Local Government Revenue and Expenditure: Second Quarter Local Government
National Treasury has today released local government’s revenue and expenditure for the second quarter of the 2014/15 financial year, as well as spending on conditional grants for the same period. This report covers the first six months (1 July 2014 - 31 December 2014) of the municipal financial year ending on 30 June 2015.
The report is part of the In-year Management, Monitoring and Reporting System for Local Government (IYM) which enables provincial and national government to exercise oversight over municipalities, and identify possible problems in implementing municipal budgets and conditional grants.
In-year reporting is now well institutionalised with most municipalities consistently producing quarterly financial reports. The reporting facilitates transparency, better in-year management as well as the oversight of budgets, making these reports management tools and early warning mechanisms for councils and officials to monitor and improve municipal performance.
1. On aggregate, municipalities spent 42.3 per cent, or R142.6 billion, of the total adopted budget of R336.8 billion as at 31 December 2014 (second quarter YTD results for the 2014/15 financial year). In respect of revenue, aggregate billing and other revenue amounted to 47.7 per cent, or R160 billion, of the total adopted revenue budget of R335.7 billion.
2. In the period under review, capital expenditure amounted to R19.1 billion or 30.6 per cent of the main capital budget of R62.5 billion. In the previous financial year 32 per cent performance was recorded.
3. Of the operating expenditure budget amounting to R274.3 billion, R123.4 billion (44.9 per cent) was spent by 31 December 2014.
4. According to the budgeted monthly operational and capital expenditure submitted by all municipalities as supporting tables to the adopted budgets, there is an under performance of 1.3 per cent or R1.9 billion on year-to-date revenue collection, 7 per cent or R9.2 billion on operational expenditure and 40 per cent or R12.7 billion on capital expenditure.
5. Municipalities have budgeted R76.9 billion for salary and wage expenditure for the 2014/15 municipal financial year. This represents 28 per cent of their total operational budget of R274.3 billion. As at 31 December 2014 spending is R37 billion or 48.1 per cent.
6. Aggregated year-to-date expenditure reported by metropolitan municipalities amounts to R87.8 billion or 44.8 per cent. The aggregated adopted capital budget for metros in the 2014/15 financial year was R34.6 billion of which they have spent 28.7 per cent or R9.9 billion compared to R5.9 billion reported in the second quarter of 2013/14 financial year.
7. When billed revenue is measured against their adopted budgets, the performance of Metros shows surpluses across all four core services for the second quarter 2014/15. This does not take into account the collection rate:
- Water revenue billed was R10.6 billion against expenditure of R9.4 billion;
- Electricity revenue billed was R32.2 billion against expenditure of R29.4 billion;
- The revenue billed for waste water management was R4.2 billion against expenditure of R3 billion, and
- Levies for waste management billed were R3.4 billion against expenditure R3.3 billion.
8. Similarly the performance against the adopted budget for the four core services for the secondary cities for the second quarter 2014/15 also shows surpluses against billed revenue without taking into account the collection rate:
- Water revenue billed was R2.6 billion against expenditure of R2.1 billion;
- Electricity revenue billed was R7.8 billion against expenditure of R6.4 billion;
- The revenue billed for waste water management was R1.1 billion against expenditure of R669 million; and
- Levies for waste management billed were R918 million against expenditure of R650 million.
9. Aggregate municipal consumer debts amounted to R96.6 billion (compared to R98.9 billion reported in the first quarter) as at 31 December 2014. The amount for outstanding debtors for government represents 4.1 per cent or R4 billion of the total outstanding debtors. The largest component relates to households which accounts for 62.7 per cent or R60.5 billion (58.6 per cent or R57.6 billion in the first quarter).
10. It needs to be acknowledged that not all the outstanding debt of R96.6 billion is realistically collectable as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.
11. If rates and consumer debt is limited to below 90 days, and all interest is excluded from the calculation then the actual realistically collectable amount is estimated at R20.7 billion.
12. Metropolitan municipalities are owed R55.4 billion in outstanding debt as at 31 December 2014. This represents an increase of R3.4 billion, or 6.6 per cent, from the second quarter of the 2013/14 financial year. Compared to the previous quarter’s publication, there is a slight increase of R10.7 million. The City of Johannesburg is still owed the largest amount at R18.2 billion. This is followed by Ekurhuleni Metro at R10.5 billion, Cape Town at R6.7 billion and City of Tshwane at R6.4 billion. The three Gauteng metros constitute 63.4 per cent of the total debt owed to all eight metros across the country.
13. Households are reported to account for R34.9 billion or 63 per cent of outstanding debt to metros, followed by businesses which account for R17.4 billion or 31.3 per cent. Debt owed by government agencies is approximately R1.6 billion or 3 per cent of the total outstanding debt owed to metros.
14. Secondary cities are owed R18.1 billion in outstanding consumer debt. The majority of debt is owed by households which amount to R10.6 billion or 58.6 per cent of the total outstanding debt. Out of the total debt of R18.1 billion, R14.8 billion or 81.5 per cent has been outstanding for more than 90 days. The total amount shows an increase of R1.6 billion from the R16.5 reported in the second quarter of the previous year.
15. Municipalities owed R22 billion as at 31 December 2014, an overall decrease of R4.2 billion on the R17.8 billion reported in the second quarter of 2013/14. When compared to the R17.8 billion reported in the second quarter of 2013/14, an increase of R4.2 billion is realised. A majority of the amount owed to contractors and service providers is mainly under the 30 days classification and may indicate delayed spending by municipalities. This amount is however understated when compared to the aggregated amount of R39.9 billion for metros as disclosed in the Annual Financial Statements as at 30 June 2014.
16. Free State has the highest percentage of outstanding creditors greater than 90 days at 81.9 per cent, followed by Mpumalanga at 74.6 per cent and North West at 64.5 per cent respectively. The year-on-year increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges.
17. The aggregated year-to-date actual collection rate is 95 per cent compared to an adopted budgeted collection rate of 90.7 per cent. This represents an aggregated over-performance of 4.3 per cent. It is suspected that the reported collection rate is distorted owing to reporting inconsistencies on cash flow movements of municipalities.
18. At the inception of the financial year, the metros budgeted for an adopted collection rate of 92.9 per cent and achieved an actual collection of 94.8 per cent which is 1.9 percentage points better than the original target.
19. The secondary cities reported collection against billed revenue at 92.7 per cent which is 5.8 percentage points more than the adopted budgeted target of 86.9 per cent.
20. The total balance on borrowing for all municipalities equates to R54.5 billion as at 31 December 2014. This includes long term loans of R34.6 billion, short term marketable bonds of R4.0 billion, long term marketable bonds of R14.2 billion. The balance represents other short and long term financing instruments.
21. As at 31 December 2014, the total investments made by municipalities equates to R23.3 billion. This is R1.2 billion less than the R24.5 billion reported in the previous quarter. Investments include bank deposits of R16.7 billion, guaranteed endowment policies (sinking funds) of R3.7 billion, negotiable certificates of deposits at banks of R2.1 billion, listed corporate bonds of R761 million and some smaller investments.
22. All municipalities are now required to report on their quarterly targets for service delivery (non-financial) performance with effect from 1 July 2014. This is a new requirement and the poor response is an indication that municipalities are struggling to incorporate this expanded reporting requirement into the Section 71 reporting framework. As it relates to metros and secondary cities progress has been made through a concerted effort on the part of National Treasury and going forward attention will be given to the remaining municipalities in collection the non-financial performance information.
23. During the 2014/15 financial year, an amount of R32.9 billion was published as conditional transfers (i.e. both direct and indirect transfers) to the local sphere of government. The allocation excludes the unconditional transfer of Equitable Share (ES), General Fuel Levy, Urban Settlement Development Grant (USDG) and the Integrated City Development Grant (ICDG) amounting to R44.5 billion, R10.2 billion, R10.3 billion and R255 million respectively.
24. The equitable share allocation is an unconditional grant to municipalities which includes the RSC Levies Replacement (R4.1 billion) and the special contribution towards the Councilor Remuneration (R935 million). The USDG programme supplements the capital revenue of the metros in order to support the human settlement development programme while focusing on poor households. The ICDG is targeted at metros and provides a financial incentive for those that demonstrate good performance in infrastructure delivery while achieving an integrated urban spatial development.
25. The second quarter reporting against conditional grant provides for the expenditure performance of municipalities as reported by the transferring national officers (TNO) responsible for the administration of different grant programmes.
26. As at 31 December 2014, R13.5 billion was transferred to municipalities in form of direct grants. The total conditional expenditure reported by the national transferring officers amounts to R8.7 billion (35 per cent) while municipalities reported R9.9 billion (40 per cent). As pointed out above, reporting against USDG and ICDG grant for the receiving metropolitan municipalities is monitored through the City Support Programme and therefore does not form part of this analysis.
27. The overall conditional grant performance denotes slow spending by municipalities and maybe attributable to a number of challenges including ineffective project management skills, delays with procurement processes and limited capacity specifically in the engineering field.
28. Significant performance is recorded under the Expanded Public Works Programme at R315 million (53 per cent) against conditional grant allocations amounting to R595 million. The second performing grant is the Integrated National Electrification Programme at R537 million or 49 per cent.
29. Performance ranging between 40 per cent 45 per cent is recorded under the Municipal Infrastructure Grant (40.5 per cent), Infrastructure Skills Development grant and the Local Government Financial Management Grant (43.3 per cent).
30. The lowest performing grants as reported by the municipalities during the period under review were the Water Services Operating and Transfer Subsidy Grant (WSOS) and the Municipal Disaster Grant at less than 30 per cent. The reason for the slow performance is mainly due to ineffective procurement processes.
31. During the 2014/15 financial year, the government introduced three grants, namely: the Municipal Human Capacity Grant (MHCG), Municipal Water Infrastructure Grant (MWIG) which is a schedule 6B and the Municipal Disaster Recovery Grant (MDRG). The MHCG and MWIG were introduced in support of the government priority towards eradicating the bucket sanitation backlogs and would be administered by Department of Human Settlement and the Department of Water Affairs respectively. The MDRG was introduced in order to assist with the rehabilitation and reconstruction of municipal infrastructure which has been damaged by disaster.
32. It should however be noted that the Department of Human Settlement did not make transfers against the Rural Households Infrastructure Grant (RHIG) and the Municipal Human Settlement Capacity Grant (MHSCG) since the department envisages changing the scope of the programme. Also, the RHIG would be moved to the new department of Water Affairs and Sanitation. Expenditure in these conditional grants is expected to be take place during the third quarter of 2014/15 municipal financial year.
Further details on this report can be accessed on the National Treasury’s website: www.treasury.gov.za.
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