SOUTH AFRICA MUNICIPAL FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT


Overview

  • Reference: P-ZA-KA0-002
  • Approval date: 07/09/2016
  • Start date: 28/04/2017
  • Appraisal Date: 20/05/2016
  • Status: ApprovedAPVD
  • Implementing Agency: DEVELOPMENT BANK OF SOUTHERN AFRICA DBSA
  • Location: South Africa

Description

The proposed operation will finance technical assistance and capacity building activities in core skills required for effective implementation of the municipal PFM legislations and procedures. Skill shortage and capacity limitations is one of the biggest challenges facing local governments in South Africa. The operation will place particular emphasis on skill development and knowledge transfer to ensure sustainability. The project has two mutually reinforcing components and the major activities under each component are presented as follows.

Component 1: Analytical and Advisory Services

The objective of this component is to support evidence-based policy making process in government and inform the local government reform program in South Africa. This component will focus on supporting the National Treasury to undertake four analytical work in areas where the Government prioritise for policy reform. Key activities under this component will involve mobilising a specialised experts to assess and analyse: (a) municipal pension, retirement and provident fund schemes that operates in the sphere of local government including analysis of the assets & liabilities of each scheme and the risk associated; (b) government property ownership and property rates debt per municipality and examine the liability for payment of debt in respect of property rates; and (c) the economic and financial viability of municipalities in terms of its revenue base and ability to generate sufficient own revenue from levying property rates and rendering municipal services to communities. It will undertake municipal profiling that incorporates the demarcation, economic climate, population demographic, spatial plan and establish linkages to the municipal General Valuation Roll and Supplementary Valuations. This assessment will indicate whether the municipality is economically viable as well as the strength of the municipality's revenue base. This component will further focus on delivering policy papers in the three areas identified above.

Component 2: Building Municipal Financial Management Capacity

This component aims at building human resource capacity at municipal levels responsible for public finance management. It will target key players involved in budget preparation, planning, reporting, supply chain management, risk management, cash and investment management, internal control and financial reports. The complexities in local government arise as a result of the challenges experienced and high expectations of the public demand that key personnel at municipalities have the necessary skills, experience and capacity to fulfil their responsibilities and exercise their functions and powers. The reforms in financial and performance management have also resulted in a higher level of competency requirements for municipal managers, chief financial officers, supply chain officials and other senior managers. In this regard, the project will complement government initiatives to improve the state of local government finances. Key activities under this component include: (a) develop standard operating procedures (SOPs) manuals for local government in key internal control cycles. The internal control cycles are divided into four (Cycle 1 - Budgeting, Planning and Reporting; Cycle 2 - Supply Chain Management; Cycle 3 - Corporate Governance; and Cycle 4 - Costing and Reporting); (b) develop support materials (toolkits and processes) for long-term technical advisers and technical advisers who are deployed in municipalities to support the Municipal finance management improvement program; and (c) deliver training program under the minimum competency levels for municipal officials responsible for financial management in line with the MFMA Act and related regulations. Recent assessment shows that municipal officials working on budget and treasury offices struggled to articulate, unpack and demonstrate their level of understanding of how the municipal financial management systems and process operate. Although some of the candidates have acquired knowledge and skills of the local government financial management through audit assignment, their lack of practical financial management application of the budget and treasury offices in municipalities failed them drastically. Shortage of the skilled and competent budget and treasury officers is very detrimental to the success of the government Program for improved infrastructure and service delivery, and good governance at local government levels.

Description of expected outputs The project is expected to result in increased public finance management capacity for efficiency and equitable delivery of services at municipal and local government level. At the end of the project, the following outputs are expected: (a) learning and training materials for technical advisers and technical assistants developed; (b) standard operating procedures and manuals developed for municipal officials; (c) training materials for municipal budget and treasury officials developed; (d) 15 technical advisers, 15 technical assistance and 150 municipal officials received training of which (30% of them are women); and (e) 3 analytical reports produced to inform reforms on government property management, pension and retirement scheme, and economic viability and sustainability of local governments.


Rationale

Strengthening Municipal PFM capacity is crucial to deliver infrastructure and service delivery related priorities to citizens of South Africa. The country's PFM reform strategy aims to achieve fiscal discipline, efficient service delivery, and strategic allocation of resources. Over the past couple of years, South Africa has achieved fiscal discipline at the national level. Decentralisation, being part of the core PFM reform, requires the same or equal level of expertise at the sub-national level to first, achieve fiscal discipline, but more importantly move towards efficient service delivery, which is the primary responsibility of provinces and municipalities. At present, this remains a challenge. In this regard, the National Treasury and other Central Government Departments are involved in a number of capacity building programmes aimed at strengthening the capacity and competency of sub national government staff to effectively manage financial resources to deliver infrastructure and service delivery related priorities to citizens.

Government adopted a strategy to address Municipal performance failure: Municipalities across South Africa have experienced a number of service delivery protests that range from inadequate provision of housing facilities and roads, to services like electricity and water. The most recent audit outcomes provide an indication of the financial health of municipalities but it does not measure municipal service delivery to communities. Municipal service delivery challenges include skills shortages to undertake sound financial management, infrastructure provisioning and effective transaction processing amongst others. Recent studies and audit reports shows that South African municipalities are under severe pressure to deliver sustainable services to communities that already have access to such services and then having to extend access to communities that are still without them. Further, incidents of communities engaging in service delivery protests provide an indication of where municipalities are failing dismally. As a result of persistent poor performance of municipalities over the past fifteen years, numerous support programmes and interventions have been initiated by both national and provincial government in an effort to improve the capacity of local government, to address inadequate service delivery issues and enhance good governance through better accountability and transparency. The outcomes of PEFAs, 2015 done at Provincial level indicate varied performance across municipalities. Major challenges relate to human capacity in PFM, effectiveness of internal controls in budget execution, local revenue administration and inefficacy in the collection of taxes and other local fees owed to local governments (Table 1). The National Treasury is working on program to address these (among other things). In this regard, the National Treasury is seeking support from the Bank to address issues of PFM capacities in two provinces: the North West and F ree State.

The proposed operation will help to improve in-year processes and help mitigate some of the root causes of the findings raised by the Office of the Auditor General. It will also institutionalize the implementation of the Municipal Regulation on minimum level of competency to help professionalise the local government sector to make it a career sector of choice for new and current incumbents. National Treasury of the Republic of South Africa has issued the Municipal Regulations on minimum competency levels on the 1 June 2007. The regulations affect the following positions: Municipal Managers, Chief Financial Officers, Heads of Supply Chain Management, Senior Managers, Managers and Middle Managers tasked with financial management responsibilities. The overall objective of the municipal minimum competency program is to equip officials tasked with financial management responsibilities to deliver on their contracted mandate under financial management in line with the MFMA Act (Act 56 of 2003), the relevant regulations and guidelines including the reforms in this sector. Further, the audit outcomes over the past five years have been indicative of various challenges still faced by local government. It is with this in mind that the OAG has identified support measures to strengthen implementation of this reforms through other funding sources, such as the AfDB.

The operation will enhance the implementation of financial management reforms and also to support the practical application thereof. This will result in improved internal control efficiency and effectiveness. The OAG has therefore identified the need to develop a generic set of Standard Operating Procedures (SOPs) for the key accounting cycles. Thus local government would be able to utilize this reform and inevitably be able to implement the expected internal controls, budgeting, financial management and other reforms in order to improve sound financial management and audit outcomes across recipient municipalities.

Gaps identified in terms of promoting social and economic development: Lack of spatial planning function of municipalities is a constraints to promote social and economic development. In some municipalities the function does not exist or is not effective due to clear policy and qualified staff. In other cases, it is the complex institutional arrangements that make coordination of processes related to the built environment difficult. The project will respond to this gap by carrying out an assessment of the viability of municipalities, mainly carrying a demarcation on boundaries of municipalities with economic potential, on sound valuation methodologies and the municipality's capability to effectively render services and collect revenue due from such services. Moreover, evidence shows that where the Municipal Property Rates Act has been implemented, positive increases in revenue were observed, the National Treasury also reported that a percentage of allocated funds remained unspent due to incompleteness of the information required to facilitate payment for property rates. There are also cases where several properties have title deeds with unverifiable property ownership information; and in these cases, the registered property owner no longer exists. Government departments immovable asset registers may not be accurate if they cannot account for all properties they may in fact own. The local government's budgets and expenditure review 2008 indicated that asset maintenance and life cycle of management are very weak and that municipalities are failing to manage their finances in a sustainable manner which has a negative impact on the sustainability of services to communities. The proposed project will improve knowledge on property management and promote efficiency in collection of property tax on Government property; the transfer of Government property accordance with the Deeds Registry will increase the capacity of municipalities in revenue collection. Efficiency and effectiveness in the various pension funds that are operating as Defined Contribution Funds in different municipalities will raise municipal revenues.

The matter of outstanding municipal debt is of particular concern as this constitutes non-compliance to the national financial management legislative framework. In terms of the Municipal Property Rates Act, Act 6 of 2004 and also the previous property rates legislation repealed by the new Act, the registered property owner has historically been liable for the payment of property rates to the municipality. In the case of government owned properties it may be that the property rates debt has accumulated over the years because the registered property ownership has yet to be verified; and then it raises the concern that government departments immovable asset registers may not be accurate if they cannot account for all properties they may in fact own. It is the incidence of unverifiable government property ownership that this assignment seeks to address so that liability for outstanding government debt in respect of property ownership can be directed to the correct registered property owner.

The project will help to build knowledge and inform policy reform on the financial sustainability and legal framework for pension, retirement and provident fund schemes that presently exist within the sphere of local government. In September 2013, the Executive Committee of the Central Council of the South African Local Government Bargaining Council took a decision to seek relevant information form the Registrar of Pension Funds, government employers and funds operating in the sector, to establish the number of funds operating in the sphere of local government (SALGBC Circular: 8/2013). The audit was however not well support as only 158 municipalities of the 278 municipalities responded to the request for information. Furthermore, the information provided did not specify which funds are operating as Defined Contribution Funds (DCFs). There is presently no conclusive information with regard to the number of pension, retirement and provident fund schemes that are operational in the sphere of local governments and of the extent of local government employees' financial commitments to such funds. There is no detailed financial information of how the employee contributions and benefits are calculated yet contributions are deducted from employee salaries and regularly paid to such funds.

The proposed operation will help to strengthen the National Treasury's legal mandate for monitoring and oversight of local governments which is derived from the Constitution and the Municipal Finance Management Act (MFMA) No 56 of 2003. The fiscal framework, whereby financial resources are allocated to the spheres of government, is based on the premise that local government will generate approximately eighty percent of their funding from own revenue sources (property rates, water, electricity and waste management services) that they are legally mandated to deliver. The MFMA also prescribes effective municipal budgeting and spending however, in spite of the legal obligation and current support from National Treasury and other national departments, several municipalities are in financial crisis and it is exceedingly hard for them to maintain adequate cash flows. The argument of "municipal viability" is presently at the center of the policy debate about local government performance failures. Poor service delivery, accumulating bad debt, unrealistic and unfunded budgets, financial distress and weak fiscal effort are among the contributing factors to municipal failures and consequently, the "non-viable" debate. This debate must now be expanded to consider all the elements that constitute "viability" of municipalities such as geographic boundaries as demarcated, economic activity across this landscape but still within the boundary, investment opportunities, population spread and employment statistics for example.

The operation is aligned to the National Development Plan, and PFM Capacity Building Strategy. The main priority highlighted in these strategies is the need to assist local governments to be more effective finance managers, planners and providers of service delivery and infrastructure to the communities including education, water and sanitation, solid waste management, local roads and public transport. While the project will not directly support provision of these services, it will build critical capacity that will eventually result in more efficient and effective service provision. The proposed operation is consistent with the Bank's Country Strategy Paper (CSP) for South Africa which aimed at promoting knowledge, analytical and advisory role of the Bank. The CSP mid-term review report highlights the need to continue to engage government to identify and priorities areas of partnership for technical assistance, analytical and advisory services. It is aligned with the Guideline on Middle Income Countries Technical Assistance Fund (MIC TAF) which highlights capacity building/technical assistance, and country analytical work as priority activities eligible for financing from the resources of the MIC TAF. It is also aligned with the Bank's Governance Strategic Action Plan (GAP II) which focus on strengthening local governance and accountability to effectively manage public resources for service delivery and promote citizen participation in decision making processes. To this end, the National Treasury's request for Bank financing of technical assistance is not based on financial need, rather it is keen to develop partnership and secure access to Bank expertise, knowledge and advisory services and reform implementation capacity to support its municipal capacity development and transformation program. The technical assistance to be financed under the project will be managed effectively to facilitate the institutional reform and deliver results in terms of building competency of municipal officials and technical advisers.


Key contacts

GEBRE-SELASSIE Kalayu - RDGS4


Costs

Finance source Amount
MICFUAC 683,527
TotalUAC 683,527