REPORT TO THE SELECT COMMITTEE ON CO-OPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS OF THE NCOP

1. REPORT TO THE SELECT COMMITTEE ON CO-OPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS OF THE NCOP By Ms N. Dube, MPL MEC for Co-operative Governance and Traditional Affairs KwaZulu-Natal January 2011

2. CONTENT • Purpose • Background • Terms of Reference of Administrators • Briefing per Municipality • Motivation for Intervention • Intervention Activities • Indaka Local Municipality • Umhlabuyalingana Local Municipality • Okhahlamba Local Municipality • Msunduzi Municipality • Progress

3. PURPOSE • To provide a report to the Select Committee on Co-operative Governance and Traditional Affairs of the National Council of Provinces on the Interventions by the Provincial Executive Council of KwaZulu-Natal at the: • Indaka, Umhlabuyalingana , Okhahlamba and Msunduzi Municipalities • In terms of Section 139(1) of the Constitution.

4. BACKGROUND • Executive Council approved interventions in terms of Section 139(1)(b) • MEC responsible for Co-operative Governance and Traditional Affairs • Authorized to appoint Ministerial Representatives to assume the function in terms of section 51 of the Municipal Systems Act to establish and organise the administrations of these municipalities in a manner that would enable the municipalities to achieve the objects of local government as set out in section 152 of the Constitution. • Mandated to monitor the intervention and report progress to the Executive Council in February 2010. • Sub-Committee on Interventions established by the Executive Council of KwaZulu-Natal, including the MECs for Finance; Ms I Cronje, Economic Development; Mr M Mabuyakhulu and Transport, Safety and Security; Mr W Mchunu.

5. Ministerial Representatives to assume function would, inter alia: • Devise a turn - around strategy for the Municipalities. • Ratify all decision of the municipal councils and /or its committees, prior to implementation • Ratify all decisions taken by Municipal Managers and section 57 Managers in terms of delegated or original authority • Ensure implementation of council resolutions by the Administrations. • Implement a system to control and approve all expenditure. • Implement all governance systems and procedures including appropriate councillor oversight mechanisms. • Ensure implementation of financial systems, policies and procedures. • Ensure implementation of the Municipal Property Rates Act. • Set out a specific strategy for addressing each municipalities’ financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection revenue. • Prepare the adjustment budgets for the 2009/2010 financial year in respect of each municipality. • Review the organisational structures of these municipalities.

6. INDAKA: MOTIVATION • Annual financial statements for 2008/2009 not submitted by 31 August 2009 • Non-compliance with section 121 of the MFMA • No performance report evaluating the performance of the Municipality or Section 57 employees • Did not table or submit an oversight report • Irrespective Council paid performance bonuses to Section 57 employees

7. INDAKA: MOTIVATION • Auditor General reports for 2005/2006; 2006/2007 & 2007/2008 financial years • Serious deficiencies in management systems and other accounting and financial controls • Qualified audit opinions • Council failed to address recurring issues adequately • Serious financial problems • Poor cash flow • Accumulated deficit of R8,4 million incurred as at June 2008 • Entity’s total liabilities exceeded its total assets by R1,9 million • Reserves amounting to R6,5 million not supported by cash.

8. INDAKA: MOTIVATION • 99.7 percent grant dependant and not providing any services but appointed seven Section 57 managers. • The total salary cost was 51 percent of the total operating expenditure. • Implemented the Municipal Property Rates Act 6 of 2004 (MPRA) on 1 July 2009, • Failed to produce or deliver rates accounts. The delay resulted in an additional burden on rate-payers to pay over a lesser period with a potential rates-boycott. • Did not apply for condonation. • Council • Not been able to exercise effective oversight over the administration • Decisions were negatively impacting on the finances and functioning of the municipality evident in: • Over expenditure on the budget • Poor grant management • Not implementing an effective debt collection and credit control policy resulting in increasing outstanding debt.

9. INDAKA: MOTIVATION • No political or administrative leadership • Mayor passed away • MM suspended • Problems date back to the 2005/2006 financial year • council and the administration do not have the capacity to correct the institutional problems • Or to exercise an oversight role and implement the necessary reforms • Despite the ongoing support • Not capable of administering its affairs on its own • No progress made to improve the administrative and financial controls

10. Indaka: intervention activities • Met Indaka Council on 14 December 2009, informing of Provincial Executive’s decision • Mr Roger Ferguson appointed as Administrator, commenced in January 2010 • Imbizo at Indaka on 22 January 2010 • Community highlighted the lack of, and poor service delivery relating to basic needs • Water • Sanitation • Electricity • Clinics • Access to FET colleges • Housing

11. Indaka: progress • In respect of financial matters, the recovery process has been slow, however the following has been achieved:- • Unnecessary expenditure curbed. All financial records neglected for a six month period previously, are now up to date. All outstanding creditors are paid within 30 days as per the MFMA. All reserves and grants are now cash-backed with the accumulated deficit reduced to zero for the 2009/10 financial year. • The municipality was able to reinstate the equitable share amounting to R4.3 Million, which was withheld due to non-compliance in reporting. The Municipality was also able to reconcile and recover outstanding VAT claims to the value of R1.6 million. All Financial policies and procedures have been reviewed and implemented. Internal controls have been introduced to detect irregular transactions. • 2009/2010 Annual Financial Statements submitted to Council and Office of the Auditor General by the 31 August 2010 an improvement on the past financial year. • In respect of governance and administration:- • The Councillors and Management have been work shopped by the Administrator to create awareness and an appreciation of the overall local government legislative environment and the need for compliance, accountability and oversight in order to ensure a well functioning and developmental municipality. • The organizational review of municipal administration has led to the reduction in the number of section 57 employees from 7 to 5. The un-manned Community Services department was abolished and the function incorporated into the Corporate Services Department. New positions have been created in different department’s. • The MPRA will be implemented in the 2011/12 financial year. The rates policy has been developed and necessary condonations have been approved. • The Municipality has a GRAP compliant asset register. An asset management system is being implemented to provide effective and efficient service delivery to the community. • Audit Committee established

12. UMHLABUYLINGANA: MOTIVATION • Allegations of maladministration, fraud and corruption • Incurred irregular expenditure amounting to approximately R16 million relating to Municipal Infrastructure Grant (MIG) as well as other conditional grants • Supply chain management irregularities • Forensic investigation in terms of Section 106 of the Municipal Systems Act, 2000 commenced in May 2009 • Investigation finalized and recommends disciplinary, civil recovery and criminal action

13. UMHLABUYALINGANA: MOTIVATION • Assessment of Annual Financial Statements, Audit Report and responses, in terms of section 131 of the MFMA • Cash flow problems with an accumulated deficit at 30 June 2008 of R8,9 million. • Unspent grants totalling R13 million. • Shortfall of R14 million in financing of fund reserves, creditors and provisions • Salaries for September and October 2009 were paid late. • Unauthorized expenditure of R2,5 million incurred, being conditional capital grant funding utilised for operating expenditure. • Unauthorised expenditure of R555 498 incurred, being the over-expenditure of repairs and maintenance and leave encashment budgets. Over-expenditure not ratified by council in terms of section 29(3) of MFMA.

14. UMHLABUYALINGANA: MOTIVATION • Discretionary Intervention by MEC for Co-operative Governance and Traditional Affairs in terms of Section 136 – 138 of the MFMA. • Financial expert reported a lack of cooperation from the senior management and council decisions with financial implications taken in his absence. • Auditor General reported difficulty in audit (2008/2009) • Municipal Manager and Chief Financial Officer not available • Documents not available • No cooperation from officials.

15. UMHLABUYALINGANA: MOTIVATION • Municipal Property Rates Act, No. 6 of 2004 (MPRA) • Implemented 1 July 2009 • Did not comply with certain prescribed timeframes • Did not apply for condonation for non-compliance • Budgeted R994 000 as projected rates income - did not produce and deliver necessary accounts • Despite being cash strapped, EXCO approved Swiss International Exhibition trip • Mayor, MM and Chairperson of Planning, LED and Infrastructure Development Portfolio Committee to attend • Travel costs were sponsored but the trip did not materialize • Council paid 4 000 Euros for a stand at the Swiss International Exhibition which is construed as fruitless and wasteful expenditure.

16. UMHLABUYALINGANA: MOTIVATION • Special Council meeting on 28 October 2009 (20h30) suspended MM and CFO and administration without leadership • Summary • Serious and persistent breach of legislation • Continued decline in financial management and administration • Weak performance and a lack of accountability. • Council for two consecutive years condoned irregular, fruitless and wasteful expenditure • Council failed to exercise oversight over administration and finances • Council had taken decisions not in best interests of community • Failure by council to implement the financial recovery plan • Municipality was dysfunctional and financially compromised.

17. UMHLABUYALINGANA: INTERVENTION ACTIVITIES • Met Umhlabuyalingana Council on 13 December 2009, informing of Provincial Executive’s decision • Mr Bamba Ndwandwe appointed as Administrator commenced in mid-December 2009 • Imbizo at Umhlabuyalingana on 17 December 2009 • Community highlighted the lack of, and poor service delivery relating to basic needs • Access Roads • Water • Sanitation • Electricity • Clinics • Housing

18. UMHLABUYALINGANA: progress • The Municipality has improved significantly and financial stability has been achieved:- • Internal controls have been implemented to prevent irregular and unauthorized expenditure. • The 2010/2011 budget was approved within the statutory time-frames. This budget, unlike previous years is focused on service delivery to improve the lives of the community. • A moratorium was placed on all operating expense activities such as travel, subsistence, overtime, functions and sporting activities and a reserve was built to address irregularities amounting to R14.3 million. Payments to all outstanding creditors totaling R4 million were honoured. The overdraft of R 1million rand has been paid and the facility cancelled. Staff salary payments which were always a source of uncertainty is now paid on time. • The balance of the 2008/09 unspent grants have been reduced from R7 634 897 to R3 578 970. All unspent grants are now cash backed. The bank balance now reflects reserves. The Administrator has been tasked in conjunction with council to put in place plans to improve service delivery using a portion of the surplus funds. • In respect of Integrated Development Plan/PMS/Governance • The 2010/11 IDP is more realistic and aligned to the budget, focused on key service delivery initiatives. Section 57 managers signed SDBIP’s for the remainder of 2009/10 in March 2010, and new SDBIP’s for the 2010/11 financial year have been finalized. The Municipality has implemented a performance management system and agreements are in place for all section 57 employees. In May 2010 a draft organogram was completed for review which indicates a possible savings of R1,6 million on staff expenditure. Various civil and criminal matters instituted against officials. An MM and CFO have been appointed. • In respect of service delivery the 2010/2011 budget has made provision for the following activities:- • Formalisation of the Town of Manguzi and Mbazwana; • The compilation of waste management plans and the improvement of refuse removal services by purchasing a refuse collection truck and bulk refuse skips. The establishment of a kit free Fire Service unit. • Water and Electricity are the two top priority areas in terms of the IDP. Engagement with the District Municipality, Eskom and other role players is crucial in addressing these problems. It is important to note that the sewer system and sanitation projects would rely heavily on the availability of water.

19. Okhahlamba: motivation • Auditor General reports • Serious deficiencies in management systems, accounting and financial controls • Disclaimed audit opinions - two consecutive financial years and an adverse opinion in respect of the last year • Annual financial statements submitted after statutory deadline 31 August 2008 • Council failed to address recurring issues adequately. • Non-compliance • Annual report 2007/2008 did not comply with section 121 of MFMA • No performance report evaluating the performance of the Municipality or Section 57 employees • Council did not table or submit an oversight report • Council did not have an established internal audit unit and audit committee

20. OKHAHLAMBA: MOTIVATION • Serious financial problems • Poor cash flow • Posted a deficit of R17 963 025.00 (un-audited) • Accumulated deficit as at June 2009 totaled R24 517 042.00 • Grant funding allocated for Housing utilised irregularly to finance the operations resulting in a shortfall of over R20 million in the Housing fund • Unspent conditional grants of R20 196 551.00 were not cashed backed • 2008/2009 AFS • General expenses increased from R11 306 725.00 in 2006/2007 to R57 294 633.00 in 2008/2009 = increase of 407% • Municipality failed to make payments to its creditors as and when due

21. OKHAHLAMBA: MOTIVATION • Discretionary Intervention • Process commenced with Council on 31 July 2009 • Serious financial problems highlighted • Consultation as is required by the MEC responsible for Local Government in terms of Section 136(1) of the MFMA • Council resolved to request MEC to afford it six months to turnaround due to new management being appointed • Motivated that “primary responsibility to avoid, identify and resolve financial problems rests with the municipality itself” - Section 135 MFMA • Three months elapsed and Department monitored situation • Department assisted • Draft a recovery plan • Secured the services of a finance technical expert from the DBSA • Compiled the AFS for 2008/2009 as the CFO passed away in September 2009

22. OKHAHLAMBA: MOTIVATION • Municipal Property Rates, No. Act 6 of 2004 (MPRA) • Implemented 1 July 2009 • Failed to produce or deliver rates accounts • Delay an additional burden on the rate-payers to pay over a shorter period • Potential rates-boycott • Five condonations for non-compliance required • As at June 2008, unable to recover debt on rates, totaling R6 256 060.00

23. OKHAHLAMBA: MOTIVATION • Council • No effective oversight over administration • Decisions negatively impacting on finances and functioning • Cost of security for Mayor • Nature of projects undertaken not part of functions of local government • Educational assistance to students • Unfunded mandates such as primary healthcare • Hosting arts and culture programmes at cost • Agricultural projects • Council had no conception of its primary responsibility to deliver basic services and ensure sound management and administration

24. OKHAHLAMBA: MOTIVATION • Summary • Only municipality in the Province to receive an adverse audit opinion • Serious financial problems • Problems date back to 2005/2006 • Council and administration did not have capacity to correct the institutional problems • Or no capacity to exercise oversight and implement necessary reforms • Council given six months to improve • CFO passed away • Newly appointed MM lacked necessary experience to turn-around the municipality within timeframe • Political interference of the Council – negative impact on functioning and financial position • Service Delivery and Budget Implementation Plan (SDBIP) indicated council not aware of its role and has incurred expenditure on unfunded mandates

25. Okhahlamba: intervention activities • Met Okhahlamba Council on 14 December 2009, informing of Provincial Executive’s decision • Mr Clermont Sithole appointed as Administrator, commenced in January 2010 • Imbizo at Okhahlamba held on 20 February 2010

26. Okhahlamba: progress • Through the implementation of the recovery plan, the financial position has stabilised:- • Financial controls especially internal controls of monitoring expenditure have been implemented and are adhered to. An amount of R 3.1 million withheld by national treasury has been released. Financial policies, systems and procedures have been reviewed and adopted by council. The credit control and debt collection strategy has been implemented with renewed vigour in an attempt to increase the collection rate of the Municipality; • Based on the unaudited 2009/10 Annual Financial Statements, as a result of the budget adjustment and financial austerity measures introduced at the end of January 2010, the Municipality has reduced general expenses from R61 030 685 to R27 837 872. This translates into a saving of R33 192 813. (55%) Based on the unaudited annual financial statements the municipality moved from a R16,3 million deficit in the 2008/09 financial year, to a surplus of R11,6 million in the 2009/10 financial year. The Administrator has been tasked in conjunction with the council to put in place a plan to improve service delivery using a portion of the surplus funds. • The Annual Report has been submitted to SCOPA and the Audit Committee for an oversight report, the budgetary process is also on track; • In respect of governance, administration and service delivery:- • The oversight committees have been reconstituted, including the Municipal SCOPA and audit committee. The internal audit unit is fully functional and the risk management profiling of the municipality has been completed. The LED Strategy and the revenue enhancement strategy are being developed taking cognizance of the unique potentials surrounding the Okhahlamba Municipality. The small town development initiative is being supported by COGTA. • The organisational structure has been reviewed and aligned to the powers and functions mandated to the municipality. The municipality has also embarked on a comprehensive maintenance and upgrade plan of Bergville Town which included the filling of all major potholes in town and renewal of dilapidated buildings. A Rural Maintenance Programme for refuse collection and other related maintenance issues was also introduced with the use of unemployed local labour. • A Forensic Audit Report commissioned by COGTA was completed and forwarded to the Okhahlamba Council. The Council then deliberated on its findings and appropriate recommendations pertaining different areas of investigation are being addressed. Action has been taken in this regard as the Hawks are now part of this process. Disciplinary action has been instituted against certain officials.

27. MSUNDUZI: motivation • The EXCO of the Municipal Council failed to exercise effective oversight and to fulfil its specific legislative obligations, and failed to deal with 62 outstanding items on the agenda of EXCO, some of which date back to 2007. These include, amongst others, the following which are guided by key legislative obligations:- • the non-adoption of the mid-year budget and performance review by 31 January 2010 as contemplated in section 72 of the Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (“MFMA”), which remains outstanding despite the financial crisis; • the non-adoption of an adjustments budget as contemplated in section 28 of the MFMA, as a result of the serious financial problems identified in November 2009, which remains unresolved; • the failure to implement the recommendations of the forensic investigation report by “The Firm” commissioned by the MEC responsible for local government in terms of section 106 of the Local Government: Municipal Systems Act, 2000.

28. MSUNDUZI: motivation • the failure to adopt the Integrated Development Planning Process Plan for 2010/2011, as contemplated in section 28 of the Systems Act; • the failure to receive and deal with reports relating to supply chain management matters, such as the contract variation reports outstanding from November 2008 and quarterly reports on the award of tenders, as contemplated in the SCM Policy of the Municipality, prepared in terms of section 111 of the MFMA; • the failure to deal with the issue of excessive overtime and non-compliance with the Labour Relations Act, 1995 (Act No. 66 of 1995), which was reported to the Municipal Council in the forensic investigation report of the MEC, which was tabled in Municipal Council on 21 August 2007, as well as by the Auditor-General reports in respect of the 2007/2008 and 2008/2009 financial years, which has now led to the disruption of the refuse removal service within the municipality; • the failure to reallocate Municipal Infrastructure Grant budget allocations outstanding from the 2008/2009 financial year, as contemplated in section 28 of the MFMA; and • the failure to deal decisively with losses to council, as contemplated in section 32 of the MFMA

29. MSUNDUZI: exec. Obligations not met • The Mayor and Executive Committee, amongst others, failed to fulfil the following specific executive obligations relating to the EXCO of the municipality:- • section 99 of the Systems Act, by failing to exercise supervisory authority in relation to the implementation and enforcement of the municipality’s credit control and debt collection policy and by-laws; • section 52 of the MFMA, by failing to take all reasonable steps to ensure that the municipality performs its constitutional and statutory functions within the limits of the municipality’s approved budget; and • section 54 of the MFMA, by failing to promptly respond to and initiate remedial or corrective steps, and alerting the Municipal Council and the MEC responsible for local government to the serious financial problems of the municipality. • The Municipal Council, amongst others, failed to fulfil the following executive obligations relating to the administration of the municipality:- • section 41 of the Systems Act by not including measurable priorities, objectives and performance targets for certain functions, such as water equipment, low income and rural housing, as reported by the Auditor-General; • section 46 of the Systems Act by not providing adequate performance information in the annual report of the municipality for the 2008/2009 financial year as reported by the Auditor-General; • section 32 of the MFMA by not recovering unauthorised, irregular, fruitless and wasteful expenditure, and not informing the MEC responsible for local government and the Auditor-General of such expenditure; • section 54 of the MFMA by not exercising budgetary control and early identification of financial problems over two consecutive years; • section 72 of the MFMA by not conducting a mid-year budget and performance assessment of the municipality within the statutory deadlines for two consecutive financial years; • section 121 of the MFMA by the exclusion of performance information in the annual report of the municipality; • section 131 of the MFMA by a failure to address issues raised in the Auditor-General report on the municipality for consecutive years.

30. MSUNDUZI: progress • Municipality is currently stable in respect of financial matters. In respect of the financial challenges identified at the municipality the following progress is reported:- • Revenue income has increased by activities such as operation ‘Pitbull’ which targeted illegal water and electricity connections. As a result of operation ‘Pitbull’ a total of R17 million has been received by the municipality in two weeks. • The cash flow of the Municipality is analysed daily and has improved drastically with the operating deficit being reduced. Payment of overtime was a contentious issue, and has been curbed with only essential services now incurring overtime. Creditors are paid within 30 days after being screened. Eskom tariffs are a challenge to the municipality’s cash flow, and needs to be addressed with relevant stakeholders to achieve an amicable solution. The Municipality has implemented the credit control and debt management policy effectively. The municipality is managing outstanding debt, which has improved the rate of payment. • Supply Chain Management- The supply chain management policy has been revised and implemented. Ongoing monitoring for any deviations is conducted regularly. The Municipality has achieved relative financial stability and the systems, procedures and internal controls put in place will assist the municipality in a full financial recovery.

31. MSUNDUZI: progress •  In respect of governance and administration:- • A legal framework for the Msunduzi corporate and legal services department has been developed in order to service both the corporate and operational functions of the Municipality. A disciplinary procedure was implemented on 1 July 2010. • Various forensic investigations have been conducted into allegations of misconduct and fraudulent activity within the municipality. Based on the findings of these investigations, the Municipality has instituted Criminal, Civil and Disciplinary actions against the identified members of staff. Forensic investigations are continuing in the following areas: Supply Chain Management; Electricity Supply: Building Plans & Petrol & Diesel Supply. • Five senior managers have been suspended and criminal and civil charges have been brought against them which matters are progressing. • The organisation structure has been finalised aligned to the powers and functions of the municipality. The structure has been presented to the local labour forum. • The political structures have been revised taking into account principles of democracy and all applicable legal prescripts.

32. MSUNDUZI: progress • Community Services, service delivery and maintenance • The municipal police and traffic officers are now operating at an optimal level. By-laws pertaining to informal traders and informal settlement are being enforced. • The current By-laws are inadequate and are in the process of being reviewed. Where By-laws do not exist, new ones are being drafted and finalized. By-laws pertaining to Environmental Health and informal settlement are being enforced. Programmes have been implemented to promote environmental health e.g. grass cutting is carried out regularly, water quality is assessed regularly. • In respect of infrastructure, all service levels have been investigated with a view of improvement. Service levels with regard to basic services have been redefined and documented to ensure an optimal and continuous provision of service. A customer Relations Management Development Committee has been formed which is addressing the interface with the public regarding queries, complaints and feedback. This committee is currently establishing a customer relations centre. • A Water Management maintenance plan, an electricity Management maintenance plan, and a Sanitation Management maintenance plan has been introduced to promote proactive steps that ensure that Council’s assets are properly maintained to provide effective and efficient services to the community. • In respect of economic development, a committee was established in June 2010 to manage and monitor progression of further initiatives.

33. Specific risks • Recently, the IFP expelled 13 councillors at Okahlamba municipality, 10 ward councillors and 3 PR councillors. The councillors challenged the expulsion in the High Court and were re-instated in terms of an interim order. Although, the council then remains intact, the conflict and political instability must be noted as a potential risk in respect of the intervention; • The Administrator at Indaka municipality was replaced, upon completion of his contract, with Mr. Sithole who is also the Administrator at Okahlamba municipality. There appears to be a lack of co-operation from the side of the Mayor, Speaker and acting MM, who appear to be operating almost as an autocracy. Based on this and the fact that the municipality received a n adverse audit report, this situation at Indaka will be monitored and further and more stringent intervention steps must be considered.

34. THE WAY FORWARD • All interventions will terminate on 30 June 2011, to ensure that fully functional municipalities are in place for the newly elected councils. • Considerable progress has been achieved, however, there is a need to ensure that all matters have been attended to that gave rise or constituted the motivation for the interventions; • The Administrators are preparing sustainable exit strategies based on the challenges identified and addressed in the recovery plans and specifically identifying outstanding matters; • The exit strategies, amongst other matters, must include outstanding matters that require implementation, resolution or completion and action plans to achieve success within reasonable and realistic time frames. • The focus at this stage of the intervention is sustainability of the progress made in respect of the intervention, however, this is dependant on various factors, e.g. capacity, resources, competence and skill of officials e.t.c

35. THANK YOU! QUESTIONS AND DISCUSSION