how you would set about considering the desirability and viability of building a new town hall in your municipality. 4. How can you, in your area of responsibility, ensure that the financial and other resources of the municipality are utilised effectively, efficiently, economically, and transparently? 5. How is the price of a product or service calculated in your municipality? 6. Why is the volume of water (in kilolitres) expected to be consumed, or the number of units of electricity (in kilowatts) sold, important for pricing purposes in a municipality? 7. How is capital planning done in your municipality? 9.4. Introduction In Chapter 8 the budget, with its forward-looking, or strategic and better informed approach than in the past, was discussed. By linking the budget to the IDP, an improvement can be made in terms of the judgement that is made about future priorities for capital development and service delivery. In practice, the temptation always exists to do incremental budgeting by 91

106 means of using the previous years information, thus eliminating the necessity to plan and cost services rigorously, and also making consultation a mere exercise in window dressing. Doing so invariably results in poor service delivery performance, and in unrealised community expectations. The SDBIP has also been said to be the detailed plan of each functional area or department, which is intended to implement the delivery of municipal services contemplated in the annual budget. The plan should indicate monthly revenue and expenditure projections, as well as quarterly service delivery targets and performance indicators. The SDBIP effectively becomes the contract of service delivery between the administration and the community, and the tool by which the community holds the municipality accountable for the use of public funds. The adoption of such an approach to budgeting and detailed planning invariably leads to the need to do more accurate costing and capital planning, and also to better manage processes to obtain the means for service delivery (capital assets) and service delivery itself. This chapter, therefore, focuses on costing and capital planning Where the individual municipal official fits into the picture Strategic Plan (IDP) KPAs Institutional, resource & operational delivery arrangements Capital projects to create means of service delivery (infrastructure) Operations to deliver services and support service delivery Products & services delivered at a price Impact on consumers, users, beneficiaries & environment Performance Input Process Output Outcome Figure 12: Municipal service delivery system Figure 12 above depicts municipal service delivery as a system with input derived through the IDP from the environment, and with stakeholders that are translated into institutional, resource and operational delivery arrangements. These arrangements lead to capital projects to bring about and to maintain the means of service delivery and operations to deliver the services required, and support the delivery of such services. The output is a range of products and services that are delivered at a price, but that also impacts on stakeholders and the environment in positive and sometimes, unfortunately, negative ways. These impacts must again inform the next round of strategic planning. The focus in this chapter is on the process part of the system. The process to bring about a service or a product can be likened to manufacturing a product in a factory. First of all, no entrepreneur will place a product on the market if the price is not right for the prospective customers. The prospective producer will, therefore, investigate the market, and specifically 92

107 the price of competitive products, to determine whether it is feasible to produce the new product. This process is called target costing. A feasibility study considers the cost of the manufacturing equipment and other capital assets, such as vehicles, that will be used to make the product and the cost of employment of people operating the equipment (i.e. the direct fixed costs). In addition, it considers what the cost of the material to make the product (i.e. the direct variable costs) will be. A proportional share of indirect/overhead costs, such as the infrastructure that will be shared with other product lines in the same factory, and the amount of water and electricity that will be used by the whole factory, as well as the support staff, including the IT, accounting and HR staff who will provide services for the whole factory, with all its products, have also to be considered. If all these costs are too high, in relation to the target price, the producer will either dismiss the idea, or he/she will investigate ways of achieving greater economy (i.e. of acquiring resources at a lower price), efficiency (i.e. of producing the product at a lower price, or of producing more of the product at the same price), and effectiveness (i.e. reconfiguring the product to be cheaper, but still fit for purpose). Obviously, the target price runs parallel with the target sales volume, because the more products that can be made and sold using the same machinery (i.e. the direct fixed cost item) and the same administrative support (i.e. the indirect cost item), the lower the proportion of these costs will be per product. In order to achieve the target price, the producer will carefully investigate each step of the process, from the design of the product and the acquisition of raw materials (i.e. the direct variable cost item), through the production processes, removing all forms of waste and unnecessary cost items, without compromising the purpose of the product. The producer must have a comprehensive understanding of each element of the manufacturing system, and should aim to use the insights of each and every stakeholder to reach the target and to maximise profits. In a South African municipality, where municipal products and services are delivered at a price that is determined exactly as was done in the scenario of the factory described above, pressure always exists to close the gap between what the residents can afford, due to their socio-economic realities, and the production costs that the municipality incurs. The one option that municipal officials do not have is that they are unable not to produce the product if it is too expensive, because the municipality has a constitutional obligation to provide the products and services that it is mandated to supply. The second option, namely to expect more unconditional grant money from centrally generated tax money to close the gap, is also severely constrained. In the cost-saving process in the given scenario, the financial accountants might be able to assist with providing certain cost data, but it is the insight of those who are in the manufacturing lines where the product is made that will bring about small savings until the price is right. The obligation that each municipal official, therefore, has is to take all reasonable steps within their respective areas of responsibility to ensure (b) that the financial and other resources of the municipality are utilised effectively, efficiently, economically and transparently (MFMA, section 78). The officials must, therefore, meticulously and continuously consider how to fine-tune the nature of the product or service and each valueadding step that is required to bring it about. They must also consider the cost implications 93

108 that are associated with making small changes in the system to bring about such a product or service Project management as an indispensable way of working Figure 12 illustrates the fact that the delivery process relies on the means to bring about the product or service, as well as the operations that are involved in so doing. The project management body of knowledge (PMBOK) provides expertise and tools for both parts of the process, because it serves to focus on better and more meticulous planning of each activity to bring about the product. In that sense, a project is defined as the investment of capital in a time-bound intervention to create productive assets. With the capital planning of the means of delivery, capital refers to physical resources, and the assets created are also physical. With the planning of operations, capital refers to both human and physical resources, and the assets that are created may be human, social, institutional, or physical. In both planning exercises, investment and productive refer to the meticulous consideration of the utilisation of resources for best return, which is mostly social return. The time-bound intervention part of the definition implies that a project has a determined start and a determined finish. Although operations do not have such specific starts and finishes, parts of the operations always have, and can be managed as projects to maintain a balance between the scope of work, the amount of time that it takes to do, the cost of the resources involved, and the quality requirements. The create part of the definition implies a deliberate and purposeful process, consisting of logically sequenced activities. The PMBOK provides for a range of tools that would enhance the processes of implementation, both for capital projects, and for the implementation of operations and support services, by aligning resources with the hierarchy of objectives, culminating in the strategic vision and mission of the municipality. Project management encourages: engagement in goal-orientated processes; the adoption of holistic approaches to problemsolving; the decentralisation of accountability; and organisational flexibility. Such management provides the tools that enable each and every official to make the most of his/her discretionary authority by fine-tuning production in his/her area of responsibility Costing Costing entails a process of collecting, or of accumulating, cost data in some organised way by means of an accounting system, and then assigning these costs to the products or to the services for which costing is done. The purpose of costing is not only to collect and to assign cost data in order to determine a price for each service or product, but it also serves to provide decision-making information whereby the efficiency of service delivery can be analysed, budget decisions can be made, tariffs can be set, and a choice can be made between alternative methods of providing services. Municipalities follow different approaches to costing, very much depending on the size of the municipality, on the range and volume of the services provided, and on the sophistication of the cost accounting system used. The most basic approach is called absorption costing, whereby the costs of the chain of processes leading to the revenue-generating product or service (which is also called the cost object) are assigned relatively arbitrarily, due to the lack of precise data which could else have informed more accurate allocation. 94

109 ABC provides for much more accurate cost accumulation and allocation than does absorption costing, but requires the use of a more sophisticated cost accounting system. A cost accounting system must, nevertheless, even in its most basic application, distinguish between costs in terms of traceability (i.e. direct vs. indirect costs, as discussed in the above scenario) and behaviour (i.e. fixed vs. variable costs, as discussed in the above scenario). Costing, as a process relying on cost accounting information, must culminate in a price for the units of products or services, such as the kilolitres of purified water that are made available for consumption, that are provided to the public. Apart from the units of services that are delivered externally to the public, internal services, without which the external units cannot be delivered, are also provided. Such internal services include: information and communications technology (ICT); billing; internal audit; strategic management; and human resource management. The above-mentioned internal services can also be measured as units of products or services. However, seeing that they are not the outputs of the municipality that earn revenue through consumer tariffs, user charges, property taxes, licence fees, grants, or any other forms of revenue, their costs must be included in the price of the external products or services. In other words, the unit of output that, in being delivered to the public, generates revenue is the result of a chain of processes originating much further back than just the direct labour and material of the visible product delivered. Financial sustainability in a municipality can only be achieved if the costing of services leads to unit prices that will cover and recover all costs involved. The costing process should include due consideration of the risk of overestimation of demand leading to lower than breakeven unit prices, as well as to such unforeseen costs as sharp increases in resource prices. In keeping with the above, the ideal costing should result in all consumers and users being able to pay the full price, as determined by the costing process, either as full-priced consumer tariffs, for such consumer services as water and electricity, or as property taxes, based on a rate that should cover all costs for providing such collective services as streets and parks. Included in these tariffs and rates should be the cost of capital to finance the capital assets that are necessary for delivering the services, as will be discussed in the next section. The tariffs and rates must also adhere to the restrictions placed on municipalities by such regulatory authorities as NERSA and the water boards. National Treasury MFMA Municipal Budget Circulars on the MTREF include information on these restrictions. However, given the socio-economic circumstances that are typically characterised by high levels of poverty and the inability to pay bills, revenue planning must include considering alternative sources for indigent support. Figure 13 illustrates the sustainability challenge with which each municipality in South Africa is presented. The challenge is to minimise the inner revenue not realised from tariffs & rates due to indigence, which is a time-consuming multistakeholder process of local economic development and the socio-economic development of indigents. Simultaneously, revenue realised through consumers paying tariffs must be stretched to cover the increasing resource and production costs, without exceeding the limits set by the regulatory authorities and affordability for the community concerned. 95

110 Increasing resource & production costs Revenue realised through consumers paying tariffs & rates Price restrictions by regulators Revenue not realised from tariffs & rates due to indigence Socio-economic realities of community, affecting affordability Figure 13: The sustainability challenge for municipalities The above-mentioned sustainability challenge further highlights the need for accuracy in costing, and does not, as is often argued, diminish the need for it. On the one hand, therefore, the accurate costing of products and services, based on realistic expected volumes and on numbers of consumption, will help to determine the cost of municipal products and services and continuously higher levels of efficiency. On the other hand, however, it is equally important to keep a regularly updated indigent register to determine the amount of money that cannot be recovered from the prices charged for such products and services. Alternative sources of revenue, such as unconditional grants, must then be used wisely to help close the gap and to ensure financial sustainability. The National Treasury MFMA Municipal Budget Circular for the 2013/14 MTREF (National Treasury Circular No. 67) addresses the sustainability challenge as follows: The medium-term expenditure framework (MTEF) uses the National Development Plan (NDP) as point of departure The NDP emphasises the need to lower the cost of living for households and reduce the cost of doing business for small and emerging enterprise. These objectives need to take into account fiscal sustainability, which ensures that progress will not be interrupted or reversed; Expenditure-control systems across government will be revised over the period ahead. There will be tighter rules for intergovernmental transfers, especially for infrastructure projects; Measures will be taken in SCM to make it harder for tender processes to be manipulated and to avoid situations where government pays above-market prices for goods and services, including local government; Given the economic realities and the fact that recovery is likely to be slow, municipalities are once again reminded to adopt a conservative approach when projecting their expected revenues and cash receipts. Municipalities should also 96

111 pay particular attention to the affordability of tariff increases especially on main services, managing all revenue and expenditure and cash streams effectively, and carefully evaluating all spending decisions. Over the next three years, government, as a whole, will have to learn to do more with less. The efficiencies that are achieved will protect public finances and enable the country to accelerate development when economic conditions improve. Local government must ensure that efficiency gains, eradication of non-priority spending and the reprioritisation of expenditure relating to core infrastructure inform the next planning framework of all municipalities Capital planning The NDP mentioned above emphasises the need to lower the cost of living for households and to reduce the cost of doing business for small and emerging enterprises, in order to reduce the current levels of indigence, and the promotion of fiscal sustainability to ensure that progress is neither interrupted, nor reversed. In addition, it also shifts the composition of spending from consumption towards capital investment. South Africa needs to invest in a strong network of economic infrastructure that is designed to support the county s mediumand long-term economic and social objectives. Capital planning, which is also referred to as investment appraisal, is used to derive longterm investment needs for new or replacement buildings, infrastructure, plants, machinery and equipment from the strategic objectives of the municipality. Capital planning is the response to the question: What is the most beneficial capital investment that the municipality can make, given the service delivery and the development needs of the community (and the country), the condition and the appropriateness of existing capital assets, the revenue-generating potential or the productivity of capital assets, and the affordability of further financing, given the liquidity position of the municipality? Capital expenditure is characterised by the fact that it provides for benefits extending beyond one year. It includes expenditure on land, buildings, engineering infrastructure, machinery and equipment, as well as on vehicles, office furniture and IT equipment. The annual capital budget may, in most instances, be much smaller than the operating budget, but capital assets represent a very large commitment of municipal resources over time. The large initial cost of individual assets procured, developed, improved, or extended in life, and the long-term operating and maintenance cost, as well as the revenue implications of such investments, necessitate the separation of planning from operating expenditure. Such cost might also justify accessing long-term financing solutions beyond the limited options provided by the cash generated from the working capital cycle of the municipality. A longterm capital plan is, therefore, vital for ensuring financial sustainability. The MFMA places a large premium on the integrity of capital expenditure programmes. Of special relevance is section 33, which determines that contracts having future budgetary implications can only be entered into after a lengthy and comprehensive process of consultation with the community, the National Treasury, the relevant provincial treasury, the national department that is responsible for local government, and the responsible national department, as far as the contract involves the provision of water, sanitation, electricity, or any other service, as may be prescribed. The financial obligations emanating from such a 97

112 contract must also be taken into account by the council. Section 19 of the MFMA also ensures that capital projects receive special consideration in terms of cost implications over the life cycle of the asset by the council, and the dedication of the funding sources. A capital expenditure programme must, therefore, be derived from the IDP as strategic plan. The programme must be developed in consultation and interaction with such key stakeholders as the council, the mayor, the ward councillors and committees, the community forums, the media, organised business, the provincial and national departments, entities and regulating authorities, as well as with all relevant municipal officials, especially the division heads, who must have the capacity to generate capital and operating cost information. The capital expenditure programme is also the result of particular demographic conditions affecting the municipality, and of key local, regional, provincial and national issues affecting the area, as well as of the municipal capacity involved. Given the long-term financial implications of capital planning, and the involvement of multiple stakeholder groups in the process, sound project management is indispensable to sound municipal functioning. However, in a public sector environment, good project management alone does not guarantee success, because the output that is created through such management might fail both in serving the intended programme objectives, and the intended strategic objectives. It is, therefore, indispensable to derive the desired projects to be delivered from the IDP of the municipality, through the appropriate interpretation of needs, into a capital expenditure programming process. If this is done, the meticulous application of project management tools in the project cycle of conceptual development, detail design and development, execution and closeout must follow to attain project success. Whereas the IDP derives its input from community needs, environmental challenges, economic opportunities, national and provincial policies, strategies, and other directives, as well as from relevant legislation, capital expenditure programming is derived from the IDP and from concomitant departmental plans with programme objectives. Heads of departments must, therefore, also lead the process of identifying capital projects that will serve the objectives of the programme. With the execution of individual capital projects, each project must be assigned to a competent project manager, who must be held accountable for project delivery to planned scope, quality, cost and time frames. The careful consideration of the long-term financial implications of projects is, however, also essential, because project success relies not only on deriving the right project from the strategic and capital planning process, and executing it meticulously. It also relies on ensuring that the project benefit is maximised over the planned life cycle of the asset so created Summary In this chapter, costing and capital planning have been discussed. Each municipal official has a role to play in ensuring that the financial and other resources of the municipality are utilised effectively, efficiently, economically, and transparently in his or her area of responsibility. Doing so will minimise costs, but, in order to do so, meticulous planning of each part of the service delivery process is essential. Project management provides the tools to do so. However, cost minimisation can only take place if the relevant cost data are generated. Therefore, after defining costing, an explanation was provided of why accurate 98

113 costing is indispensable for efficient and effective service planning and delivery. Finally, capital planning was defined, the importance of capital planning explained, and the process of developing a capital expenditure programme referred to. 99

114 Chapter 10: Asset management Learning outcomes After completing this chapter, you should be able to explain: your own role and responsibility in municipal asset management; the need for asset management and for the maintenance of an asset register; the legislative mandates for municipal asset management; financing; the utilisation of assets; financial performance; accounting for assets; and disposals and transfers Key concepts Asset A tangible or intangible resource that is capable of being owned (MFMA municipal transfer regulations). Capital asset Immovable assets, such as land, property, buildings and movable assets, including plant, machinery and equipment, which can be used continuously or repeatedly for more than one year in service delivery, for rental to others, and for administrative purposes, as well as from which future economic or social benefit can be derived. Asset management The monitoring and maintenance of anything of value in an organisation through a systematic process of operating, maintaining, safeguarding, upgrading, and disposing of assets cost-effectively, as well as the management of assets to achieve the greatest return, which could be social return in a public sector environment. Asset register A record of assets that is compiled in terms of section 63 (2) (c) of the MFMA, and containing comprehensive and up-to-date asset inventory information, including: which assets the municipality owns; where the assets are; how much the assets are worth; what condition the assets are in; and what, when and how much investment is needed to maintain the assets Scene-setting questions 1. What is your role in, and contribution to, asset management in your municipality? 2. What are the benefits of good asset management for your municipality? 3. What are the benefits of maintaining an asset register for your municipality? 4. To what extent does your municipality consider financing options, the proper utilisation of assets, and the financial performance of assets? 5. What benefits are to be gained from considering financing options, the proper utilisation of assets, and the financial performance of assets? 6. What practices are followed by your municipality in disposing of assets? 7. Why is it important to manage disposals rigorously? 100

115 10.4. Introduction In recent years, the trend in public sector accounting has been to move towards greater transparency and accountability in relation to the public at large, regarding the utilisation of public funds, and asset and liability management. Municipalities are under constant cash flow pressure, as the economic conditions slow down, and the non-payments of debtors increase. The need for financial resources negatively impacts on asset management in many ways. These include: compromising the maintenance programs of capital assets; limiting the need to expand existing infrastructure to the availability of cash resources; selling capital assets to fund operational expenses; and the suing by suppliers to sell capital assets to service outstanding debt. These negative acts threaten the ability of municipalities to sustain service delivery. Assets provide the means to deliver services, as was discussed in the previous chapter. The conducting of asset management by experts in said field is important. However, such management is not only a function of dedicated experts, but it is also a function of the users of such assets in terms of service provision. It is the latter s responsibility to ensure that the economic or social return on assets is maximised. In addition, section 78 (1) (c) of the MFMA determines that each municipal official MUST take all reasonable steps within his/her area of responsibility to ensure that the municipal assets and liabilities are managed effectively, and that said assets are safeguarded and maintained to the required extent. In this chapter, the individual responsibility of all officials is discussed. In addition to pointing out the legislative mandates for asset management, the financing and utilisation of assets is explained. Financial performance and accounting for assets is discussed, and, finally, the disposal and transfer of assets is explained Where the individual municipal official fits into the picture Each municipal official to whom reference is made in section 78 of the MFMA MUST take all reasonable steps to ensure, in regard to his/her area of responsibility, (1)(e) that the assets and liabilities of the municipality are managed effectively and that assets are safeguarded and maintained to the extent necessary. Even though some of the specialised functions of asset management require the guidance or support of, and the consolidation of data by, the asset management specialists in the BTO, the biggest exposure to such risks as damage or theft takes place where the assets are in use. The phases of an asset in a municipality, requiring the involvement of municipal officials other than the BTO specialists, are as follows: 1. During the identification of need phase, the requirement for a new asset is planned for and established, the end user plays the most important role in determining and in specifying the asset in terms of fit for purpose. A life cycle approach must be followed, in terms of which an attempt is made to minimise life cycle cost, rather than to minimise acquisition price, in prescribing the need. Compromising need identification will have negative implications for the full life of the asset. 2. The acquisition phase, during which the asset is purchased, constructed or otherwise created, may largely be managed by BTO staff, but the end user must have a say in 101

116 choosing the best option where alternatives are available, and must also confirm that the actual asset adheres to fit-for-purpose requirements. 3. The operation and maintenance phase, during which the asset is used for its intended purpose, might be marked by periodic refurbishment or major repair, requiring the asset to be taken out of service for specific periods of time. Inadequate attention to maintenance can accelerate the need for major repairs, or it can shorten the operational life of the asset. It can also prejudice the likelihood of being able to achieve maximum returns on the disposal of the asset. Conversely, the careful management of existing assets can extend their effective life, and avoid, or at least defer, the need for new acquisitions. The end user has a substantive role to play in ensuring that the asset is safeguarded and maintained to the extent that is necessary to fulfil life cycle expectations. The performance of an asset in service delivery is a matter for discussion in a following section, but the individual official must, as part of his/her obligation within his/her area of responsibility, ensure that assets are maximally used for the purpose for which they were acquired. No misuse or abuse of assets may be tolerated, as doing so will also shorten the operational life of the asset, and it will also compromise its availability for official purposes. Consequently, any misuse, or abuse, of an asset must be treated as misconduct. 4. The disposal phase is initiated when the economic life of the asset has expired, or when the need for the service provided by the asset has disappeared. In a final, but indispensable, step, the end user should provide feedback regarding whether the economic life of the asset has expired, or whether the asset has become obsolete Management of assets and the asset register Asset management (see the definition of the term under key concepts above) refers to the monitoring and the maintenance of anything of value in an organisation. It may apply to both tangible assets, such as buildings, and to intangible concepts, such as intellectual property and goodwill. Asset management is a systematic process of operating, maintaining, safeguarding, upgrading, and disposing of assets cost-effectively, but also including the managing of assets to achieve the greatest return possible, which could even be social return in a public sector environment. Said activities call for asset management expertise and, as was explained in the previous section of this learner guide, the involvement of all other officials concerned. Assets must be meticulously managed through all the phases of asset management, because accountability for the proper use and the stewardship of capital assets is increasing in importance as part of accountability for financial management. The linkages between asset management and financial reporting have become more emphasised with contemporary accounting practices than they were in the past. If assets are managed well and kept in a good condition, they provide better and more efficient services and reduced risks than used to be the case, while poorly managed and maintained assets give rise to concerns about liability. The asset register is not only a legislative requirement, as it is referred to in the next section, but it is also an indispensable tool for the management of assets. The extreme usefulness of the register comes from its consolidation and its keeping asset data up to date for decision- 102

117 making purposes during the asset life cycle, as well as for the management of assets as a portfolio. The asset register must contain at least the following information: the acquisition dates of all capital assets; clear descriptions of individual assets; an identification reference for physical verification and asset management purposes, meaning a pre printed, sequentially controlled serial number for individual identification purposes, for instance a barcode; the name of the department or service that uses or controls the asset; details as to the location of the asset; the title deed and stand number, in the case of fixed property; the original cost; where land and buildings are revalued, the revalued amount of individual sites and buildings, as well as the date and basis of such valuation; the accumulated depreciation (opening, current and closing) on individual capital assets; the carrying value of the asset; impairment losses (opening, current and closing) on individual capital assets; details of the expected useful life of individual asset items; residual values; information regarding insurance arrangements; whether the asset is required for the performance of basic municipal services; whether the asset is pledged as security for any external loan or other obligation; the price and date on which the asset is disposed of; the depreciation rates concerned, determined in accordance with the principles set out in recognised accounting practices; the historical cost, or fair value, of individual capital asset items, or the fair value of assets received as donations; and details of the funding sources of individual capital assets. Table 8 illustrates the composition of an asset register. 103

118 Code Barcode Past years Useful life register Future years Title deed Stand number Work in progress (fixed assets) Budget 2012/13 a Budget 2013/14 b Budget 2014/15 c Book value 30 June 2015 Budget 2015/16 Budget 2016/17 Budget 2017/18 Budget 2019/22 Book value 30 June 2022 Code Description Class Department Location Acquisition date Construction year Original cost SRC (Funding Source) Asset flag Revaluation date Accrued depreciation Current depreciation Book value Current year Depreciation Book value 30/06/2012 Current impairment losses Accrued impairment losses Type Table 8: Typical governance positioning of the Budget and Treasury office A B C D E F G H I J K L M N O P Q R S T Server Groupwise R /05/ N C L Routerboard 1100L6 for wireless GTP 254 GP Nissan 1400 & canopy UPS Maxi Fero 5000VA online /08/ H A F R /04/ N C L R /11/ H C L U V W X Y Z AA AB AC AD AE AF AG AH AI AJ AK AL AM AN ( )

119 Table 9: Key with which to interpret Table 8 A Code U & A are the unique identifier for the asset, this is issued by the municipality B Description A description of the asset C Class The class is the classification of the asset as determined by GRAP D Department The department that procured the asset E Location Where the asset is F Acquisition date When the asset was procured G Construction year The year when the fixed asset was completed and ready for use H Original cost Original cost I SRC[L1] Where the funding of the asset was sourced from, e.g. CRR, Grant Funding J Asset flag A flag indicating if the asset is work in progress or complete K Revaluation date L Accrued depreciation Accumulated depreciation The date on which assets are reevaluated. E.g. KM uses the fair value model which is revalued annually, so this date will always be at the end of the financial year. M Current depreciation Depreciation for the current period N Book value Current Book Value (Cost - Accumulated Depreciation - Impairment costs + Revaluation) O Current year The current financial year P Depreciation Depreciation for the current period Q R S Book value 30/06/2012 Book Value at the end of the Financial Year Current impairment losses Accrued impairment losses Impairment losses for the current year Accumulated impairment losses T Type Asset Type, e.g. loose asset, fixed asset or toolbox item V Barcode Where possible items are bar-coded to assist with the loose asset count W Past years The life of the asset to date X Useful life register The useful life of the asset is determined from the class of the asset. X + Z = Y Y Future years How many years does the asset still have left. Z Title deed Applicable for a property/fixed asset AA Stand number Applicable for a property/fixed asset AB Work in progress (fixed assets) AC Budget 2012/13 AD a AE Budget 2013/14 AF b AG Budget 2014/15 AH AI c Book value 30 June 2015 AJ Budget 2015/16 AK Budget 2016/17 AL Budget 2017/18 AM Budget 2019/22 AN Book value 30 June 2022 Linked to J The budget that is expected to be spent on the asset for the specified budget year in respect of repairs & maintenance, replacement, upgrading and depreciation. The budget that is expected to be spent on the asset for the specified budget year in respect of repairs & maintenance, replacement, upgrading and depreciation. Book value in 3 years time The budget that is expected to be spent on the asset for the specified budget year in respect of repairs & maintenance, replacement, upgrading and depreciation. The budget that is expected to be spent on the asset for the specified budget year in respect of repairs & maintenance, replacement, upgrading and depreciation. Book value in 10 years time 105

120 10.7. Legislative mandates Legislation has been developed and implemented to assist the council and municipal management with their management efforts. The MFMA forms the foundation of asset and liability management. The following sections of the Act are of particular relevance here: Section 63 places the responsibility for the management (including the maintenance and safeguarding) of the assets and liabilities with the accounting. The accounting must take reasonable steps to ensure that: o the municipality has, and maintains, a management, accounting and information system that accounts for the assets and liabilities of the municipality; o the municipality s assets and liabilities are valued in accordance with GRAP standards; and o the municipality has, and maintains, a system of internal control of assets and liabilities, including an asset and liabilities register, as may be prescribed. Section 96 deals with the responsibilities of an accounting of a municipal entity for the management of assets and liabilities Financing of assets Asset management is not limited only to the assertions of ownership, existence and valuation. Such management entails many other critical focus areas, including the following: The financing cost of assets severely affects the ability of municipalities to generate sufficient cash flow to service their long-terms loans. The soccer stadiums across South Africa can be seen in this regard. The sources of financing are currently limited to government grants, Development Bank loans, and, in a few instances, retail bank loans. Options like bond issues and international financing are currently only exploited by a few of the municipalities. Obtaining financing is linked to the credit rating of institutions, and few municipalities have gone through a cycle of obtaining and maintaining credit ratings. Although finance tools are available, they are scarcely used. Feasibility studies, net present value, the time value of money, discounting cash flows, and weighted average cost of capital are vehicles that can assist management with optimising the use of assets. Such studies influence decision-making regarding the procurement, the development, the maintenance, and the financing of long-term capital assets. Financing alternatives are more widely available to municipalities, and include: the outright purchasing out of cash reserves; capital replacement reserves; hire purchase transactions; long-term bonds; and leasing transactions. Although such instruments seem to be easy to use, they vary widely in their effects on cash flows, and on the calculation of rates and service charges for future years. Section 46 of the MFMA contains provisions for long-term borrowing that also apply to lease and hire purchase financing. This becomes evident when examining the definitions of the concepts of debt and financial agreement in the MFMA. A municipality may incur long-term debt only for the purpose of: 106

121 capital expenditure on property, plant or equipment to be used for the purpose of achieving the objects of local government; or refinancing existing long-term debt. The prescribed approval process for securing long-term debt includes obtaining a resolution from the municipal council, signed by the mayor, approving the debt agreement. The accounting must also have signed the agreement or other document that creates, or acknowledges, the debt Utilisation performance of assets Asset utilisation is a measure of how effectively an asset is being used to meet the organisation s service delivery objectives, in relation to the asset s potential capacity. To assess utilisation, the criteria and the benchmarks that are appropriate to the services being delivered, and to the class of asset being considered, firstly must be established. The criteria should have regard to: the value of the asset s unit of service potential that is being used relative to the units of service being delivered; the physical measures of asset capacity, relative to the units of service being delivered; and the use being made of the asset, relative to the optimal availability for the type of asset (e.g. the number of computer hours used, relative to the number of operational hours available on a mainframe computer). Underutilised assets should be identified, and the reasons for their underutilisation should be examined. The asset might, for example, no longer be effective in performing the activities required of it, or it might be in less-than-optimal condition. The need for the services that the asset delivers or supports might also have diminished Financial performance of assets The financial performance of an asset must be evaluated to determine whether or not it is providing economically viable service. To do this, the entity needs to monitor and to assess operating expenses, and current and projected cash flows, including capital expenditures. This information essentially determines the current and the projected economic return of the asset or portfolio concerned. Performance measurements include the measurement of: Economy, which refers to the acquisition of the appropriate quality and quantity of financial, human and physical resources at the appropriate time and place, and at the lowest possible price. Effectiveness, which refers to the extent of the achievement of set or predetermined outcomes, objectives or other intended effects of programmes, operations, activities, or processes. Efficiency, which refers to the use of resources, with the output being maximised for any given set of resource inputs, or with the input being minimised for any given quantity and quality of output provided for assets standards have been developed for the recording of assets. GRAP 17 provides the 107

122 framework for the measurement, recognition and accounting treatment of assets that are classified as property, plant and equipment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. GRAP 17 contains guidelines on the information regarding property, plant and equipment to be disclosed in the financial statements. Said information includes: the measurement bases that are used for determining the gross carrying amount; the depreciation methods used; the useful lives, or the depreciation rates, used; the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and at the end of the period concerned; a reconciliation of the carrying amount at the beginning and at the end of the period concerned, showing additions, disposals, acquisitions through business combinations, and increases or decreases resulting from revaluations, and from impairment losses recognised or reversed directly in net assets, under the GRAP standard on the impairment of assets; and impairment losses recognised, or reversed, in surplus or deficit, in accordance with the GRAP standard on impairment of assets Disposals and transfers of assets Sections 14 and 90 of the MFMA contain provisions for the disposal of capital assets in municipalities, and in municipal entities, respectively. Said sections determine that a municipality and/or a municipal entity may not transfer ownership as the result of a sale or other transaction, or permanently dispose, of a capital asset that is needed to provide the minimum level of basic municipal service. A municipality (or municipal entity) may dispose of a capital asset only after the council (or the council of the parent municipality), in a meeting that is open to the public: has decided, on reasonable grounds, that the asset is not needed to provide the minimum level of basic municipal service; and has considered the fair market value of the asset, and the economic and community value to be received in exchange for the asset. Any transfer of ownership of a capital asset must be fair, equitable, transparent, competitive, and consistent with the SCM policy that the municipality must have in place, as well as maintain, in terms of section 111 of the MFMA. Section 48 contains provisions on how the municipalities may give security for loans that are advanced to the municipalities. The responsible management of the municipal debt burden remains of uppermost importance, including in terms of the fact that the municipality must still be able to serve its current liabilities, when they fall due. The Municipal Asset Transfer Regulations include the following governing principles: In terms of the valuation principle, a value should be attached to all assets that are transferred or disposed of, to ensure that the interests of the municipality/ municipal entity are not prejudiced by the transfer or disposal. 108

123 In terms of the continuity of service principle, an uninterrupted supply of municipal service is to be ensured when the asset is disposed of or transferred, particularly when the asset is used in providing the minimal level of basic municipal service. In terms of the risk transfer principle, the risk relating to the asset must be transferred in conjunction with the transfer of the asset. In terms of the asset preservation principle, the indiscriminate, or unsustainable, transfer or disposal of municipal assets that might undermine the ability of the municipality to render, or to expand, municipal services in the long term is to be prevented. The above-mentioned regulations further deal with the transfer, and the permanent disposal, of non-exempt capital assets. The chapter further concentrates on: the decision-making process for municipalities and municipal entities; and the provisions that are applicable to both municipalities and municipal entities. Said regulations also deal with the transfer of exempted capital assets, and with the granting of rights to use, to control, or to manage municipal capital assets Summary Asset management is a systematic process of operating, maintaining, safeguarding, upgrading, and disposing of assets cost-effectively. It also includes the practice of managing assets to achieve the greatest return, which could be social return in a public sector environment. Although asset management requires a certain level of specialised expertise of dedicated asset managers, it is the responsibility of all officials to ensure that the economic or social return on assets is maximised, and to take all reasonable steps, within their areas of responsibility, to ensure that the assets and the liabilities of the municipality are managed effectively, and that the assets are safeguarded and maintained to the extent necessary. In this chapter, the responsibility that all officials have for asset management was highlighted. In addition, the legislative mandates for asset management were set out, and the financing and utilisation of assets, as well as the financial performance and accounting for assets, were discussed. Finally, the disposal and transfer of assets was explained. 109

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125 PART FOUR SUPPLY CHAIN MANAGEMENT, ALTERNATIVE SERVICE DELIVERY MECHANISMS, AND CONTRACT MANAGEMENT To show their understanding of the material that is covered in this part of the learner guide, the participants must be able to explain the concepts and functioning of municipal SCM, alternative service delivery mechanisms and contract management. Projects and operations for delivering services SERVICE DELIVERY ETHOS 11: Supply-chain management 10: Alternative service delivery mechanisms 12: Contract management Figure 14: The concepts and functioning of municipal SCM, alternative service delivery mechanisms and contract management 111

126 Chapter 11: Supply chain management Learning outcomes After completing this chapter, you should be able to explain: SCM as a responsibility of all officials; institutional arrangements and policy provisions for SCM; governance provisions with respect to SCM; legislation and government policies impacting on SCM; the SCM process; competitive bids; and contemporary issues in municipal SCM Key concepts SCM A systematic process that ensures that goods and services are delivered to the right place, in the right quantity, of the right quality, at the right cost, and at the right time. SCM process As a process, SCM consists of demand management, acquisition management, logistics, and disposal management, with the monitoring of performance being a crosscutting function covering all phases of the process Scene-setting questions 1. What is your involvement in SCM in your municipality? 2. How do institutional arrangements, policy and governance prescriptions, and legislation relating to SCM benefit service delivery in your municipality? 3. Why is SCM, as an integrated process, important for service delivery? 4. How do competitive bidding processes benefit service delivery in your municipality? 5. Were any matters of emphasis or qualifications relating to SCM in your municipality included in recent audits of your municipality, and what was done to address them? Introduction The National Treasury has been reforming public sector procurement processes since Both the PFMA (No. 1 of 1999 [as amended by Act No. 29 of 1999]), as well as the MFMA compel accounting s to accept full responsibility and accountability for all expenditure incurred. These Acts serve to bring the concept of SCM into line with international best practice. SCM, which is an integral part of financial management, can be described as a systematic approach that ensures that goods and services are delivered to the right place, in the right quantity, of the right quality, at the right cost, and at the right time. SCM commences with demand management when, during the strategic planning phase that aims to determine the functions and goals of the entity, the goods and services are identified, budgeted for, and programmed. Such management includes a detailed analysis of the goods and services required, following the best-cost approach to obtain the goods and services involved. Acquisition management follows on from demand management, during which stage a 112

127 strategy is determined regarding how to approach the market, how to prepare detailed descriptions and specifications of what will be acquired, how bids are to be evaluated, and how recommendations are to be made. Logistics and disposal management form the later parts of this integrated system. The consideration of supply chain performance includes various issues that should be monitored and evaluated continuously, such as the achievement of goals, compliance with norms and standards, and the cost-efficiency of the process. This chapter covers the involvement of all officials in SCM; explains the institutional, policy and governance provisions for SCM; and points out legislation impacting on SCM. In addition to exploring SCM as a process, it provides a closer look at competitive bidding. Finally, contemporary issues relating to SCM are highlighted Where the individual municipal official fits into the picture Although the SCM unit manages all the procurement procedures involved to ensure the implementation of the IDP, as will be discussed in a following section, the SCM process is not confined to the unit that is responsible for procurement, but permeates all the planning and implementation processes throughout the municipality. The project managers in each line function department need to interact with this unit during all phases of the procurement process, after which they are required to implement sound project and contract management processes to ensure that the service delivery does indeed take place. The interaction starts with demand management, which, as has previously been stated, is the beginning of the supply chain, where the following actions take place: The conducting of a needs assessment ensures that goods or services are acquired in order to deliver the agreed service. Specifications are precisely determined. Requirements are linked to the budget, and the supplying industry is analysed. This phase brings the supply chain practitioner close to the end user, to ensure that value for money is achieved. As mentioned above, the linking of demand management to the budget connects the SCM to the strategic planning, because the IDP informs key performance areas, programmes, operations, projects and activities, and the budget process that, amongst other contributors to the mix, determine what resources must be obtained. The end user provides the activity know-how to inform the budget about the resources to be obtained. In terms of National Treasury MFMA Circular No. 62, all user departments are required to submit their procurement plans to the head SCM in their municipality or municipal entity, to improve the planning and management of resources. s of municipalities may then, upon request, make available to the relevant treasury a procurement plan containing all planned procurement for the financial year, in respect of the procurement of goods, services, and infrastructure projects that exceed the set threshold per case. National Treasury MFMA Circular No. 62, Annexure A advises that demand management must be coordinated by the SCM officials of the institution, in consultation with the end users. Such coordination includes performing a detailed analysis of the goods, works or services required, such as determining the scope of the work to be executed; estimating the amount of time that is needed to complete the project; and establishing what material, resources, and equipment are required to execute the project. 113

128 The outcome of the above-mentioned activity should be a detailed planning document that outlines what goods, works or services should be procured, the manner in which they should be procured, as well as the timelines for executing the procurement functions. Acquisition management also calls for cooperation between the SCM unit staff and the line managers as end users. Such issues as the manner in which the market will be approached, and what evaluation criteria should be used for the selection of the successful bidder, can only be decided upon with this kind of cooperation. The end users must determine the time of use of goods and services, and schedule acquisitions to make provision both for lead time and for risk of delays. Logistics management includes contract management, in terms of which the end user plays an indispensable role (see Chapter 13). The end users should also provide input into the consideration to be given to obsolescence planning, as an element of disposal management. For the above reasons, all officials are required to have a strategic SCM mindset, whereby they consider the goods that they use not only in terms of the immediate demand for them, but also in terms of a bigger set of considerations, to ensure that the municipality will enjoy maximal life cycle benefits from what is procured Institutional arrangements and policy provisions for SCM The SCM unit In terms of sections 79, 82 and 106 of the MFMA, SCM units are required to be established in all municipalities and municipal entities, and must operate under the CFO. Such a unit must be adequately staffed with people who comply with the requirements of the minimum competency levels or, when appointed, must be able to achieve such competency levels within a predetermined period of time. This unit effectively manages all the procurement procedures, to ensure implementation of the IDP. The project managers in each line function department need to interact with this unit during all phases of the procurement process. They then have to implement sound project and contract management processes, to ensure that the required service delivery takes place The SCM policy The SCM must be implemented in accordance with the council-approved SCM policy, which is drafted in accordance with the prevailing legislation and related regulations. While this policy addresses the SCM processes, it must also include the Code of Ethical Standards for officials and other role-players in the SCM system. As the legislation and the regulations can change, as can other related policies, this policy should be reviewed on an annual basis, as part of the annual budget process. Delegations, in writing, should be in accordance with the SCM policy provisions. The SCM policy must describe effective systems in sufficient detail, as set out in Table

129 Table 10: SCM systems System Demand management Brief description Effective demand management ensures that the resources of a municipality that are required to support the strategic and operational commitments are delivered at the correct time, at the right price, and at the right location, and that the quality and the quantity satisfy the needs of the municipality. Refer to MFMA Circular 62, Annexure A Guideline on the Implementation of Demand Management. Acquisition management Logistics management Disposal management Risk management Performance management Effective acquisition management ensures that all goods and services are procured in accordance with authorised processes only. Expenditure is incurred in terms of an approved budget. Generally, all procedures, processes and documentation, as well as the specification, evaluation and adjudication, are all in accordance with legislative requirements. Other aspects include: lists of accredited prospective providers; written or verbal quotations, and formal written price quotations; the process for competitive bids; the handling, opening and recording of bids; negotiations with preferred bidders; committee systems; the procurement of consultants; and the treatment of unsolicited bids. Effective logistics management ensures that minimum reorder levels for inventory are determined. In addition, such management ensures the maintenance of efficient procedures for: the placing of orders; the receiving and distributing of goods, storage and warehousing management; the expediting of orders; transport management; vendor performance; and maintenance and contract management. The process for the disposal, or letting, of assets, including those that are unserviceable, redundant and obsolete, must be spelt out in the SCM policy. Any SCM policy must ensure that potential risks in the SCM system are identified, considered and avoided. An effective internal monitoring system must be put in place to ensure that the SCM processes are being followed, and that the desired objectives are being achieved. At all times, the processes and procedures must ensure openness and transparency, in line with the Batho Pele principles. The SCM regulations set out a range of procurement processes, with the value of the transaction determining which process is followed. The two most important processes are: for transactions involving value between R and R , formal written price quotations are required; and for transactions involving value over R , competitive bids are required (using formal tenders, with tenders placed in a tender box). 115

130 Contractual conditions Contracts may enhance economic development by encouraging bids from SMMEs, or the minimum proportion of local content. The green agenda can be advanced through specifying green energy consumption, and minimum percentages of recycled materials. Any contract can also ensure that skills transfer takes place, by including mentoring and training in the specifications. All contracts must have the necessary provision in place to ensure that the intellectual property of any documentation, reports or graphics produced becomes the property of the municipality. Further requirements for contracts are contained in section 116 of the MFMA Governance of municipal SCM The accounting is responsible for the management of municipal expenditure, including that on SCM. He or she must take all reasonable steps to ensure that the SCM policy of the municipality is implemented in a way that is fair, equitable, transparent, competitive, and cost-effective (MFMA, sections 65 and 115). In terms of sections 79 and 81 of the MFMA, the accounting may delegate SCM duties to the CFO. The accounting must also take all reasonable steps to ensure that proper mechanisms and the separation of duties in the SCM system are in place, to minimise the likelihood of fraud, corruption, favouritism, and unfair and irregular practices (MFMA, section 115 (1) (b)). A committee system governs bidding. The committee system The MFMA provides for a committee system, in terms of which three committees must be established (without involving councillors), in accordance with the legislation (Regulations 26 28), and with the necessary delegations and terms of reference. The three committees are: the bid specification committee, which sets up the specifications of tenders; the bid evaluation committee, which evaluates the tenders received, and which makes a recommendation regarding the awarding of a tender; and the bid adjudication committee, which awards the tender, noting that if a tender other than the one recommended in the normal course of implementing the SCM policy is approved, then various parties must be advised in writing of the reasons for deviating from the recommendation. Once the contract is awarded, full project management procedures must be implemented, and the contract that is entered into must be carefully managed, to ensure that value for money is received for the spending of public funds Legislation and government policies that impact on SCM processes The section on SCM should not be read in isolation of other sections, such as section 33, which deals with long-term contracts, section 113, on unsolicited bids, and related sections dealing with interference by any person in the SCM processes. 116

131 Other policy issues relating to SCM In addition to the National Treasury s SCM policy discussed above, a broad range of other legislation, policies and regulations also influence SCM. Such influence necessitates alignment between the SCM and the broader government policies that impact on SCM activities. New legislation needs to be monitored continuously to see whether and how it impacts on the municipal SCM policy. Table 10 below provides a summary of legislation, policies and regulations to be considered in terms of SCM. Table 11: Legislation, policies and regulations to be considered in SCM Legislation Broad-Based Black Economic Empowerment Act No. 53 of 2003 Consumer Protection Act No. 68 of 2008 Competition Act No. 89 of 1998 National Small Business Act No. 102 of 1996 Anti-corruption Measures and Practices State Information Technology Agency (SITA) Act No. 88 of 1998, as amended by Act No. 38 of 2002 Trade policy Labour issues Issues to be considered in the legislation Specific reference must be made to Regulation 11, regarding auctions, when dealing with the procedures related to the disposal aspects of SCM. The Act regulates business practices, with the purpose of outlawing anticompetitive business practices (such as price-fixing and collusive bidding) between businesses, their supplier(s) and customers. The Act establishes the National Small Business Council (NSBC) and the Ntsika Enterprise Promotion Agency (Ntsika), whose main function is to enable small businesses to compete successfully within the economy. The Constitution and related financial management legislation emphasise the maintenance of high standards of ethics within public administration. Transparency and anti-corruption measures that strengthen the public sector s ability to combat corruption serve to protect employees when making disclosures against their employers. This Act makes provision for the SITA to assist municipalities and municipal entities with the acquisition of all IT-related goods and services. This arrangement requires the maintenance of a Service Level Agreement between the SITA and the municipality (or the municipal entity) that incorporates the payment to the SITA for services rendered to the municipality (or municipal entity); in either case, the accounting is accountable for maintaining the relationship involved. Government s commitment to trade liberalisation should be evident in its supply chain practices. Foreign companies should not be excluded from bidding for government contracts. s should ensure that suppliers/contractors comply with the prevailing provisions of the labour law, as the government subscribes to international best practice principles of equitable and fair labour practice. Suppliers, service suppliers, or contractors who do not comply with the country s labour standards should be designated non-preferred service providers. 117

132 Safety, health and environment PPPs New Partnership for Africa s Development (NEPAD) Proudly South African Minimum South African content Batho Pele A policy of zero tolerance should be adopted in terms of occupational health and safety standards. Occupational health and safety issues should be considered in relation to municipal employees, as well as in relation to the employees of contractors who are performing work on-site at any municipality/municipal entity. The applicable Treasury Regulations should be complied with when goods, works and/or services are procured by means of PPPs. SCM practices should strive to support the NEPAD objective of recognising global interdependence in respect of: production and demand; the protection of the environmental base that sustains the planet; reversal of the skills loss from the continent; and a global financial architecture that rewards good socio-economic management and global governance. The Department of Trade and Industry is a key sponsor and strategic partner of the Proudly South African campaign that encourages South African companies to promote locally produced products. The government s SCM should support this campaign if and when appropriate opportunities arise. A number of pronouncements have been made on the minimum South African content on certain items that are known to be imported. Always check these requirements before advertising the tender, to ensure that the specifications given are correct. At all times, the Batho Pele principles must be kept in mind. In SCM processes, the principles relating to openness and transparency, value for money, service delivery standards, and information must all be adhered to. Source: The Chief Financial Officer s Handbook for Municipalities. Other guidance can be obtained from the MFMA Circulars 2; 22; 25; 29; 33; 34; 40; 43; 46; 52; 53; 56; and 62 (as well as from subsequent Circulars providing further insights), which are made accessible through Some of these Circulars have been superseded by the Supply Chain Regulations, with which they must be read Municipal SCM processes Chapter 11 (in sections 110 to 120) of the MFMA contains the express provisions on SCM. All municipalities must develop, implement and regularly review their SCM policies. They must also ensure that the SCM processes are fair, equitable, transparent, competitive, and costeffective. In fact, the oversight requirements for SCM require that the accounting report, on a quarterly basis, to the mayor, in regard to the implementation of the SCM policy, as well as on an annual basis to the council. The council must also approve the SCM Policy, which should be reviewed on an annual basis. Figure 15 which has been taken from the CFO s handbook, depicts the different elements in the supply chain. 118

133 Note that the figure depicts a functional structure, and is not indicative of a staffing structure for SCM. Staffing for fulfilling the function is done at the discretion of the municipality. The framework that is outlined in the legislation covers a range of matters, from tender procedures and quotations, to auctions and other types of competitive bidding processes. It deals with screening processes and with the compulsory disclosure of conflict of interest. The framework is clear on measures for combating fraud, corruption, favouritism, and unfair and irregular practices. It also seeks to promote the ethical behaviour of officials, and other roleplayers, who are involved in SCM. In keeping with the financial governance concepts raised in the MFMA, councillors cannot oversee the SCM process and be involved in its implementation. Therefore, councillors may neither be a member of a tender committee, nor may they, in any way, take part in the tender process. Tender committees are appointed by, and are responsible to, the accounting. Such committees should be formed from among the senior officials of the municipality. The municipal manager, through the tender committee, will administer the SCM policy that is adopted by the council. Figure 15: SCM model Competitive bids Although the MFMA Municipal Supply Chain Regulations provide for unsolicited bids to be received outside a competitive bidding process, for very unique or exceptionally beneficial products or services, and prescribes what processes to follow, should such a bid be considered, such procurement is exceptional, and competitive bidding is the norm. Noncompliance to the prescribed bidding process, except under exceptional circumstances, must be considered and treated as misconduct Evaluation of competitive bids According to the prescripts of section 2 of the Preferential Procurement Policy Framework 119

134 Act (PPPFA) No. 5 of 2000, competitive bids must be evaluated in accordance with a preference points system. The bid documentation (containing the conditions set for the bid) should clearly specify: whether the bid will be evaluated in terms of functionality; the evaluation criteria for measuring the functionality concerned; the weight of each criterion; and the applicable values, as well as the minimum threshold for functionality. If unsolicited bids are to be considered by a municipality, a prescribed framework must be followed Acceptable bids A bid is regarded as acceptable if: it complies in all respects with the specification and conditions of the bid; the bidder has completed and signed all the prescribed bid forms to enable the principal to evaluate the submitted bid; the bidder has submitted the required tax clearance certificate, and other forms, as prescribed by the various Acts, and in the bid documentation; and the bidder has the necessary capacity and ability to execute the contract Assessment of bids The Preferential Procurement Regulations, 2011 pertaining to the PPPFA require that the evaluation of the competitive bids must be conducted in the two stages described below. During the first stage, functionality must be assessed in terms of the evaluation criteria, and in terms of the minimum threshold referred to above. A bid must be disqualified if it fails to meet the minimum threshold for functionality, as per the bid invitation. During the second stage, only the qualifying bids are evaluated in terms of the 80/20 or 90/10 preference points systems, with the 80/90 points being used for pricing only, and the 20/10 points being used for broad-based black economic empowerment (B-BBEE) status level of contribution. The 80/20 preference point system must be used for the acquisition of goods, works and/or services up to a Rand value of R1 million; whereas the 90/10 preference point system must be used for the acquisition of goods, works and/or services up to a Rand value above R1 million Prescripts of the Construction Industry Development Board (CIDB) In the case of bids relating to the construction industry, institutions are required to adhere to the prescripts of the CIDB, as prescribed in the Municipal Supply Chain Management Regulations, 2005, section 21 (a) (iii) Cancellation of tenders A tender can be cancelled if: due to changed circumstances, the need for the services, works or goods requested no longer exists; or the funds are no longer available to cover the total envisaged expenditure; or 120

135 no acceptable tenders are received. The cancellation of the tender must be published in the Government Tender Bulletin, or in the medium in which the original tender invitation was advertised Deviation from procurement processes The SCM policy of the municipality may allow for the accounting to procure goods or services outside the official procurement processes, but only in an emergency, or when there is only one provider, or for special kind of goods or services. These are, however, exceptional cases, and the accounting concerned must record the reasons for the deviation from the standard procurement processes. Said must report the deviation to the council, and include a note to such effect in the AFS Specialised SCM sourcing The specific SCM requirements for certain specialised services are briefly summarised in Table 11 below. Table 12: SCM requirements for specialised services Area of specialisation Procurement of banking services Procurement of ITrelated goods and services Procurement of goods and services under contracts secured by other organs of state Procurement of goods necessitating special safety arrangements Related Regulation Regulation 30 states that: the contract must not be for longer than 5 years; it must be procured through competitive bids; and it must commence at least 9 months before the end of an existing contract, with a minimum of 60 days between it being advertised and the closing of the bid/tender submissions. Regulation 31 requires that the SCM policy may allow the accounting to request the SITA to assist the municipality, or the municipal entity, with the acquisition of IT-related goods or services through a competitive bidding process. Regulation 32 stipulates that the SCM policy may allow the accounting to procure goods or services for the municipality, or municipal entity, under a contract that is secured by another organ of state, in certain circumstances. In accordance with Regulation 33, an SCM policy must restrict the acquisition and storage of goods in bulk (other than water) that necessitate the making of special safety arrangements, including those that are made in relation to gases and fuel Contemporary issues in municipal SCM According to AGSA, continued non-adherence to SCM legislation defers restoration of the public s confidence in the ability of state officials to systematically take care of their interests and deprives citizens of much-needed services (AGSA, 2012:69). The following shortcomings were reported in the 2010/11 local government audit outcomes: Inadequate record keeping and document management resulted in insufficient appropriate audit evidence in compliance with the requirements of the SCM legislation, which could not be provided. 121

136 Certain awards that were made to employees and councillors, or to other state officials, could have been prevented and detected by means of implementing basic controls, including by means of obtaining declarations of interest from the parties concerned. Awards had been made to close family members of employees and councillors. Awards to close family members are not prohibited, but the non-disclosure of such in the financial statements, and the failure by the officials or the suppliers to declare their interest, indicated that the relationships had been concealed. Uncompetitive or unfair procurement processes that did not comply with the MFMA and SCM Regulations were followed in some cases. The SCM controls practised were inadequate on occasion. The above-mentioned shortcomings indicate that many of the intentions of a SCM system have not yet been realised. It is the responsibility of each and every official to contribute towards the improvement of said situation Summary SCM is a much wider concept and abides by a much wider set of practices than does procurement. Procurement largely deals only with the demand and acquisition aspects of SCM. The South African government has adopted a complete system of SCM (as approved by Cabinet in 2003) that accommodates demand management, acquisition management, logistics management, and even disposal management, in accordance with international best practice. These are managed in accordance with normal risk management and performance management procedures. The contents of this chapter covered the involvement of all officials in SCM, served to explain the institutional, policy and governance provisions for SCM, and pointed out legislation impacting on SCM. SCM was also explored as a process, and competitive bidding was considered in some detail. Finally, contemporary issues relating to SCM were highlighted. While the SCM unit must, according to legislation, fall within the ambit of the Finance Department, the SCM process is not confined to the unit that is responsible for procurement, but permeates all the planning and implementation processes throughout the municipality. Contemporary issues highlighted by AGSA have shown that many of the intentions of a SCM system are not yet realised in numerous municipalities. In this light, it is the responsibility of each and every official to contribute towards improving the existing situation. 122

137 Chapter 12: Alternative service delivery mechanisms Learning outcomes After completing this chapter, you should be able to explain: what your own involvement may be in determining whether an alternative service delivery mechanism should be considered; the reasons for municipal entities as service delivery mechanism; the pros and cons of PPPs as municipal service delivery mechanism; the principles underlying PPPs in municipal service delivery; and matters to consider in the use of PPPs in municipal service delivery Key concepts Public private partnerships (PPPs) A private party performs a municipal function for, or on behalf of, a municipality, or acquires the management, or the use, of municipal property for its own commercial purposes. It might also perform a municipal function for, or on behalf of, a municipality, and acquire the management, or use of, municipal property for its own commercial purposes. Engagement in such a partnership also means that the private party involved assumes risk, and receives benefit Scene-setting questions 1. Why do you think municipal entities should be considered as an alternative service delivery mechanism? 2. What would you do to decide whether a service in your area of responsibility should be delivered by means of a PPP? 3. What would be the benefits of being part of a PPP in your area of responsibility? Introduction Municipalities face major service delivery challenges. Although significant investment has been made in infrastructure and service delivery programmes by national government grantfunded programmes, as well as in independent service delivery programmes funded from own funds, or from borrowed funds, at municipal level, substantial backlogs still remain. With the global economic situation affecting the ability of municipalities to service funds raised in the capital market, and with the costs of the maintenance of the initial infrastructure programmes being funded from grants now taking their toll on operating funds, municipalities need to leverage every opportunity to address the remaining backlogs, while limiting the impact of such on service tariffs. Considering new options for maintaining fiscal prudence, while providing economic, efficient and effective service delivery when addressing backlogs in essential public services, is vital. Enabling legislation, in the form of the Municipal Systems Act, as supported by the MFMA, allows for a number of different mechanisms, whereby municipalities may provide municipal services within their area, or part of area, of jurisdiction. These service delivery mechanisms may include internal municipal mechanisms, such as a department, or any other administrative or business unit 123

138 that operates within the municipal administration, and under the control of the municipal council. External service delivery mechanisms can also be considered, once completing the necessary legislative investigation into service delivery options (see sections 77 and 78 of the Systems Act). These external mechanisms include the use of a municipal entity, another municipality or traditional authority, an organ of state, or the outsourcing of the service to a community-based or non-governmental organisation, or to some other legally competent business entity. If the legal process identifies the potential of providing a service through a municipal entity, then section 84 of the MFMA also has to be followed. Other external service provision mechanisms are pursued through the SCM provisions of the municipality. No matter what external service provision mechanism is used, the municipality remains the service authority for that service. Therefore, the municipality retains the power to regulate the provision of the service by the service provider. The relationship with the service provider is managed through a service delivery agreement that must comply with the minimal requirements regarding the content, as set out in section 81 of the Systems Act. The contents of said section must be consulted together with the community, and they must be made available on the municipal website. In this chapter, the involvement of individual officials in deciding on service delivery options is discussed, and the reasons for municipal entities are considered. The pros and cons of engaging in PPPs are also explored. The principles underlying PPPs in terms of municipal services are discussed, ending in considering matters that have to do with the use of PPPs for municipal service delivery Where the individual municipal official fits into the picture Each senior manager of a municipality, and each official of a municipality exercising financial management responsibilities, must take all reasonable steps within their respective areas of responsibility to ensure, amongst others, that the financial and the other resources of the municipality are utilised effectively, efficiently, economically, and transparently (MFMA, section 78 (1) (b)). What you should consider in this respect is how services must be delivered. Apart from various internal options, you could consider forms of contracting out. Not only municipalities, but any business entrepreneur at some stage usually has to decide whether to make or buy something. Manufacturers would tend to have to ask themselves the following questions regarding the way that they do business: Would it be better value for money to make that part, or to buy it from another manufacturer? Would it be more affordable to make, or to buy, the component? Would manufacturing risks be likely to be less with making, or with buying, the component? Would it be more profitable to make or to buy it (for example, would providing economy of scale benefits will lower the price of the product or service, and increase the demand for it)? The above questions are tactical rather than strategic. During strategic planning, what decisions are taken regarding products or services to be provided, at what levels of standards and accessibility, and when these are to be phased in and sequenced is of importance. 124

139 It stands to reason that such tactical decisions are best informed by tactical managers. Such managers have detailed knowledge about the nature of the products or services under consideration. If they combine their detailed knowledge with the skills of financial analysis, such as cost effectiveness analysis, they can consider the life cycle costs, including externality costs and non-quantifiable secondary benefits of various options, to provide the same product or service. They can also analyse the risks involved in each option, and thereby make informed recommendations about the best option that is available. A municipal entity, or a PPP, might be considered as a possible way of delivering services, or part of services, as is provided for in sections 84 and 120 of the MFMA, respectively. However, as is indicated in these sections of the MFMA, before a decision is taken, you need to undertake a very thorough analysis to be able to answer the above questions. In addition, the framework of compliance to legislation, policies and reporting must also be considered. Such decision-making requires the input of all managers, in their respective areas of responsibility Municipal entities as service delivery mechanism A municipal entity should effectively provide municipal services. It exists by showing that it is able to provide such services in a way that achieves the strategic objective(s) of the municipality, and in a way that benefits the local community. The entity must, therefore, account for such service provision in accordance with the requirements of applicable local government legislation. Most of the provisions that are related to municipal entities are outlined in Chapter 10 of the MFMA, as well as in parts 5, 6 and 7 of Chapter 8A of the Municipal Systems Act. The budget of the municipal entity must be consolidated with the municipal budget. The entity must submit monthly financial performance reports to the parent entity. The entity must, each quarter, report performance, in terms of the key performance objectives, to the council. The AFSs must be consolidated into the parent municipality s financial statements. The Municipal Systems Act and the MFMA, as well as the related Regulations, stipulate, among others, various processes and procedures that must be complied with by both the municipal entity and the parent municipality to maintain legislative compliance: the appointment of relevant competent staff, in accordance with the minimum competency requirements, and the related training and experience requirements; the adoption of the accounting standards that are applicable to local government for the preparation of the AFSs of the municipal entity; the maintenance of a SCM policy that aligns with the SCM policy adopted by the municipal council, for implementation by the municipal administration; the development, implementation and maintenance of financial policies, internal controls and risk management; and the related reporting procedures to ensure transparent reporting, and to minimise the potential for fraud, theft and corruption. The Code of Conduct for Councillors, as contained in Schedule 1 of the Municipal Systems Act, with the relevant changes, as outlined in section 93L, applies to the directors of a municipal entity, while the Code of Conduct for Municipal Staff, as contained in Schedule 2, applies, with the relevant changes, to the staff of the municipal entity. 125

140 A municipal entity may take on the form of a private company (which is considered to be a state-owned company (SOC), in terms of the Companies Act No. 71 of 2008), or the form of a service utility. The private company must be established by one or more municipalities, and the joint holding by the municipalities must constitute the effective vesting of control in one or more of the municipalities, which explains why the company is then known as a SOC. Any SOC must comply with the requirements of the Companies Act, as well as with those of the MFMA. Where there is a conflict between the requirements of the two Acts, those of the latter Act shall prevail. A service utility may be established by a single municipality, or a multi-jurisdictional service utility may be established, where two or more municipalities have concluded a written agreement to provide services in this manner. Any service utility is established by means of the municipal council(s) passing a by-law that will provide for, inter alia: the purpose for which the service utility is established; the powers and the duties of the service utility; the budgetary and funding arrangements; details regarding the board of directors, and all procedures regarding the appointment and the recall of directors; the procedures to be followed regarding the acquisition of infrastructure, goods, services, supplies, and equipment by the service utility; and the appointment of staff, as well as arrangements regarding the secondment or transfer of municipal staff to the service utility by the municipality/ies concerned. The above is to be done in accordance with the requirements of applicable labour legislation and all other matters that are necessary for the proposed functioning of the service utility. Municipal entities may only perform services that are in keeping with the functions and powers that those that are in the local government sphere are competent to perform. All the activities of the municipal entity must be limited in line with the above. Responsibility for the operations of the municipal entity lies with: a board of directors, exercising their fiduciary responsibilities in terms of the requirements of the Companies Act, the Systems Act and common law; and the CEO of the municipal entity, who is recognised as the accounting, in terms of the MFMA. The official lines of communication between a municipal entity and the parent municipality(s) are between the chairperson of the board of directors and the mayor of the municipality. The parent municipality must exercise any shareholder, statutory, contractual or other rights and powers that it may have with respect to the entity. This is in order to ensure that there is full legislative compliance. It is also to ensure that the municipal entity is both managed responsibly and transparently, and that it meets its statutory and contractual obligations, as well as any other obligations or responsibilities that it may have. The parent municipality must establish, by agreement, a set of annual performance objectives for the entity. The set of objectives must be included in the annual business plan for the entity that is submitted every year during the municipal budgeting process. The progress that is made must be monitored against these objectives and indicators. If the 126

141 performance is found to be unsatisfactory, or there is non-compliance, the parent municipality can determine to liquidate or to disestablish the entity concerned. In order to ensure the ongoing monitoring of the activities of the entity, the Systems Act authorises the parent municipal council to appoint a councillor or official, or both, to represent it as a non-participating observer at meetings of the board of directors. The councillor and/or official also has to exercise the parent municipality s shareholder rights and responsibilities, as mandated, at any special or general meeting of shareholders. A person is barred from serving on the board of any municipal entity if he/she: holds office as a councillor with any municipality; is a member of the National Assembly or of the provincial legislature; is a permanent delegate of the National Council of Provinces; or is an official of the parent municipality of the municipal entity. In addition, anybody who is convicted of any offence, and who is sentenced to imprisonment without the option of a fine and who, within a period of 5 years since the completion of the sentence; anybody who is declared by a court to be of unsound mind; or to be an unrehabilitated insolvent, is not eligible to serve as a director of a municipal entity Principles underlying PPPs in municipal service delivery As said before, the Municipal Systems Act provides for various service delivery mechanisms. Apart from the possibility of operating according to a service delivery agreement (as outlined in section 81 of the Systems Act), other mechanisms for service delivery include entering into a PPP Defining a PPP A PPP is in no way similar to privatisation or commercialisation. A privatised business is one that was formerly owned by the public sector, and which is now owned by the private sector. Municipal PPPs need to satisfy all three of the following requirements to qualify as a PPP: Commercial purposes: A private party performs a municipal function for, or on behalf of, a municipality, or it acquires the management, or the use of, municipal property for its own commercial purposes. An alternative option is that it both performs a municipal function for, or on behalf of, a municipality, and acquires the management, or the use of, municipal property for its own commercial purposes. Assumption of risk: The private party assumes substantial financial, technical and operational risks in connection with the performance of the municipal function, or the management, or use of, the municipal property, or both. Receipt of benefit: The private party receives a benefit from performing the municipal function, or from utilising the municipal property, or from doing both. 127

142 Correctly structured PPPs are a useful service delivery option from both an operational and a strategic perspective. However, whatever the PPP type, structure, payment mechanism or source of funding, all municipal PPPs have to pass three strict tests in terms of the PPP Regulations, namely the tests of: affordability; value for money; and substantial transfer of technical, operational and financial risk. PPPs fall under the procurement reforms, as the full SCM process must be followed, along with other legislated processes, before a PPP agreement can be entered into. In this way, their establishment differs from that of a municipal entity, or from any of the internal business mechanisms that can also be used for the delivery of municipal services PPP-related legislation Whereas national PPPs are governed by Treasury Regulation 16, municipal PPPs are governed by: the Municipal Systems Act; the MFMA; the Municipal PPP Regulations; the Municipal Supply Chain Regulations; and the Municipal Service Delivery and PPP Guidelines. The legislative framework, as given in the Municipal Systems Act, as amended, and the provisions of the MFMA that deal with PPPs (section 120) should be read together for a full understanding of this alternative service delivery mechanism, and the processes that must be followed in accordance with them. As noted above, section 76 of the Municipal Systems Act describes both the internal and the external mechanisms for municipal service provision. Whenever a municipality considers reviewing a service delivery mechanism, and the triggers, as outlined in section 77 of the Municipal Systems Act, apply, a full assessment of the current and potential options for service delivery, and their impact on the municipal and staffing structure must be undertaken. Section 78 of the Systems Act contains the requirements for these assessments. The MFMA prescribes that PPPs must provide value for money, present an appropriate allocation of risks between the contracting parties, and be affordable in terms of both current and projected budget provisions. As well as expanding on section 120 of the MFMA, the Regulations concerned also require municipalities to conduct feasibility studies before concluding PPPs. The National Treasury must also assist with carrying out and assessing such studies. The accounting in each municipality must formally solicit the views and recommendations of the National Treasury, along with those of the other relevant departments, once the feasibility study has been completed. International and recent South African experience has shown that the private sector option needs to be supported by means of sound regulatory practices, to ensure that potential PPPs are affordable. The Service Delivery and PPP Guidelines combine in one document the requirements of the Systems Act and the MFMA, harmonising them, and providing sufficient detail to explain many of their general provisions. Where the Acts do not address a specific issue, guidance is provided. 128

143 12.8. Pros and cons of a PPP The main reason why a PPP might be considered as a viable form of service delivery is that a private party can sometimes deliver better value for money, whereas the risks that are associated with the service provision are also taken on by the private party. Such an option might, therefore, be seen as more viable and affordable for the municipality concerned. Operationally, the benefits of PPPs include: efficiency gains; output focus; economies generated from integrating the design, building, financing and operation of the assets; the innovative use of assets; managerial expertise; and better project identification than might otherwise be achieved. The benefits to be obtained from entering into a PPP can result in some combination of better and/or more services for the same price, and savings, which can be used for other services, or for investment elsewhere. Strategically, partnership contracts enhance accountability by clarifying the responsibilities involved, and by focusing on the key deliverables of a service. PPPs that are committed to genuine economic empowerment are long-term projects, typically involving at least three critical empowerment areas: equity participation in projects over a significant period; the use of SMMEs in construction; and operational activities, as well as the meaningful transfer of financial and technical skills. Each PPP has the advantage of sustained government expenditure over the life of the project, meaning that, by means of stringent financial penalty systems, the government can enforce contractual BEE provisions. Similarly, incentives for exceeding empowerment objectives can be put in place through a variety of financial and contractual mechanisms. However, PPPs are not only beneficial. According to Minnie (2011:13), the real success of any particular PPP is rarely investigated in depth, and... comparisons between different PPPs in terms of their success are limited. This is especially true in South Africa. Despite the positive light in which PPPs are regarded in many countries, there is considerable resistance against and criticism of PPPs. Organized labour see PPPs as disguised privatization... PPPs face more than economic policy challenges. Cultural and institutional differences between the public and private domain and, in addition, the difficulties of bringing the two together, constitute a serious threat to successful PPP. Making a PPP work demands careful management of the critical success factors involved Matters to consider when using PPPs Municipalities need to enhance their capacity to use PPPs in a sound and effective manner. Ensuring effective service delivery through PPP arrangements typically requires additional functional capacity in financial, technical and managerial areas that are not normally associated with the operations of a municipality. Moreover, while it could be argued that government officials have developed skills as contract managers in the simpler forms of PPP arrangements, such as service and basic management contracts, this does not apply to more complex PPP contracts. A balanced approach is, therefore, required both to build the required capacity, and to reduce the demand on capacity, by adopting, for example, 129

144 measures that simplify PPP arrangements. National Treasury has a fully fledged PPP unit that can assist municipalities with implementing a PPP. No municipal entity may initiate, procure or enter into a PPP agreement on its own, or on behalf of its parent municipality. However, it may be a party to a PPP agreement begun, procured and entered into by its parent municipality Summary Both municipal entities and PPPs are integral mechanisms in the government s overall strategy for the provision of public services and public infrastructure across all sectors. This does not imply that these mechanisms are either always, or automatically, the preferred option for improving the efficiency of service delivery. Rather, the mechanisms are on a par among a range of possible service delivery options that are available at all spheres of government. PPPs are certainly neither an easy procurement option for the public sector, nor do they offer a universal solution. However, they do provide a flexible framework, within which the skills and resources of the private sector can be mobilised to provide betterquality, sustainable, and more cost-effective public services, given the right circumstances, than do certain other alternatives. The circumstances concerned relate to affordability, value for money, and the substantial transfer of technical, operational and financial risk. In particular, PPPs may offer particular benefits for BBBEEs. In order to succeed, municipalities need to enhance their capacity to use PPPs in a sound and effective manner. The involvement of individual officials in deciding on service delivery options is vital, and the pros and cons of using PPPs to deliver a particular service in a particular setting must be carefully investigated. 130

145 Chapter 13: Contract management Learning outcomes After completing this chapter, you should be able to explain: contract management as a responsibility of all officials; contract management in the municipal context; and contemporary issues in contract management Key concepts Contract A contract is an agreement (which is either explicit or implied) that is legally binding on the two or more parties to the terms of the agreement. Contract management Such management is the systematic process of managing contract planning, creation, collaboration, execution, administration, monitoring and evaluation, and closeout, for maximising financial and operational performance and minimising risk Scene-setting questions 1. What is your involvement in the contract management of any municipal contract? 2. What are the provisions for contract management in your municipality? Comment on the benefits of efficient and effective contract management Introduction The preceding chapters have dealt with such topics as project management, SCM and PPP. Invariably, these processes require contracting, which, in turn, requires managing. The process starts with awarding a contract, as was set out in Chapter 11 of this learner guide. Once a contract has been awarded, whether it is a contract entered into for the supply of goods or services, a construction contract, or a PPP agreement, it must be managed. As the custodian of public funds, the municipality must ensure that the correct goods or services are provided against the prices tendered, or that the correct quality of construction takes place, and that all the required actions take place within the set, or requisite, time frames. In this chapter, we discuss the role of the individual municipality in contract management; explore contract management in the municipal context; and discuss contemporary issues in municipal contract management Where the individual municipal official fits into the picture The preceding discussion in this chapter, as well is in Chapters 11 and 12 of this learner guide, indicate that contract management is supported by experts in the SCM unit and on the bid committees. Certain specialised services also require other specialist input, including legal services. Other officials are also responsible in terms of contract management. Section 78 of the MFMA determines that each official of a municipality exercising financial management responsibilities must take all reasonable steps within their respective areas of responsibility to ensure (amongst others) that: 131

146 the financial and other resources of the municipality are utilised effectively, efficiently, economically, and transparently; any unauthorised, irregular, or fruitless and wasteful expenditure, as well as any other losses are prevented; and the provisions of the MFMA (including those relating to contract management) are complied with, to the extent that they are applicable to the official concerned. The above has a direct bearing on contract management as the responsibility of all officials. The specialists in contract management mentioned above are not necessarily specialists in the products or services that are obtained through contracting, although the end-user officials are. The latter should, therefore, be involved during the full life cycle of contracts. Only then can contracts contribute towards the effective, efficient, economical, and transparent use of financial resources in the areas of responsibility of all officials. Top management must create a culture of precise and meticulous contract management, as indicated in the next section. Meticulous contract management is part of performance management. Performance contracts with internal staff are contracts that are aimed at ensuring that all levels of management contribute to the performance of the organisation as a whole. With each delegation or assignment of responsibility comes a need for control, in order to fulfil accountability requirements. This not only holds true for internal performance agreements, but it also is equally so in the case of the use of external service providers. Section 116 of the MFMA requires that the performance of a contract must be monitored on a monthly basis, with the day-to-day management of the contract being dealt with by the municipal administration. It must be noted that, while a project or contract manager may document, and agree on, any changes or amendments that may arise during the contract implementation/execution, such changes have to be tabled at council. In addition, the local community has to be given reasonable notice of the intention to amend a contract, and has to have been offered the opportunity to submit representations on the proposed changes. The accounting must report to the council on a regular basis regarding the management of the contracts or agreements, and the performance of the contractor. Attention should be paid to MFMA Circular 56 regarding the Database of Restricted Suppliers Contract management in the municipal context Contract management, in general, includes negotiating, and ensuring compliance with, the terms and conditions in contracts, as well as documenting and agreeing on any changes or amendments that might arise during its implementation or execution. In a private sector setting, contract management would certainly strongly emphasise the first three stages in the life cycle figure (Figure 16), which include negotiating the terms and conditions in contracts. This also holds true for the PPP process, in relation to the negotiation of the terms and conditions of the partnership, as well as in relation to the submission that is made to the council for approval to enter into the contract. The accounting must be authorised to sign the contract, in the form in which it is presented to council. 132

147 However, in the municipal context, most contracts that are entered into by way of the SCM process are set contracts that have already been published with the tender specifications. Contract management does not include negotiating the terms and conditions in the contracts. The administrative aspect of the contract life cycle diagram (see Figure 16) is the effective contract management part of project management, which is required in the municipal context. Administration, in such terms, includes: checking compliance with the terms and conditions, as stated in the contract; tracking deliverables against contract specifications and quality standards; ensuring adherence to rates and the collection of discounts and rebates; verifying invoices or certificates; and ensuring that the end deliverable is as per the original specification, within the time frame and the budget, as set out in the tender documentation and agreed to by the bid adjudication committee. It is essential that contract management should insist upon obtaining full compliance with the terms and conditions of the contract, to ensure that best value for money is achieved with the use of public funds. Effective contract management should result in the maximising of financial and operational performance, and the minimising of risk. standards and legislative requirements require all business ventures to establish, and to document business controls, to ensure improved financial tracking and reporting, in order to ensure compliance, and to facilitate the auditing process. Some companies and municipalities might be turning to IT solutions, or to e-sourcing tools, that will allow them to gather and to track all of the relevant information used in the e-sourcing process. The functions involved include keeping electronic copies of agreements together with key deliverables, and maintaining the standards of deliverables, so that the tracking and enforcement of agreements can easily be facilitated by the project manager concerned. However, not all municipalities can handle an electronic solution at the current moment, and such electronic handling is not necessary in many instances, as long as a satisfactory contract management process is in place. Figure 16 sets out the contract life cycle. Any such process must be managed to ensure that the following basic elements, among others, are in place: a template repository, including: the draft basic contracts and standard clauses (noting the CIDB requirements); draft compliance notices; warnings and termination notices; and any other templates that are considered to be necessary to ensure standardisation; a collaborative contract creation and workflow process (which is usually facilitated in the bid specification process, when the tender specifications and the contractual terms of the bid are determined and signed off by a legal practitioner), which documents the development of new contracts from draft contracts and standard clauses, and which allows for others to use the new standard clauses approved by the legal services; a centralised and searchable contract repository of contracts entered into; 133

148 a monitoring and alerting process against milestones that are stipulated in the contracts, including contract expirations, automatic renewals, required approvals, and detected deviations, pending tasks, incomplete information, and invoicing/payment cycles, which are checked to see that the information is as per the contract deliverables, and provided at the contracted rates; reporting and analytical tools; delegations, clear roles and responsibilities, permissions, and security requirements; and closeout reporting requirements. PLANNING CREATION COLLABORATION EXECUTION Consideration of contracts during the planning and budgeting process. These processes will identify the need for contract creation and when this must happen to ensure delivery can occur as approved in the budget The contract author decides on the most appropriate wording to give effect to the intended outputs and prepares the first draft of the contract documentation The drafting and negotiating process including internal and external reviews to ensure that the contract will give legal effect to the requirements of all parties to the contract The act of signing the contract, making it legally enforceable and formalising the terms and conditions agreed to ADMINISTRATION CLOSEOUT / RENEWAL Monitoring the delivery under the contract to ensure that it achieves its original objectives and effecting any necessary changes to the contract Necessary actions to end or renew the agreement and associated performance review Figure 16: The contract life cycle (Source: CFO s Handbook) A contract should always be: in a written format; a legally-binding agreement between the parties identified in the agreement; between parties that are legally competent to enter into such an agreement; between parties that accept the terms of the claimed contract, and that show this agreement through signing the agreement or contract; and managed to ensure the fulfilment of the terms and conditions outlined in the agreement Types of contracts include, but are not limited to: purchasing agreements; sales agreements; service agreements (external and internal); insurance policies; 134

149 warranties; loans; leases; non-disclosure agreements; and collaboration agreements. Some types of contracts require more management intervention than do others Benefits of effective contract management systems Besides the legislative requirement to monitor the performance of the contractor against the contract, the meticulous management of contracts has also proved to be effective. Research in the United States and in Europe has shown that implementing effective contract management systems has resulted in dramatic improvements in: compliance management; material/service and administrative costs; the elimination of evergreen contracts; and the standardisation of procedures and terms. All of these improvements indicate that contract management systems are essential parts of the systems of effective, efficient and transparent control that are referred to in sections 62 and 78 of the MFMA. Section 116 (2) of the MFMA determines that the accounting must: take all reasonable steps to ensure that a contract is properly enforced; monitor, on a monthly basis, the performance of the contractor; establish capacity in the municipal administration to do so; and regularly report to council. The above-mentioned requirements necessitate the keeping of a contracts register. Such a register provides a summary of such contract information as: the title; the number; the date signed; the details of the contractor; the contract value; the name of the contract owner (i.e. the end user) and of the contract manager; and updated data on contract progress, progress payments, variances, and amendments. The register forms part of enterprise contract management. Such management involves managing the contract portfolio, as well as every contract in the municipality throughout the contract life cycle, with a view to maximising value for money through: identifying and maximising opportunities; maximising revenue; minimising costs through efficient operations; minimising risk; ensuring compliance with policies, procedures, Regulations, and terms and conditions; and monitoring and evaluating the performance of parties to the contract Benefits of good contract management The benefits of good contract management are that it: optimises the delivery of large capital projects; specifies management techniques and processes for all types of contracts; encourages the achievement of value for money and continuous improvement; identifies savings and additional revenue opportunities; 135

150 enhances risk management; provides clear and complete records for audit; and encourages communication between all parties to contracts. The failure to implement adequate contract management could result in: paying for goods and services that do not meet the standards set out in the contract; significantly higher costs; revenue collection delays; customer and supplier dissatisfaction; overcharges by the suppliers, or underpayments by the buyers; erroneous payments; service delivery issues; missed opportunities to save; failed compliance with regulatory provisions; increased risk; complications associated with audits; the accidental renewal of goods or services; the lack of verification of timeliness and the accuracy of payments, receipts or deliverables; the lack of monitoring of the use of discounts or rebates; the lack of monitoring of contract management processes and mechanisms; the lack of monitoring of supplier performance across contracts; and the lack of enforcement in regard to non-performance, or the violation of Regulations, or of other terms and conditions Contemporary issues in contract management Shortcomings in municipal contract management The Consolidated General Report on the Audit Outcomes of Local Government 2010/11 (AGSA, 2012:69) identified the following five most prevalent findings on inadequate contract management as part of SCM: No written contract / contract not signed by delegated official: Goods and services were received, and payments were made to suppliers without a written, signed contract being in place. Inadequate contract performance measures and monitoring: The measures applied in monitoring the performance of contractors were insufficient to ensure that the contractors delivered in accordance with the contract. Contracts amended or extended reasons not tabled in council: In order to enable accountability and oversight, the MFMA prescribes that the reasons for amendment, or for extension, of contracts should be tabled in council. Instances were identified where the council was not informed. Contracts extended or renewed to circumvent competitive bidding processes: It is normal business practice to extend, or to renew, contracts where circumstances 136

151 warrant it. However, at some auditees such extension or renewal was done to the extent that competitive bidding processes were being circumvented, resulting in a procurement practice that was unfair, uncompetitive, or not transparent. Performance of contracts not monitored on a monthly basis: The performance of the contractor in terms of the contract or agreement was not monitored on a monthly basis, as was required by the MFMA. Other findings: Contracts were not prepared in accordance with the general conditions of contract (as prescribed by National Treasury). The contracts did not stipulate provisions for termination in the case of non-compliance. According to the AGSA (2012:69), shortcomings in the manner in which contracts are managed result in delays, wastage, and fruitless expenditure, which, in turn, impact directly on service delivery to the communities served by the municipalities. In mitigating these shortcomings, the AGSA suggests that non-compliance should have consequences and that accountability must be enforced at all levels. The political and administrative leadership should make a conscious decision to take action against transgressors Summary The municipal context makes its own unique demands on contracting and on contract management. The nature of contracts, the contracting process, and contract management and control is different from that of private sector contracts. As contracting forms part of SCM and project management, contract management can be viewed as not only the responsibility of contract management specialists, but of all officials. Specialists in contract management are not necessarily specialists in the products or services that are obtained through contracting, but the end user officials are. They should, therefore, be involved during the full life cycle of contracts, to ensure that the contracts contribute towards the effective, efficient, economical, and transparent use of financial resources in their areas of responsibility. Adequate evidence exists to provide proof that meticulous contract management brings about better efficiency in organisations. The opposite is also true: Shortcomings in the manner in which contracts are managed result in delays, wastage, and fruitless expenditure, which in turn impact directly on service delivery to the communities served by municipalities. 137

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153 PART FIVE REPORTING AND CONTROL To show understanding of municipal reporting and control, the participants must be able to explain the functioning of: in-year reporting; MFMA performance monitoring; annual reports; risk management; internal control processes, audits and audit committees; external audit frameworks; and International Audit Standards (IAS). SERVICE DELIVERY ETHOS Projects and operations for delivering services 14: In-year reporting 15: MFMA performance monitoring 16: Annual reports 17: Risk management 18: Internal control, audits & audit committees 19: external audit as consolidated and independent finding on performance Figure 17: Municipal reporting and control 139

154 Chapter 14: In-year reporting Learning outcomes After completing this chapter, you should be able to explain: in-year reporting in the municipal context; your own obligations in reporting; and contemporary issues in reporting, and possible ways of mitigating the challenges involved Key concepts In-year reporting A framework for collecting data, whereby actual revenue and expenditure and service delivery performance are recorded, and variances with projected revenue and expenditure and service delivery performance are reported on a monthly, quarterly and semi-annual basis Scene-setting questions 1. What is your responsibility in regard to in-year reporting? 2. What does in-year reporting entail, and what are the benefits derived from such reporting in your municipality? 3. How is the data quality for informing in-year reporting managed in your municipality? Introduction The objectives of the reforms that were introduced by the MB&RR was to formalise the norms and standards to improve the credibility, the sustainability, the transparency, the accuracy, and the reliability of budgets and in-year reports of municipalities and entities. The strengthening of the accountability, the transparency, and the clarity of the information provided made monitoring a natural progression from the budget reforms. Certain in-year reports have been formalised by means of Chapter 5 of the MB&RR, which were published in This system of reporting assists the administration to make available relevant information both internally and externally. Internally, managers should use the information to ensure that performance takes place in accordance with the approved SDBIP, and that shortcomings are timeously corrected. The recommendations that are made by the managers in effectively reviewing the information should assist the mayor and the councillors to take full responsibility for their oversight role. They should also be equipped to interpret the information provided adequately, to monitor the implementation of the budget, and to make informed policy decisions, where necessary. It is only through effective monitoring that the effectiveness of certain policies can be assessed. In this chapter, we explore: reporting as a responsibility of all officials; reporting in the municipal context; and reporting and contemporary issues in in-year reporting. 140

155 14.5. Where the individual municipal official fits into the picture Section 78 of the MFMA determines that each official of a municipality exercising financial management responsibilities must take all reasonable steps within their respective areas of responsibility to ensure that the financial and other resources of the municipality are utilised effectively, efficiently, economically, and transparently. They must also ensure that any unauthorised, irregular, or fruitless and wasteful expenditure, as well as any other losses, are prevented. The above implies that all managers should use the data provided in the financial reporting process, and that they should collect actual service performance information, to ensure that the performance takes place in accordance with the approved SDBIP. They should also see that any shortcoming in regard to underspending, overspending or under-delivery is managed through the PMS and through the implementation of corrective actions. Managers are also compelled to provide regular and relevant information through the analysis of performance, the addressing of shortcomings, and the improving of internal controls and service delivery. By taking the monthly statements and the service delivery performance, as well as the findings of the past year s annual report, into consideration, a longitudinal picture is created to ensure that corrections are made continuously, rather than ex post facto (i.e. after the fact). In-year reporting, therefore, provides an early warning system for correcting variations between intended and actual financial and service delivery performance. Managers, therefore, form part of the performance data-generating process that informs the monthly progress in each department. Further, managers can use the information to assess and to adjust internal controls, to ensure service delivery takes place in the most effective and economical manner, with the greatest efficiencies and the best achievement of the IDP objectives. The recommendations made by the managers in effectively reviewing the information assist the mayor and the councillors to take full responsibility for their oversight role, and to interpret the information provided adequately, to monitor the implementation of the budget, and to make informed policy decisions, where necessary. It is only through effective monitoring that the effectiveness of certain policies can be assessed Reporting in the municipal context Financial reporting, the monitoring of progress, non-financial reporting, and general in-year reporting are discussed in this section Financial reporting Monthly, quarterly, semi-annual and annual reports must all be drafted in terms of the budget reform formats, and in accordance with the requirements of the MFMA, sections 71 and 72, and the MB&RR, in particular Part 5 of Chapter 2 and Schedule C (or part 5 of Chapter 3 for municipal entities, as well as Schedule F). The annual report forms part of another chapter in this learner guide. The above-mentioned financial reporting provides monthly reports on the year-to-date financial performance of the municipality. If correct information is reported, and the longterm projections are carefully considered, the reports should serve as early warning systems, 141

156 by advising on where revenue collection is lagging behind the budget provisions, where expenditure is lagging, or where it is exceeding provisions, and where capital expenditure is lagging, or where it is exceeding the approved capital budget. This will ensure that the managers become aware of the financial situation, so that they can implement remedial action. Table 12 below provides an overview of financial reports. Table 13: Overview of financial reports Type of report When produced To whom submitted Benefits to be gained from Monthly section 71 report No later than 10 working days after the end of the month Provided to the mayor and to the provincial treasury by the accounting. The mayor may, but does not have to, table the report in the municipal council. Must be tabled by the mayor in council Shows the state of the municipality s budget for the year to date against actual revenue; actual expenditure per vote; actual capital expenditure per vote; and explanations of material variances from budget figures, as well as from the information that is provided in the SDBIP, and any remedial or corrective action to be taken. Quarterly section 52 (d) report Within 30 days of the end of each quarter Gives information on the implementation of the budget and on the financial state of affairs of the municipality. Includes a summary on the municipality s consolidated performance against the SDBIP, and the approved and any adjusted budgets, with explanations of material variances; performance in relation to quarterly performance targets for the delivery of basic services; and the financial impact of the performance on the MTREF and on longterm sustainability. All quarterly reports tabled in the council must be placed on the municipal website (see section 21A of the Systems Act). Mid-year budget and performanc e assessment (section 72 report) By 25 January of each year The accounting must submit a report to the mayor, the National Treasury, and the provincial treasury Provides an assessment of the performance of the municipality for the first half of the year. Considers financial information, performance against the SDBIP, progress made with resolving problems identified in the previous annual report, and the performance of the municipal entities (if any). Further, an explanation of the impact of national and provincial budgets must be provided. The municipal manager also makes 142

157 Type of report When produced To whom submitted Benefits to be gained from 143 recommendations on whether an adjustments budget is necessary, and recommends revised projections for revenue and expenditure, to the extent that this may be necessary. This report should be considered together with the oversight report on the annual report, which stipulates the performance of the municipality up to 30 June of the previous year, and which includes the AFSs and the related audit report. This allows for a true review of performance, and for the mayor to recommend adjustments to the budget process under way. [Refer to the three-year reporting programme Figure E Annexure 1.] The monthly information must be presented to the mayor to review. The mayor may, but does not have to, table such information in the council. The quarterly information must be tabled by the mayor within 30 days of the end of each quarter. At this meeting, the in-year performance must be monitored, and corrective action must be taken. It is important to note that the six-month report must be presented to the council by 25 January Financial transparency and ongoing performance In order to achieve an effective oversight mechanism and the appropriate fiscal discipline and managerial accountability, financial management systems must provide sufficient transparency for accurate measurement of the ongoing performance of the municipality. The MFMA facilitates the above by requiring the municipality to develop measurable performance objectives for revenue and expenditure, taking into account the IDP. The municipality must report against these measures in the mid-year and annual reports Monitoring progress Managerial oversight of performance should operate, in the first instance, within the municipality itself. With this in mind, the MFMA requires that the section 71 and 72 reports must be submitted by the accounting to the mayor, who must give them all due consideration. The reports should also contain recommendations on the remedial action to be taken. The mayor should check to see that there is alignment with what was proposed in the SDBIPs, and issue any instructions regarding the implementation of the budget and the spending of funds. Any related remedial action must be assigned to the accounting to implement. This ensures that there is an ongoing review of the financial position of the municipality, and that there is continual review of the progress that is being made toward attaining the set performance objectives. In addition to the above, and mindful of the role of both the national and the provincial

158 government, the MFMA requires the municipality to report on certain issues, thus identifying problems as they arise. This helps to ensure that, where required, prompt remedial action can be taken by the province, or by the National Treasury Non-financial reporting All reports must contain both financial and non-financial information, in order to communicate performance effectively. Non-financial information, such as subjective narratives on service delivery backlogs, the number of electricity and water connections, and explanations of council policy on indigents and free basic services, should supplement the financial data and the key performance measures General in-year reporting obligations The municipal manager must advise the National Treasury, the relevant provincial treasury, and the AGSA about all bank accounts as they are opened. Said manager must also report to council, the provincial treasury and the AGSA the details of certain prescribed withdrawals each quarter. The municipal manager must also report on any unauthorised, irregular, or fruitless and wasteful expenditure as it occurs, and on any impending budget shortfalls or overspending. Details of expenditure on staff benefits must regularly be reported to the council, as well as be reflected in the annual report. The mayor must also report to the Member of the Executive Council (MEC) for Local Government any issue that necessitates provincial intervention, as it arises. The CEO of a municipal entity must provide the municipal manager of the parent municipality with regular reports on the entity s finances and performance. Table 13 below provides a summary of the budget and reporting cycle in a municipality. This table should be compared to Figure 11, which shows the high-level budget timetable outlining the time frames for the budget preparation, approval and implementation that are described in Chapter 8. Table 14: Summary of the budget and reporting cycle Month Previous financial year Current financial year Future financial year July Start of the AFSs for the financial year ended on 30 June stand-alone municipality Drafting of the annual report Implementation of budget for financial year, starting on 1 July Monitoring and reporting on the implementation of the budget for the first month at the end of the month Approval of the rollovers for all contractual commitments from the previous financial year in an adjustments budget for the current year, Report submitted to the council for the approval of the IDP and the budget timetable for the next financial year August Finalisation of the AFSs for the financial year ended on 30 June stand-alone municipality Review of the draft Public consultation on the priorities that should be in the IDP for the next year, supported by the evidence contained in the unaudited annual report 144

159 annual report by the municipal manager, after which sent to the Audit Committee, and tabled in the council Recommendation by the council that the unaudited annual report be used for the IDP public consultation, whereupon report sent to the MPAC for the drafting of the oversight report which started on 1 July At the end of the month, monitoring and reporting on the implementation of the budget for the second month September First month of audit by the AGSA on the AFS Finalisation of the consolidated AFSs Receipt of public comments on the unaudited annual report Monitoring and reporting on the implementation of the budget for the first quarter Consultation with sector authorities for drafting the legislated sectoral plans for the following financial year October Second month of audit by AGSA on standalone/ municipal AFS Review by the MPAC of the public comments on the unaudited annual report, as well as drafting of the oversight report Monitoring and reporting on the implementation of the budget for the fourth month Review of the priorities of the community and sectoral requirements, and determination of the MTREF November Audit report of the AGSA on standalone/municipal AFS Within 7 days of receiving the final audit report, the final oversight report on the stand-alone municipal annual report must be prepared and tabled in council for Monitoring and reporting on the implementation of the budget for the fifth month Review of the national allocations that are published in draft format Review of the service delivery agreements and the contractual obligations into the future 145

160 consideration and approval December Audit AGSA report on the consolidated AFS Within 7 days of the final audit report on the consolidated AFS being received from the AGSA, the final oversight report must be prepared and tabled in council for consideration and approval Monitoring and reporting on the implementation of the budget for the second quarter Ongoing review of priorities, based on the realistically achievable revenue through the tariff review January Monitoring and reporting on the implementation of the budget half-yearly review and table adjustments budget (if necessary) Finalisation of the capital budget portion of the new year s budget Review of the budgetrelated policies February Monitoring and reporting on the implementation of the budget for the eighth month Finalisation of the budget-related policies Finalisation of the operating budget for the new year s budget March Monitoring and reporting on the implementation of the budget for the third quarter Review of the finalised sectoral tariffs that are published on 15 March Tabling of the budget 90 days before approval date Public participation on the draft new year s budget Publicising of the draft tariffs April Monitoring and reporting on the implementation of the budget for the tenth month May Monitoring and reporting on the implementation of the budget for the eleventh month Revision of the draft budget, taking into consideration the public participation Approval of the budget for 30 days before the implementation date Uploading of budget data Preparation of the SDBIPs June Monitoring and reporting on the implementation of 146

161 the budget for the fourth quarter for the new financial year starting on 1 July Drafting of the performance agreements for the new financial year starting on 1 July A comprehensive guide of all MFMA responsibilities on a month-by-month basis, titled the MFMA Finance Management Calendar, is available from the National Treasury The AGSA and other contemporary issues in mid-year reporting According to the AGSA (2012:82), municipalities rely on IT systems to perform their statutory financial management, reporting and administrative functions. The information processed and stored in IT systems is vital to the accuracy and the reliability of the financial and performance information used by management for planning, monitoring and reporting. Weaknesses in IT governance, security management, user account management, and IT service continuity have been observed. Any deficiency negatively impacts on data quality, because such quality is dependent on: data completeness; data accuracy; data relevance; timeliness; and appropriateness of presentation. Low data quality (resulting from inaccuracy in the data) results in misleading information, incorrect decisions, and inappropriate actions. The improvement of IT systems is, therefore, imperative to the credibility of in-year reporting, as set out in the MFMA Finance Management Calendar of the National Treasury Summary The system of reporting assists the administration to make relevant information available both internally and externally. Internally, managers should use information to ensure that performance accords with the approved SDBIP, and to see that shortcomings are timeously corrected. The recommendations that are made by the managers in effectively reviewing the information should assist the mayor and the councillors to take full responsibility for their oversight role. The recommendations should also enable them to interpret the information provided adequately, to monitor the implementation of the budget, and to make informed policy decisions, where necessary. It is only through effective monitoring that the effectiveness of certain policies can be assessed. Data quality, and therefore, by implication, reliable IT systems, play a significant role in the system of in-year reporting. 147

162 Chapter 15: MFMA performance monitoring Learning outcomes After completing this chapter, you should be able to explain: the purpose and the structure of the MFMA performance monitoring instrument; reporting on the status of the municipality, measured by the 30 indicators; how to link the performance indicators to individual work output and to performance agreements; and contemporary issues in financial performance management Key concepts Performance management An interrelated process to ensure that all activities and people contribute as effectively as possible to the set objectives, including a systematic review of activities and objectives, in order to learn and to improve services to the community. Monitoring A continuous function to inform management and the main stakeholders, by systematically collecting data on specified indicators to measure the extent of progress and the achievement of objectives. Evaluation A systematic and objective assessment of the design, implementation, results, and impacts of an ongoing or completed project, programme, or policy, in order to determine the relevance and the fulfilment of objectives, development efficiency, effectiveness, impact, and sustainability. Indicators Variables that provide reliable means of measuring achievement, of reflecting changes connected to an intervention, or of helping assess the performance of an organisation against the stated outcome Scene-setting questions 1. To what extent is your own personal performance linked to the MFMA performance monitoring instrument? If there is no linkage, how should such linkage be achieved? 2. What is the purpose, the structure, and the reporting process of the MFMA performance monitoring instrument, and what would the best approach be to institutionalising it in your municipality? Introduction The National Treasury has developed a performance monitoring instrument to measure the financial management performance of municipalities and their compliance with the MFMA, with respect to 12 strategic areas reflecting key municipal financial management activities provided for in the MFMA and in the supporting regulations. The measurement is done in terms of 30 indicators, covering 28 outcomes. The intended impact of the instrument is to instil a culture of financial performance among municipal officials, in which they understand what role they play in achieving the targets as part of their own work outputs. In this 148

163 chapter, therefore, we consider the linkage between performance indicators and individual work output and performance agreements; the purpose and the structure of the MFMA performance monitoring instrument; and reporting on the status, as measured by the indicators Where the individual municipal official fits into the picture Section 38 of the Municipal Systems Act determines that a municipality must establish a performance management system that, amongst others, promotes a culture of performance management among its political structures, political office-bearers and councillors, and in its administration. The Municipal Systems Act also determines that a municipality must, in terms of its performance management system, set appropriate key performance indicators as a yardstick for measuring performance (section 41). These provisions are clearly intended to ensure that performance management and measurement in a municipality become the business of each and every official in the municipality. The golden thread that runs throughout this course is that a service delivery ethos is why financial governance and management must be enhanced. Obviously, a performance culture must be instilled for the same reason. Performance management has expanded into a multifaceted system of organisational performance management, whereby organisational goals are translated into subservient goals on task, team and individual level. This requires a continual focus on aligning both team and individual performance with the strategy and goals of the organisation. Line management must own and drive the process, rather than the Human Resources (HR) Department. In order to instil a culture of financial performance in which officials understand what role they should play in achieving the set targets, as part of their own work outputs develop, the understanding of what is to be achieved must be shared. The capacity of the officials and the organisation to achieve such a culture must be developed. Furthermore, support and guidance must be provided to both individuals and teams so that they can improve their performance. The MFMA performance monitoring instrument has been established to measure MFMA compliance in municipalities. Once more, the reason for establishing such an instrument is to ensure that the MFMA objective to secure sound and sustainable management of the fiscal and financial affairs of municipalities is achieved, thereby also supporting the establishment of a service delivery ethos. For the purpose of this instrument, officials should be identified and sufficiently inducted to understand their role and the contribution that they should make to the operational and strategic outcomes. Even though the initiative should be taken by senior management, each business unit and section needs to understand its role within the system. It is, therefore, critical that officials have explained to them what role they should play in establishing the status of their municipality on each of the respective indicators. For that reason, the individual performance indicators of these officials must include the MFMA performance indicators to which they contribute. 149

164 15.6. Purpose and structure of the MFMA performance monitoring instrument Purpose The purpose of the MFMA monitoring instrument (National Treasury, 2006) is to measure the financial management performance of municipalities and their compliance with the MFMA, with respect to 12 strategic areas. Officials need to understand that they play a meaningful role in achieving the targets in indicators as part of their own work outputs, such as in managing revenue and expenditure. The indicators assist municipalities to determine the areas of concern, and to elicit improvement in such areas as the performance of business units, the skills available, the status of interdepartmental communication, the lack of coordination, and even in joint (overlapping) mandates. Municipalities should use the indicators to develop an early warning system, which they can instil into the organisational culture. The monitoring tools should be used by HR and management to support the performance management system and to address accountability. HR might need to assign responsibilities accordingly in the performance agreements of the officials concerned. The accounting must endeavour to have the organisation take individual and collective ownership of these monitoring tools through using clever and innovative systems, as well as change management processes Structure of the MFMA monitoring indicator set Generally, any performance indicators must be: pre-designed; determined for all levels of the system; precise; clear; relevant; responsive to progress; unaffected by other changes; based on economical, cost-effective data collection; practical and simple to measure; adequate; monitorable; quantitative and qualitative; and indicative of multiple dimensions of intervention outcomes. The MFMA indicator set is based on a set of 12 strategic areas that reflect key municipal finance management activities that are provided for in the MFMA and in supporting regulations. A strategic objective has been prepared for each strategic area that defines the performance standard sought in the respective strategic area, to promote compliance with the MFMA. As such, each strategic area has desirable outcomes that are determined to contribute to the achievement of the strategic objective, and which must be measured. Overall, there are 28 outcomes in the proposed indicator set, and the 30 indicators involved are used to measure whether the desired compliance levels are being achieved. The table that is included in Annexure B sets out the relationship between the strategic areas, the outcomes and the indicators, as well as the sourced documents to be used. To support the effective implementation of the indicators, a grading methodology is employed. The methodology measures indicator performance level against specified outcomes. Each grading score, from A to E, has a numeric score between 0 to 5 assigned to it, which provides a basis for the calculation of the percentage score at the strategic area level. The overall numeric score, based on the sum of the individual indicator scores that are weighted for emphasis on limited key issues, provides the actual measurement of compliance with the MFMA. An MFMA monitoring indicators scoring tool is used to facilitate the above grading process. The scoring tool is an automated Excel spreadsheet that is developed to facilitate the grading process, in accordance with the grading criteria provided. Once all the relevant data have been collected to 150

165 inform the grading scores, the municipalities are then graded on the scoring tool to determine the overall compliance measure at the strategic level, and the overall compliance with the MFMA. The level of scores at a strategic area level subsequently provides the basis for an assessment of overall compliance with the MFMA for a specific municipality, and for the province and country at large. The updated version of the 30 MFMA monitoring indicators scoring tool is available on the NT website. Various officials, including the BTOs, might be required to take ownership of the indicators, to allow for effective monitoring. The accounting and the CFO must delegate responsibility in accordance with the set requirements, to produce evidence for the purpose of monitoring and evaluation. The involvement of officials may differ from municipality to municipality, but it is expected of the BTO and the project owners to be the main contributors of evidence in the above regard. Officials should be identified and sufficiently inducted to understand their role and contribution to operational and strategic outcomes. It is critical that officials have what role they play in the achievement of reforms as a result of their contribution to improving the status of their municipality on each of the respective indicators explained to them Reporting At least once annually, each provincial treasury must submit a report to the National Treasury (in the agreed format, and signed by the provincial head of department) summarising the key assessment outcomes on the level of the MFMA implementation by the municipalities within the province. This report must be accompanied by a provincial plan of action that addresses remedial measures that have been set in place to improve the compliance levels within the province, and detailing the nature of support to be provided to the municipalities where the level of MFMA compliance is low. The National Treasury has to consolidate all the assessments received into one report, giving a national view of the level of MFMA implementation in municipalities across South Africa. This report will be published on the NT website for easy access. Information from this report can be used by other organs of state, by national and provincial departments, and by legislatures and the Parliament, for monitoring and oversight purposes. The success of the system will depend on the accuracy and on the completeness of information contributed by project and unit managers. The annual report of the municipalities has been identified as being the key source document for the completion of these assessments. However, at present, not all key information is reported in such reports. The various source documents are comprehensively listed in the table included in Annexure B. As the ownership of source documents cannot be assigned to one or two role-players alone, all the parties involved should be identified who contribute to the data and information sets in said documents. The owners and the delegated parties should accept the responsibility for ensuring that the reports and the documents reflect meaningful and quality information that is verifiable and user-friendly. The more accurate and transparent reporting becomes, the better will be the relationship with communities, as one of the users of the monitoring tools Contemporary issues in financial performance management According to the AGSA (2012: 44), reporting on performance is still viewed only as a yearend reporting requirement that must be satisfied. 151

166 One of the critical reasons for not being able to report on predetermined objectives is that organisational structures have not yet been aligned, or capacitated, to meet the requirements of such reporting. In addition, the auditees are also not staffed with appropriately skilled personnel. The findings mentioned clearly indicate that there is a mismatch between the monitoring needs and such other vital functions as organisational development in the municipalities. Organisations do not exist for monitoring purposes alone, and reports should, likewise, not be structured for such purposes only. Typically, special monitoring and evaluation (M&E) support is created that then contributes another set of templates that is accompanied by deadlines, for line managers to complete. A performance-orientated organisation is one in which vital indications of performance are generated automatically, as part of the management systems that are used by all managers in their day-to-day management activities. The challenge for municipalities is to ensure that all performance-related indicators, including the 30 MFMA-related indicators mentioned in this chapter, become part of the data capturing systems that are followed on a continuous process Summary The MFMA performance monitoring instrument serves to measure the financial management performance of municipalities, and their compliance with the MFMA, with respect to 12 strategic areas. The use of the instrument should assist municipalities to determine areas of concern, and to improve the performance of business units, the skills available, the status of interdepartmental communication, the lack of coordination, and even the joint (overlapping) mandates. Municipalities should use the indicators to develop an early warning system, which they should instil into the organisational culture. The intended impact of the instrument is to instil a culture of financial performance, in which officials understand what role they should play in achieving the targets as part of their own work outputs. It is, therefore, critical that the officials concerned have explained to them what role they should play in achieving the status of their municipality on each of the respective indicators. For this reason, the individual performance indicators of these officials must include the MFMA performance indicators to which they contribute. Good governance requires proper oversight, and therefore M&E. The monitoring tools developed will be useful in the analysis, and in the benchmarking, of municipalities. Although various roleplayers are involved in producing source documents, the successful implementation and maintenance of the system of monitoring depends on the council, the accounting, the BTO, and the delegated officials to provide timeous and accurate information for evaluation. 152

167 Chapter 16: Annual reports Learning outcomes After completing this chapter, you should be able to explain: linking the information of the annual report to individual performance management; the purpose and preparation of the annual report; the format of the annual report; the approval and the use of the completed annual report; and the contemporary issues in the production, and in the utilisation, of annual reports Key concepts Corporate governance Such governance, among other forms of governance, refers to the rules and practices by which accountability, fairness, and transparency in an organisation s relationship with all of its stakeholders are framed. As a form of action, it also relates to the decisions that define expectations, grant power, or verify performance. Annual report A comprehensive report on an organisation s activities throughout the preceding year, which is intended to inform shareholders and other interested people about activities and financial performance. Every municipality and municipal entity must prepare an annual report each year to provide a record of the activities and of the performance of the municipality over the year concerned, and to promote accountability to the community for its decisions Scene-setting questions 1. What is your own contribution to the credibility of the annual report in your municipality? 2. What is the purpose and process of preparing the annual report? 3. What are the benefits of preparing and publishing the annual report for your municipality? Introduction The annual report supports municipal governance, by consolidating the records of performance for all the stakeholders concerned, including the community that is served by the municipality. The report provides all stakeholders, including the community, with information on what actually happened during the year reported on, compared to what was promised in the original (unrevised) budget. The legislative requirements for the annual report are stipulated in section 46 of the Municipal Systems Act, and in section 121 of the MFMA. In this chapter, the desired linkages between the information that is contained in the annual report and individual performance management; the purpose and the preparation of the annual report; its format, approval and utilisation, as well as contemporary issues in the production and utilisation of annual reports are covered. 153

168 16.5. Where the individual municipal official fits into the picture The performance bonus of the municipal manager and of the managers who are directly accountable to the municipal manager may be paid after the annual report has been tabled and adopted by the municipal council, and the other requirements of regulation 8 of the Municipal Performance Regulations for Managers, 2006, have been satisfied. However, given the purpose and the preparation process of the annual report, National Treasury MFMA Circular No. 63 states that real transparency and accountability can only be achieved where there is a clear link between the strategic objectives agreed with the community, the IDP, the Budget, SDBIP, service delivery agreement with any municipal entity, performance agreements of senior management and officials, and in-year reports, amongst others. That which is, therefore, consolidated into the annual report reflects the performance of individual and unit contributions to the achievement of objectives. Only if that performance is accurately captured by valid indicators, which are consolidated and interpreted correctly, can the annual report be sound and credible. Thus, it becomes the responsibility of each official to produce a credible annual report Purpose and preparation of the annual report The purpose of the annual report is to provide a record of the activities and the performance of the municipality over the year, and to promote accountability to the community for the decisions that it has taken during that time. As such, it requires the collection of information about the nature and the extent of services provided, in reference to key performance targets and actual performance data. In addition, it should contain explanations of variations, and a narrative of the policy and the strategy adopted. The annual report must include audited financial statements that disclose a range of information that adequately reflect the financial position of the municipality at year end. Effectively, the annual report provides a record of the activities of the municipality and its entities (if any), as well as a report on their performance in terms of service delivery and budget implementation. The supporting financial information should be provided in the format that is required in terms of the applicable GRAP standards. The information should accompany the audit report, as provided by the external auditor, the AGSA. Doing so helps to ensure accountability to the local community, the stakeholders, and the investors for the management of the public funds that are entrusted to elected office-bearers. Such disclosures must include information on the allocations that have been received and made, the particulars of the employment costs of the councillors and the officials concerned, and the details of bank accounts, investments and contingent liabilities. The particulars of any non-compliance with the MFMA, and details of any material losses that have occurred as a result of unauthorised expenditure, must also be included. According to National Treasury MFMA Circular No. 63, annual reports must be aligned with the planning documents and the municipal budget for the year reported on. The IDP, the budget, the SDBIP, the in-year reports, the annual performance report, and the annual report must all contain similar and consistent information, to facilitate understanding and to enable the linkage between plans and actual performance to be seen. This can only occur if 154

169 the municipalities set appropriate key performance indicators and performance targets with regards to the development of priorities and objectives in its IDP and outcomes. Figure 18 illustrates the linkages between the various documents concerned. Figure 18: Municipal reporting flow chart (National Treasury MFMA Circular No. 63, 2012:4) Only through the provision of sufficient information and through the transparency of reporting processes will ongoing performance be effectively managed, and the necessary fiscal disciple and managerial accountability be able to be taken/implemented. This is facilitated by the requirement that both financial and non-financial information be regularly reported on. The MFMA requires that measurable performance objectives for revenue and expenditure must be determined, taking into consideration the IDP and related objectives. They must be reported on regularly, and assessed during the mid-year review process. The final achievement must be recorded against these predetermined key performance 155

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