Taking accountability to improve audit outcomes

Transcription

1 Taking accountability to improve audit outcomes

2 PLAN DO ACT CHECK 2

3 Audit outcomes 3

4 MFMA outcomes Audit outcomes Emerging risks Internal control 0% 20% 40% Root causes Total budget: R365 billion Assurance providers 60% Compliance Human resource management and the use of consultants 80% 100% Irregular expenditure and supply chain management Annual performance reports Water and sanitation Grant management Financial health Fraud and consequences Unauthorised expenditure

5 Audit outcomes of re-demarcated municipalities vs. other municipalities 3% (1) 50% (20) 20% (47) 43% (103) Movement in audit outcomes of redemarcated municipalities: Improved = 6 26% (10) 22% (53) 3% (1) 1% (3) 15% (6) 8% (19) 3% (1) 6% (14) Re-demarcated municipalities (39) Other municipalities (239) Unchanged = 23 Regressed = 9 Outstanding = 1 Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Outstanding audits 5

6 Financial health and sustainability 6

7 Financial health of municipalities Financial viability of municipalities is on a steady decline 27% material uncertainty with regard to ability to operate in future 32% (84) 35% (93) 33% incurred a deficit 44% in net current liability position R 385 m owed by local government to AGSA by end of March % (86) 17% were able to pay their creditors in less than 30 days 40% took more than 120 days to pay their creditors 46% are able to collect monies owed to them in less than 90 days Good Of concern Intervention required 44% took more than 120 days to collect money owed to them deem more than 10% of their debt to be non-recoverable 93% 7

8 Provincial overview of municipalities with indicators of financial health Northern Cape Gauteng North West Free State Limpopo Mpumalanga KwaZulu-Natal Western Cape Eastern Cape Good Of concern Intervention required

9 Provincial overview on going concern uncertainty Western Cape 7% (5) Eastern Cape 9% (6) North West 14% (10) Free State 24% (17) Northern Cape 14% (10) Gauteng 6% (4) Mpumalanga 4% (3) Limpopo 6% (4) KwaZulu-Natal 16% (11) 9

10 Human resource management and stability at municipalities 10

11 Vacancies, stability and achievement of competency requirements municipal managers and chief financial officers Vacancy at year-end Municipal managers Chief financial officers % (11) 16% (41) 20% (52) % (14) 12% (30) 17% (44) % (20) 19% (50) % (18) 13% (35) 20% (53) 27% (70) Stability (average of months in position) Municipal managers Chief financial officers months 43 months 47 months 40 months Competency (non-achievement of minimum competency requirements) Municipal managers Chief financial officers % (17) 9% (20) 8% (16) 12% (26) 3% (6) 6% (12) 7% (16) 11% (22) 6% (12) 14% (29) 16% (36) 18% (38) Vacant for less than 6 months Vacant for 6 months or more Average number of months in position Did not meet minimum competency requirements Minimum competencies not assessed/ limitation 11

12 Municipalities with increased stability at municipal manager level also achieve better audit outcomes 71 months 50 months 34 months 38 months 12 months (1 municipality) Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings 12

13 Municipalities with stability in their CFO positions produced better financial statements or audit outcomes 60 months 48 months 34 months 40 months 20 months (2 municipalities) Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings 13

14 Municipalities with stability in their CFO positions produced better financial statements or audit outcomes % 43% 32% Leadership % 39% 33% % 42% 35% Financial and performance management % 22% 20% 40% 43% 47% 40% 35% 30% % 38% 25% Governance % 36% 29% % 33% 32% Good Of concern Intervention required 14

15 Recommendations 15

16 Engaging accounting officers in conversations that are insightful, relevant and have an impact Key control engagements / status of records review objectives Key control engagements / status of records review focus areas Identify key areas of concern that may derail progress in the preparation of financial and performance reports and compliance with relevant legislation and consequential regression in audit outcome Financial health Oversight and monitoring Financial management Provide our assessment of the status of key focus areas that we reviewed IT management Key focus areas Performance management Assess progress made in implementing action plans/ follow through with commitments made in previous engagements Identify matters that add value in putting measures and action plans in place well in advance to mitigate risks HR management Compliance management Procurement and contract management 16

17 Key internal control recommendations A comprehensive and appropriate IT strategy Accountability for non-performance Stable leadership Effective governance structures and committee charters Action plans that are tracked and met Leadership Adequate oversight over financial, compliance and performance reporting An up-to-date policy register Effective and appropriate HR training plan Effective organisational structure Adequate oversight over the cash flow forecast The role of an Accounting Officer per s38 of PFMA includes, not limited to: - Having effective systems of financial and risk management and internal controls - Taking effective and appropriate disciplinary steps - Managing working capital - Enforcing compliance 17

18 Key internal control recommendations Systems and processes to monitor compliance Structured and appropriately capacitated finance function Entrenched internal control disciplines/checks and balances Effective financial systems Financial and performance management Centralised procurement process Standard operating procedures for performance reporting Proper record-keeping in all areas Formal controls over IT systems in all areas Accounting Officer should ensure that management performs these functions to support their role in addressing financial and administrative controls such as: - Proper record-keeping - Internal control disciplines are entrenched - Processes to monitor compliance - Effective financial systems and appropriately capacitated finance function 18

19 Key internal control recommendations Encourage management to submit regular report Effective risk management process Effective governance structures Thorough review of quarterly key control reports Governance Adequately capacitated oversight units Adequate resources and skills of internal audits Seriousness of internal audits Internal Audit, Audit Committees and monitoring institutions should ensure that: - Adequate oversight is administered - Risk management is effective - Role of internal audit is elevated 19

20 Observations The focus of many municipal leaders was on the local government elections and important interventions to address vacancies and instability as well as poor control environments were postponed with the view that it would receive attention by the new administration or that the amalgamation as a result of the re-demarcation of municipal boundaries would address it. The audit outcomes can be also be negatively impacted if the new administration disowns the audit outcomes of the previous years and do not follow through on the commitments made by their predecessors to improve audit outcomes. We call on the municipal leadership to ensure that accountability is given the highest priority from the start. The general report provided an overview of the audit outcomes and our messages since , and we highlighted that the audit outcomes in had significantly regressed after the 2011 elections. This was as a result of instability following changes in the political leadership and at the level of municipal manager and senior management, including the non-renewal of contracts. 20

21 Recommendations We have introduced quarterly key control engagements with all the municipalities commencing in the financial year. The main thrust of this intervention is the evaluation and review of the status of accounting records. The objective is to appraise management and leadership of the areas of significant audit risk that require their priority action. It is hoped that this will be a sufficient red flag mechanism to enable swift management reaction before major disasters materialise in the control of finances. The constitution stipulates that local government should provide democratic and accountable government for local communities. We believe that the newly elected mayors and councillors and the administration that supports them are ready to accept their responsibilities and are willing to be held accountable for the performance of the municipalities they now govern. Councils and municipal managers, with oversight from the provincial CoGTAs, should ensure stability in key senior management positions (also after elections and re-demarcations) specifically those of municipal managers, CFOs and heads of SCM units. The ability to attract and retain competent officials remains a major challenge in local government but is key to consistent performance and a strong control environment. 21

22 The macro view and benefits of corporate governance To provide democratic and accountable government for local communities To ensure the provision of services to communities in a sustainable manner To promote social and economic development To promote a safe and healthy environment To encourage the involvement of communities and community organisations in the matters of local government (Extract from King IV; Report on Corporate Governance for South Africa 2016) 22

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24 ACCREDITATION

25 PANEL DEBATE: The role of Local Government in the New Urban, Global and Local Agenda We heard from Prof. Edgar Pieterse; Deputy Minister Andries Nel; and SALGA President Parks Tau And the message was The new Urban, global and local agenda for local government necessitates a re-think of the structuring and categorization of municipalities; local government must inculcate the spirit and essence of the SDGs into our everyday planning and programmes,

26 PANEL DEBATE: The role of Local Government in the New Urban, Global and Local Agenda We were challenged to ensure that local governments and cities are given appropriate legal and policy mandates to undertake their responsibilities of delivering services to the people. Put in place specific capacity building mechanisms to support and build a cohort of elected local officials and urban professionals to implement the New Urban Agenda and SDGs. Prioritise social inclusion and spatial equity by supporting municipalities to pursue social and economic growth; and developing social housing integrated with people s activities, ecosystems and institutions. create organised networks to share cases and lessons of best practice in affordable, energy-efficient, renewable and sustainable housing technologies for our members. In line with the Addis Ababa Action Agenda paragraph 34, municipalities should be supported in raising revenues including ability to directly access international funding with minimal constraints. Engage people in co-production and co-creation towards a sustainable world to eradicate poverty, address inequality to ensure prosperity for all taking into account the diversity of the people and acknowledging culture and indigenous knowledge.

27 PANEL DEBATE: Financial Sustainability of Local Government and Fiscal Equity We heard from Executive Mayor Mpho Khonou; Economist Siphamandla Mkhwanazi; and Financial and Fiscal Commission And the message was Financial sustainability and revenue management of municipalities remain of concern; Un-funded mandates remain a challenge besetting municipalities; Inadequacy of equitable share allocations to municipalities; No clarity on the cost of basic services across municipalities;

28 PANEL DEBATE: Financial Sustainability of Local Government and Fiscal Equity We were reminded that Mayoral residences are not favours but are necessary to maintain the status of council; At other spheres of government Public Office Bearers are earning the same despite population and size but at local government it is convenient to use population and income; We were challenged to Limit the appointment of service providers especially in instances where municipalities can do the work themselves

29 PANEL DEBATE: Financial Sustainability of Local Government and Fiscal Equity We were concerned that Too much focus on metros and nothing said about financial assistance to districts; Fuel levies only extended to metros, should also go to districts to deal with transport matters; if local government was seen as important this would ve been reflected in the equitable share allocations made to the sphere; Electricity is one of the biggest revenue enhancers but in recent times have found that the revenue from electricity is no longer sustainable; Councillor security increase in attacks or threats to the lives of councillors; FFC not knowing the competencies of districts;

30 PANEL DEBATE: Financial Sustainability of Local Government and Fiscal Equity We recommend that SALGA fast track the concept of pool funding municipalities to find a way to put together resources and work together; SALGA, as a constitutionally inspired body, to occupy it s place in the IGR space and take up issues around councillor remuneration; SALGA Presidency must meet with FFC to clarify the powers and functions of municipalities and the skewed allocations to municipalities; SOEs must play a pivotal role in the enhancement of the local economies and economic growth within municipalities; FFC recommendations should be implemented; The various measures embarked upon by SALGA in protecting the sphere and in proposing viable alternatives to the current fiscal dispensation should be supported.

31 PANEL DEBATE: Economic and Infrastructure Development We heard from Minister Ebrahim Patel; Deputy Minister Jeremy Cronin; and Deputy Mayor Ian Neilson And the message was Lack of maintenance of existing infrastructure is problematic the focus only on new infrastructure and the new legacies; Municipalities also own properties in well located spaces but not used properly or most appropriately; National Government created a technical project management unit with technical experts such as engineers, project managers & accountants this is to be a resource to the state;

32 PANEL DEBATE: Economic and Infrastructure Development We were reminded that Public works the largest landlord in the country a lot of these properties are poorly maintained and some even abandoned; Key lever held by local government is the ability to own property and capital expenditure; There are number of Infrastructure development limitations; including lack or non-existence of planning schemes; lack of financial resources to execute and lack of appropriate skill levels; We were challenged to Improve the interface between Department of Public Works and other government departments and municipalities; To use existing properties for precinct development also to use it to offer decent services; Better integrate the funding.

33 PANEL DEBATE: Economic and Infrastructure Development We were concerned that Metros are developing and population increasing at the disadvantage of districts and local municipalities too much focus on infrastructure in metros We agree to Appropriate by-laws to assist and enable municipalities to play their developmental role; Address the inequalities that exist across municipalities in terms of funding, grading and infrastructure development projects; Lobby government to look at earmarking funding exclusively for maintenance; Mandate SALGA to look into how best infrastructure development could be spread across all types of municipalities;

34 PANEL DEBATE: Municipal Demarcation and its impact on Good Governance and Municipal Sustainability We heard from Executive Mayor Deon De Vos; Public Protector Adv. Busisiwe Mkhwebane; Auditor General Kimi Makwethu MDB Deputy Chairperson Ashraf Adam And the message was Demarcation must go hand in hand with functions of municipalities; Total of 26% municipalities that were re-demarcated continue to suffer uncertainty and financial viability; About a third of municipalities have overburdened financial commitments;

35 PANEL DEBATE: Municipal Demarcation and its impact on Good Governance and Municipal Sustainability We were reminded that There are some success stories following the merger of some municipalities; A number of issues regarding the demarcation process and the general functioning of the Municipal Demarcation Board remains of concern; We were concerned that Following demarcation there has been increase threats of violence from communities with municipalities directly affected;

36 PANEL DEBATE: Municipal Demarcation and its impact on Good Governance and Municipal Sustainability We agree that The MDB needs to reconsider its approach to boundary re-determinations That ward delimitation be done based on inhabitants as per the findings of Statistics SA; That practical and geographical realities needs to be taken into account in the process of ward delimitations; That the financial impact of demarcation on municipalities need to be determined; That financial viability cannot be addressed by demarcation in isolation but also through appropriate allocation of powers and functions; That a more progressive approach should be followed with regard to demarcation disputes.

37 New Urban, Global and Local Agenda Edgar Pieterse SALGA Council of Mayors June 1017

38 Dissonant Times New Horizons & Agreements Multi-level governance Institutional Reconfiguration at the Local Scale Citizen Empowerment

39 DISSONANCE

40 Trump/Duterte Rebooting of Cold War stockpiling Implosion of EU Project? Syria & Palestine Runaway income inequality Refugee Xenophobia Dramatic climate events Workless futures

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44 This week Chinese president Xi Jinping meets visiting California governor Jerry Brown to discuss a climate deal.

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46 Source: OECD

47 Temperature Population CO2 concentration GDP Loss of tropical rainforest Water use Species extinction Motor vehicles Paper consumption Fisheries exploited Ozone depletion Foreign investment The Great Acceleration Great Acceleration

48 PLANETARY CRISIS & SOCIAL CRISIS Our extractive economic system is producing severe environmental harm, inequality and economic redundancy. Existing political and regulatory institutions are not geared to address this. A solution demands a civilizational effort. Cities are at the core of this new Sustainable Development Agenda

49 Is it possible to achieve growth, economic inclusion and a stable climate in a generation? 1. How to double energy production and reduce carbon emissions by half at the same time? 2. How to increase food production by 50% while cutting land emissions by half? 3. Can the rate of innovation, speed of deployment and exchange be accelerated in a profoundly asymmetrical trade, economic and political international dispensation? ONLY FAR SIGHTED AND CAPABLE LEADERS CAN ADDRESS THESE CIVILISATION QUESTIONS

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51 The biggest threats and insecurities are: Rising inequality within and between countries Job loss due to automation Climate change impacts that exceed the capacity of the risk industry to stabilise local, national and global markets

52 GLOBAL COMPACTS

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55 Human Development (education, health, culture & social protection) [LOCAL] GOVERNANCE HUMAN RIGHTS FRAMEWORK GDP growth, job creation & resource productivity Resilient' growth (macro) GHG Emission Reduction, Resource Efficiency & Ecosystem service regeneration Source: Gold IV Report, 2016

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58 NATIONAL SUSTAINABLE DEVELOPMENT STRATEGY NATIONAL URBAN POLICY & LINKED RURAL POLICY NATIONAL SPATIAL PERSPECTIVE NATIONAL INFRASTRUCTURE INVESTMENT PROGRAMME FLAGSHIP PROJECTS: NEW URBAN AGENDA INTELLIGENT SPATIAL DATA MANAGEMENT PLATFORM Source: UCLG Gold IV Report, 2016

59 Growth Management Strategy (20yrs) Local Infrastructure Investment Plan (10-15 yrs) Integrated Development Plan (term of office) Spatial Development Framework (15-30yrs) ENERGY TRANSITION PLAN WATER SERVICES DEV PLAN INTEGRATED TRANSPORT PLAN INTEGRATED WASTE MANAGEMENT ICT PLAN Catalytic Projects (term of office) Rolling Regulatory Reform INFRASTRUCTURE LIFECYCLE ASSET MANAGEMENT PLAN INTELLIGENT DATA MANAGEMENT PLATFORM

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61 FIX the system TRANSFORM the system Source: UN-Habitat World Cities Report, 2016

62 E-governance can help Source: World Cities Report, 2016

63 As the linchpin between the political and administrative processes, governments and citizens, Mayors are arguable the most important resource and drivers of the New Urban Agenda However, this implies a new model and modality of leadership: transparent, accountable, innovation-oriented, networked and distributed.

64 THANK YOU

65 Private and confidential Consumer Health Siphamandla Mkhwanazi* Consumer Economist (011) June 2017 Analyst certifications and important disclosures are in the disclosure appendix. For other important disclosures, please refer to the disclosure & disclaimer at the end of this document

66 Private and confidential The SA consumer in brief

67 BMR household income* segmentation Key points Based on population aged 15+ Note that household income brackets differ from personal income brackets. This is because there could be more than one person generating income in a single household. Household income % of total household % share groups 2016 income brackets, p.a. Description s of income Primary source(s) of income Group 1 R0 - R20,500 Lowest % salaries, 37% grants Group 2 R20,501 - R89,000 Second lowest % salaries, 30% grants Group 3 R89,001 - R202,500 Low emerging middle % salaries Group 4 R202,501 - R412,000 Emerging middle % salaries Group 5 R412,001 - R707,000 Realised middle % salaries Group 6 R707,001 - R1, 512,000 Emerging affluent % salaries Group 7 R1,512,00 - R2,414,000 Affluent % salaries Group 8 R2,414,001+ Wealthy % investments, 36% salaries Groups 1-2: Low income earners Groups 3-5: Middle income earners Groups 6-8: Affluent earners *All income estimates are on cash-flow basis, i.e., income actually received including nonrecurring forms of income (such as inheritance, insurance pay-outs etc.), and after personal income tax obligations. Source : BMR, SBR

68 Household income vs. expenditure 3 Key points Distribution of households across income groups % share to total income by income groups 62.3% of all households in SA earn less than R89,000 p.a. This includes households that have no income. This group accounts for 11.6% of total income, but contributes 30.5% to total expenditure (a ratio of 2.6 times). % % The middle segment forms 32.3% of the population, with a 79.8% share of total income, and contribute 62% to total expenditure (a ratio of 1.9 times). Affluent groups form 1.2% of the population, have a 20.1% share to total income, and contribute 7.6% to total expenditure (a ratio of 0.4 times). % % share to total expenditure by income group Source all charts: BMR, SBR SA households primary source of income Source % of households relying on source as their primary income Salaries & Wages 62.4% Grants 23.7% Net profit 6.6% Other transfers 5.5% Pensions & Annuities 1.3% Investments 0.4% Total 100.0%

69 Private and confidential Zooming into consumption of basic household utilities & essential goods

70 Scope of the exercise: what are utilities and essential goods? 5 Total expenditure on utilities: R123.7bn in 2016 Sewage Refuse Water supply Levies Insurance and social protection (mainly by those living in estates) Total expenditure on basic/essential household goods: R951.8bn in 2016 Utilities; Food; Clothing; Health; Education; Transport ;and Communication.

71 Low income earners: Utility* bill becoming less 6 Key points Total expenditure on utilities: R123.7bn in 2016 Those earning <R7.4k pm consumed R32bn 25.9% of total expenditure on utilities *Utilities: -Sewage -Refuse -Water supply -Levies -Insurance and social protection **Essential expenditure: -Basic household utilities; -Food; -Clothing; -Health; -Education; -Transport ;and -Communication. % % Utility bill as % of income Utility bill as % of income 17.0 Essential goods** as % of income: Low income earner struggling to make ends meet Essential goods as % of income Low income earners consuming 0.4 percentage points less on utilities as % of their income, versus 2011 Income has generally grown relatively faster than expenditure on utilities Majority in rural areas, where these services are provided for free by government Generally, very low willingness to pay for municipal services Low income earners consume more than twice their income on basic goods alone Some expenditure done on their behalf by Government Family members Employers High incidence of informal credit ( mashonisa )

72 Middle income earners: Carrying the burden of expenditure on utilities 7 Key points Total expenditure on utilities: R123.7bn in 2016 Those earning: -R7.4k-R17k; -R17k-R34k; -R34k-R59k pm spent R61.6bn on utilities As a group, they contribute 49.8% of total expenditure on utilities *Utilities: -Sewage -Refuse -Water supply -Levies -Insurance and social protection **Essential expenditure: -Basic household utilities; -Food; -Clothing; -Health; -Education; -Transport ;and -Communication. % % Utility bill as % of income: Still low but rising 4.3 Essential goods** as % of income: Still high levels of conspicuous spending Utility bill as % of income Essential goods as % of income Middle income earners spending slightly more (0.2pps) on utilities as % of their income, versus 2011: Utilities have risen disproportionately to their income However, still relatively low proportion of income High tax burden, therefore tend to feel hard done by having to pay for these services again Middle income earners spend a third of their income on basic goods alone

73 Affluent earners: Utility* bill forms a relatively small proportion Key points Total expenditure on utilities: R123.7bn in 2016 Utility bill as % of income: Very low, but rising. These households have very high buying power 2.50 Affluent earners slightly more (0.2 pps) on utilities as % of their income, versus Those earning >R59k pm consumed R30bn % Utility bill has grown disproportionately to their income 24.3% of total expenditure on utilities 1.9 Because of their superior buying power, utilities are a small fraction of their income *Utilities: -Sewage -Refuse -Water supply -Levies -Insurance and social protection **Essential expenditure: -Basic household utilities; -Food; -Clothing; -Health; -Education; -Transport ;and -Communication. % Utility bill as % of income Essential goods** as % of income: Low income earner struggling to make ends meet Affluent earners spend a tenth of their income on basic goods alone Majority of their expenditure is on nonessential goods Essential good as % of income

74 Affordability: net income per income segment 9 Key points Net income 1: households that that earn <R202,500 over spend (78.6% of population). Net income 2: households earning <R1,512,000 pa (98.8% of household population) over spend. Low Income bracket % of Average income population per month Average expenditure (excl. contributions to pension funds, retirement annuities and long-term insurances Net income 1 Net income 2 (incl. pension fund, retirement annuities, long -term insurance) R0-R R R Middle R R R R R R R R Affluent R R NB: expenditure excludes savings into retirement and long-term insurance. R Source : SBR from BMR data

75 Consumer debt: sources & incidence of informal lending 10 Key points Share of adults who borrowed in 2010 Share of adults who borrowed in 2013 According to the World Bank, in 2013 the number of South Africans that borrowed money (86% of adults) was twice the world average (42%), and 35% more than the African average. Adult South Africans that borrow money from informal lenders or from family/friends have doubled since This form of debt is likely not captured. Therefore, debt per capita for adult might be much higher than officially reported. 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 44.1% 8.9% 6.8% 10.8% 34.3% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 85.6% 12.1% 18.4% 20.1% 71.2% This form of debt could be driving expenditure patterns in the lower income segments. Share of adults World Average Africa average Share of adults World Average Africa Average Source all charts: World Bank, SBR

76 Conclusion: South Africans spend more than they earn 11 There are four possible explanations of how households maintain negative net income: Households take on revolving credit; Household consumption is financed by remittances; Remittances could come in the form of wealthy individuals in the family sending money to the household It could also come in the form of gifts/donations. Expenditure is done on their behalf by government, a wealthy family member, a neighbour or an employer; and/or Households in the lower income brackets tend to under-report income. Many of these households generate income from the informal economy. Looking ahead: Economy is not creating adequate employment opportunities; Middle income earners under enormous pressure, emanating from higher taxes and job losses This impinges on their ability to service their utility bills

77 Private and confidential Appendix

78 Estimates of debt across household income segments* Key points Based on 2015 data R0-R19,000- Lowest income group R19,001-R86,000- Second lowest income group Rands, thousands Average debt per household in each income group In 2015, average debt per household was estimated to be R116,000. Debt per household in the lowest income group is estimated around R9,300, likely sourced from informal and micro lenders. This translates into 113% of income after tax. 13 R86001-R197,000- Low emerging middle R197,001-R400,000- Emerging middle R400,0001-R688,000- Realised middle R688,001- R1,481,000- Emerging affluent R1,481,001-2,360,000- Affluent R2,360,001+ Wealthy *2016 data not available yet. Average debt to income per household income group % debt to income Source all charts: BMR, SBR This group generally would not have access to credit cards. This debt is most likely funding consumption. Emerging middle income group (R197,000- R400,000) also displays high levels of indebtedness. Interestingly, the Affluent household Group (R1,481,001-R2,360,000) has extremely low levels of debt (1.5% of debt to income). One explanation could be that they may have been payed off their vehicles and houses, combined with another factor cited by BMR - that they may not be declaring overdrafts on their cheque accounts which are secured by their residential assets. Wealthy households on the other hand (R2,360,001+) seem to be relatively leveraged, presumably due to better access to finance as a result of their asset base. It is likely that this debt is used for accumulating wealth, rather than for consumption purposes.

79 Household consumption as a % of total, by primary income source 14 Key points Wages account for 73% of total household expenditure and 70% of total income. Social grants contribute10% to total expenditure and 5% of total income => higher propensity to spend. Investments account for 1% of expenditure and 8% of total income. This shows that those sourcing income from investments (mostly affluent households) have a lower propensity to spend, or inversely, a higher propensity to save. Pensions & Annuities Other transfers 2% 5% Net profit 8% Grants 10% None 1% Investments 1% Salaries & Wages 73% Source : BMR, SBR

80 Movement between personal income groups, since 2011 Key points Change in the percentage composition of each income group 15 Based on population age 15+ We compare population distribution across income groups since Group 8 Group 7 Group 6 Group 5 Group 4 Group 3 Group 2 Group % % change since 2011 Change in the number of people in each income group Encouragingly, there are some indications of population migration up the personal income groupings: Group 1 has declined by 1.7% in size since This translates to 57,110 individuals that have migrated out of the lowest income group. Group 2 has grown by 0.6%, or approximately 19,000 people. Presumably, the majority of these would have come from Group 1 Group 4 has grown 0.5% or 17,260 people Group 6 declined slightly, by 0.04%, while Groups 7 and 8 grew by 0.5% and 0.05% respectively over the same period. Group 8 Group 7 Group 6 Group 5 Group 4 Group 3 Group 2 Group 1 (57.11) (1.51) (80.00) (60.00) (40.00) (20.00) Thousands 000's of people Source all charts: SBR from BMR data

81 Movement between household income groups, since Key points Based on population age 15+ We compare household population distribution across income groups since Migration of households down the income groups Group 8 Group 7 Group 6 Group 5 Group 4 Group 3 Group 2 Group 1 Number of households migrating up the income groups Group 8 Group 7 Group 6 Group 5 Group 4 Group 3 Group 2 Group % -0.63% 0.06% 0.01% 0.10% 0.03% 0.47% 0.79% -1% -1% 0% 1% 1% (17.16) (12.72) % change since Thousands At a household level, however, a different picture emerges. Indications are that households are migrating down the income Group 2 has declined by 0.84% (17,000 households) while Group 1 gained 0.79% (16,000 households) since 2011, Similarly, Group 6 has shrunk by 0.6% (12,700 households) while Group 5 gained by 0.47% (9,600 households) since While those individuals with jobs or access to grants may have migrated up the real income curve, most households have actually regressed down the real income curve. We think this is due to: 1) a lower percentage of the adults in each household being employed, either because: (i) they are now over 15 and unemployed (54% of the youth are unemployed, up from 50% In 2011), and/or because (ii) a member of the household has lost their job 2) Real personal incomes have declined for all except those in the lowest income group. 000's of households Source all charts: SBR from BMR data

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84 FINANCIAL SUSTAINABILITY OF LOCAL GOVERNMENT AND FISCAL EQUITY SALGA INAUGURAL COUNCIL OF MAYORS MEETING 8-9 June 2017

85 STRUCTURE OF PRESENTATION Role of the Financial and Fiscal Commission Local government funding Risks to the Financial Sustainably of local government Debt: Eskom, Bulk Water and PAYE Improving financial sustainability of municipalities Rethinking the Funding for Municipalities

86 ROLE OF THE FINANCIAL AND FISCAL COMMISSION What is the FFC? Permanent statutory body established in terms of Section 220 of Constitution Independent and subject only to Constitution and the law Must function in terms of an act of Parliament Financial and Fiscal Commission (FFC) Act1997 as amended. The Commission makes recommendations to Parliament on the equitable division of nationally raised revenue and on any other financial and fiscal matter FFC in the IGFR system Municipal Finance Management Act (2004), Municipal Systems Act (2000), Money Bills Amendment Procedure and Related Matters Act (2009), Intergovernmental Fiscal Relations Act (1997) and FFC Act (1997) as amended

87 LG FUNDING The Sector received R44 Billion from the fiscus in 2008/9, which has increased to R112 billion in 2017/18. It receives 9.1% of total national acquired revenues. The local government fiscal framework has undergone many major reforms in the past two decades- policy intentions of government has been to use the grant system to promote social justice/spatial equity and erase the apartheid spatial disparities. Of concern is that grant dependence has increased- fiscal capacity appears to have declined over time. In 2004/5, aggregate municipal own revenues amounted to 90% of aggregate expenditure. In 2014/15, this had declined to about 75% of aggregate municipal expenditure. The revenue base of local government, especially in rural municipalities is on the decline. FFC research shows that many rural municipalities will continue to be transfer dependent as their revenues bases are fragile and weak. Transfers will remain the main stay of rural local government..

88 RISKS TO THE FINANCIAL SUSTAINABLY OF LG Economy which is in a recession poses a risk to the financial sustainability of LG that is transfer dependent: Declining GDP implies amount available for sharing falls Declining GDP likely to result in low investment unemployment- povertyratepayers being distressed and eventually municipalities own revenues taking a knock, etc Unfunded policy mandates (e.g. Library Services, Museums, Health Care Services) Adequacy of LG Finances Reforms on the LGFF have focused on the horizontal distribution of resources. For example, the most review of the LGES formula, focused mainly on the horizontal distribution not the vertical division, i.e the quantum of resources allocated to the LES. The LES is thus under immense pressure and a robust discussion informed by concrete evidence is needed. Cost of basic services The adequacy of the LES is also not clear because no one has a good grasp of the cost of basic services in different municipalities. Ideally the LES needs to be based on a sound costing framework for basic goods and services.

89 Funding of DMs RISKS TO THE FINANCIAL SUSTAINABLY OF LG The funding for DMs has remained unresolved. We are not absolutely sure what DMs are doing and thus their funding may not be fair. This affects their sustainability Frequent amalgamations of municipalities FFC research has shown that amalgamations are costly and will not necessarily result in financially viable municipalities, but in many cases the situation of demarcated municipalities will worsen. Rapid Urbanisation In 1996 the urbanisation rate was 46% and in 2014 it was about 63%. Rapid urbanisation exerts immense pressure on basic infrastructure Municipal and Consumer Debt Municipalities currently owe Eskom over R10 billion and at the same time they are owed R113 billion (as of June 2016) by national and provincial spheres, businesses and households

90 MUNICIPAL DEBT R billions / / / / /16 Year Bulk Electricity_Eskom Bulk Water PAYE deductions-sars The diagram depicts a five year over-view of three municipal creditors and the total amounts owed to them by municipalities year on year, from 2011/12 to 2015/16. Municipal debt to Eskom shows a serious increase from 2014/15 to 2015/16. Debt for bulk water has had a moderate increase, whereas debt to SARS on PAYE deductions shows a steady decline over the years.

91 THE OTHER SIDE: WHAT MUNICIPALITIES ARE OWED BY ORGANS OF STATE, 2015/ R million EC FS GP KZN LP MP NC NW WC Province Total overall Total debt >90