Presentation to the Select Committee on Appropriations

1. Presentation to the Select Committee on Appropriations October 16th 2012

2. Overview of the presentation • Introduction • Audit Outcomes • Provincial Support Programme and Coordinating Structures • OPCA Support Programme • Gauteng Government Debt Management Programme • Gauteng Debtor’s Book Project • Way Forward

3. Introduction • Core Functions of the Department include the following:- • Support and Strengthen the capacity of municipalities to manage their own affairs; exercise their powers and perform their functions; • Draft Provincial Legislation that affects the status, institutions, powers or functions of Local Government; • Monitor, support and promote the development of local government and see to the effective performance by municipalities of their functions as per Schedule 4 and 5

4. Audit Outcomes

5. Audit Outcomes • Of the 15 audited municipalities:- • 9 Unqualified:- COT, Ekurhuleni, Metsweding, Westrand, Sedibeng, Midvaal, Lesedi, Westonaria and Merafong • 6 were qualified:- Mogale City, Emfuleni, COJ, Nokeng, Randfontein and Kungwini • 0 disclaimers or adverse

6. Audit Outcomes- Progress • 8 Municipalities have maintained their unqualified status over the last two financial years • 4 Municipalities have maintained their qualified status over the last two financial years. • 3 municipalities have regressed over the last two financial years. • This is of great concern to the Province and plans are in place to address the challenge. Au

7. Audit Outcomes- Trend

8. BACKGROUND AND CONTEXT

9. Audit Outcomes- Analysis

10. Audit Outcomes- Analysis

11. Audit Outcomes- Analysis

12. Audit Outcomes- Analysis

13. Audit Outcomes- Analysis

14. Supply Chain Management outcomes

15. Supply Chain Management (SCM) - Metros • Supply chain management findings relating to irregular expenditure not condoned in terms of section 170 of the MFMA by national treasury. In this regard, the metros faired as follows: • COJ-R432 million • COT-R119 Million of which R94 million related to contracts entered into the prior periods • EMM-R14 Million

16. Supply Chain Management (SCM) - Metros Plan to address the issues:- • Tracking mechanisms will be implemented such that when contracts are entered into, plans for the closure of the project are in place. • Interactions with National treasury will be initiated to review the applicability and constitutionally of the legislation relating to suppliers in the service of the state. • Ensure that internal controls are in place to ensure compliance with legislation relating to procurement matters. • The city of Johannesburg deviation policy should be reviewed to ensure it meets the AG requirement. AGSA uses the requirement set in Regulation 36 and reasons provided are assessed against this SCM regulation.

17. Supply Chain Management (SCM) - Metros SCM findings on awards made to persons in the service of the state 9 SMC Regulation 44) • COJ-Municipality (13-R6.6 Million) and other state institution (27=R45 Million) excluding municipal entities; • COT-Municipality (41=R20 Million) and other state institution (127=R24, 46 Million); • EMM-Municipal (4=R0, 5 Million) and other state institutions 28=R149.9 million)

18. Supply Chain Management (SCM) - Metros Plan to address the issues:- • Internal controls need to be improved to identify suppliers who are employed by the municipalities and the municipal entities. SALGA is in the process of consolidating a database of employees of the state in Gauteng for easy access to municipalities. • It is a challenge for local government to identify employees in the service of the Public Service. Engagements are underway to discuss and resolve the matter with National treasury and the Accountant General, especially in relation to the constitutionality of the legislation

19. Supply Chain Management (SCM) - Metros Unauthorized expenditure in excess of the limits amount (provided for in the votes R50 million) • COJ –R43 Million for bulk purchase and grants and subsidies paid R13 Million • COJ-R 53 Million mainly relating to overspending on guarding services by JMPD Plan to address the issue- • The limits in legislation on the amount that the municipalities can spend over and above the allocated votes could be low. There is a need to engage and review the limits in line with the size of metropolitan municipalities and their respective budget.

20. Supply Chain Management (SCM) - Metros Fruitless and wasteful expenditure with regard to interest on:- • overdue account; • penalties from South Africa Revenue Services; • expenditure for resources not utilized and traffic fines. Plan to address the issues • Training of the compliance officers and their staff to ensure proper understanding of the applicable laws and regulations; • Explore the development of a compliance check list which will be used to ensure that laws and regulations are compiled with before transgression occur.

21. Supply Chain Management (SCM) - Locals • SCM findings on awards made to persons in the service of the state (SCM regulation 44): • Sedibeng District Municipality (SDM) (1=R836 942) and other state institution ( 23=R527 497) • Emfuleni Local Municipality (1=R94 000) and other state institutions ( 15=R4 750 553) • Unauthorized expenditure, overspending on total budget or main division within budget: • Merafong City-R 13 million for bulk purchase and grants and subsidies paid. • Mogale City- R11,8 million relating to overspending of the total operational expenditure budget • Randfontein-R53 million mainly relating to overspending on operational expenditure

22. Supply Chain Management (SCM) - Locals • Other Supply Chain Management (SCM) findings identified for all municipalities were as follows: • Reasons for deviation that do not meet the requirements of SCM regulation 36, • Advertisement for tenders less than minimum period • No competitive bidding process for other awards • Three quotations not obtained • Tender process not followed for awards that are required by the legislation • Inadequate contract management resulting in deviations to SCM as contracts are not managed properly towards the end of their terms.

23. Supply Chain Management (SCM) • Tender processes not followed for awards that are required by the legislation; • Inadequate contract management resulting in deviations to SCM as contracts are not managed properly towards the end of their terms. • Limited capacity and skill within SCM units in municipalities.

24. PROVINCIAL SUPPORT PROGRAMME

25. Introduction – Support initiatives • Revenue Enhancement and debtor management model implementation • Hands on support to monitor, advise on and coordinate the implementation of Operation Clean Audit (OPCA) • address issues raised by the Auditor General (AG) in Randfontein and Tshwane • Compilation of GRAP 17 compliant asset registers (Emfuleni and Westonaria). • implemention the shared services model in the Westrand region (the Westrand district municipality and its locals.) • The establishment and training MPAC members.

26. Introduction – Support initiatives • Coordination and support of key structures and committees • CFO and MEC/MMC Indaba Forum • OPCA Provincial Coordinating Committee (OPCA PCC) • Support to implement the Performance Management System in Tshwane • HR support with regards to the filling of critical posts with special focus on the top six posts • Implementation of the Critical and Scares skills strategy and plan

27. Management Paradigm Shift Management paradigm shift entails the following: • Increased Accountability • Role of political and administrative leadership: Mayor and MMC finance, Municipal Manager and CFO • Accountability of all employees towards achieving clean audits (declaration forms/performance contract for all SMS members) • Each senior manager to do an analysis to identify risks in their areas of work that could compromise OPCA • Development of comprehensive plans to achieve clean audits

28. Management Paradigm Shift • Diligent monitoring of the implementation plan • OPCA standing item in all Council and SMS meetings • Establishment of an OPCA steering committee to play oversight role • Weekly/bi weekly OPCA meetings to track progress made in addressing AG issues with involvement of MMC finance in the dire cases. • Management of the audit process: • Efficient document management systems (availability of supporting documentation) • Availability of senior managers during audit process

29. operation Clean Audit Support Purpose and Objectives:- • The OPCA Targeted Hands on Support is a support project focusing on assisting Municipalities that received disclaimers and qualifications in their audit opinions during the 08/09 and 09/10 financial year. • The project aims to assist Municipalities to receive unqualified and clean audit outcomes by the financial year 14/15. • The support is currently been implemented across most Local Municipality and the new City of Tshwane Metro Municipality.

30. Targeted Hands on Support • Primary focus areas of the targeted hands on support are:- • Internal Controls • Asset Management • Oversight Function • Revenue Management • Capacity Building – Scarce and Critical Skills • Performance Informatio; • Annual Financial Statements • Integration of the Financial system data- City of Tshwane

31. Progress of the targeted hands on support in Tshwane and Emfuleni

32. Tshwane Metro Municipality (CoT) operation Clean Audit Support Progress To Date Support was provided in the following areas: • Analysing revenue exception reports generated by the Computer Assisted Auditing Techniques program • Development of a Compliance checklist • Creditor’s Reconciliations • Asset verification on movable assets and operational leases

33. Tshwane Metro Municipality (CoT) operation Clean Audit Support Progress To Date Tshwane Metro Municipality (CoT) • 15 technical experts were allocated to assist with verification of over 100 000 movable assets for the city of Tshwane at different locations in the period June / July 2012 • This support has enabled the City of Tshwane to integrate the data from the merged municipalities (Metsweding, Nokeng and Kungwini.)

34. Emfuleni Asset Management Support Progress to date • The compilation of the asset register was completed in 2011, however there were still areas that needed to be resolved regarding the calculation methodologies as well as supporting documentation for opening balances. As a result the municipality was qualified in the area of asset management • The Price Water Cooper contract was extended to address the issues of qualification as well as to update the asset register with new assets that the municipality procured post the compilation as well as library books. • Significant progress has been made and more detailed reports are available.

35. Emfuleni Asset Management Support Progress to date Objective:- • The Department identified assets management (with focus on GRAP 17 compliance )as the high risk area in Emfuleni and financially supported the municipality in this regard Progress:- • To date Price Water Coopers was contracted by the municipality to compile a GRAP 17 asset register. • The initiative included both infrastructure and movable assets.

36. OPCA Provincial Coordinating Committee (OPCC) • The OPCACC , coordinating and monitoring structure was established to:- • monitor the implementation of OPCA within Municipalities as well as the provincial departments within the province. • All Municipalities the progress made in addressing AG issues as well as progress towards achieving clean audits. • All stakeholders also present the progress made in supporting municipalities to achieve clean audits. • Streamline the support from various stakeholders to municipalities.

37. Departmental Support – Supply chain • Provide hands on support to targeted municipalities. • Monitor compliance and the implementation of municipals plans through the OPCACC and Municipal Audit Steering Committees. • Facilitate and strengthen critical capacity in terms of skills, policies and systems through hands on support to targeted municipalities.

38. Internal Control Structures

39. Governance of Municipal Finances Upgrading systems to ensure effective internal control measures (Audit Committees and Internal Audit) • MFMA regulates the establishment of Audit Committees and Internal Audit. GPG conducting study on shared services where the functions are not effective. • Availability of credible annual risk based plan - alignment to risk assessment • Development of Internal Audit and Audit Committee framework • A partnership has been developed by GPG with the Institute of Internal Auditors to play a strategic role towards strengthening the functioning and focus of the Internal Audit Function. • Strengthening the assessment, monitoring and implementation of Key controls recommendations

40. Internal Control Structures • Municipalities are statutorily required by section 165 and 166 of the Municipal Finance Management Act (MFMA) to establish strong governance structures to advise the municipality on matters relating to:- • internal controls, internal audit, accounting and financial reporting, • risk management, • performance management, • governance, • compliance with the MFMA and any other applicable legislation.

41. Establishment of Functional Internal Audit Units Establishment of Internal Audit units by Gauteng Municipalities:

42. Establishment of Functional governance

43. Overall Assessment of Internal Audit Units • Most of the Municipalities have established in-house internal audit units informed by their approved Charters • The Midvaal LM and Lesedi LM which have outsourced this function to private audit firms. • The issue of outsourcing the internal audit function poses a challenge to municipalities with regard to skills transfer and huge costs to municipalities. Some municipalities view outsourcing as a means to enhance the independence of the internal auditors; • Challenge:- • The capacity of internal audit staff remains a challenge if the skills transfer clause is not implemented for those with outsourced services. • For those with internal units delays in filling of vacancies in these units impact negatively on the performance of the internal audit function.

44. Establishment of Functional governance • The internal auditors of municipalities have appropriate qualifications but not sufficient experience on IT and financial audits, • Capacity is a challenge in relation to the size of a municipality which leads to the internal audit function being less effective. • Some internal audit units are not allocated sufficient budget to purchase electronic audit software which would support their work in complying with the required professional standards. • Senior management do not give support to the internal auditors through the commitment of implementing the recommendations of internal audit unit. Ad hoc assignments by management impact negatively on the execution of the internal audit plans.

45. Establishment of Functional Audit Committees Establishment of Audit Committees by Gauteng Municipalities:

46. Establishment of Functional Audit Committees

47. Overall Assessment of Audit Committees • The assessment is based on the Departmental attendance at audit committee meetings. • The Auditor-General also attends these audit committee meetings as a means to improve audit opinions and giving guidance in this regard. • The composition of the established audit committees is in line with the MFMA as the members are not in the employ of the municipality and they are not councilors. • The challenge comes when members resign from the audit committees as it takes a lengthy process to advertise and appoint new members to serve on the committees.

48. Shared Services provincial support • In response to the challenges experienced within the Internal audit functions and audit committees, the Department has undertaken a feasibility study with the view of establishing shared services. • A study concluded that it is feasible and cost effective to establish a shared services model in the Westrand. • The outcomes of the study were then presented to the municipal managers and mayors within the West Rand Region. • The findings were also presented to the regional transformation committee, which is made up of mayors, MMCs finance, and municipal managers of all the municipalities in the Westrand. • The transformation committee approved that the shared services be established. • The individual municipalities need to take council resolutions to implement .

49. MPACS • A separation of powers model has been introduced in Gauteng local government. The Oversight Model mirrors parliament’s portfolio committees. • It was piloted City of Jo’burg (COJ) - • It has now been rolled out in the City of Tshwane and the Ekurhuleni Metropolitan Municipality. • Municipal Public Accounts Committees (MPACs), which are similar to parliament’s Standing Committee on Public Accounts (SCOPA) have been established across all municipalities in Gauteng since the Local Government Elections 2011. • Their primary responsibility is to ensure that reports of the Auditor General (AG) are given the serious attention that they require by municipal councils.

50. State of MPACS • An evaluation of MPACs in Gauteng in 2010 highlighted challenges upon which the following recommendations were formulated: • A need for a standard approach on the appointment of members, • Continuous training for members was required, constant monitoring of MPACs, • Granting chairpersons fulltime councillor status, and • To develop a legislative authority for MPACs. • By 31st October 2011, all MPACs were established in Gauteng in line with Circular 56 dated June 2011