Disclosure of Unauthorised Irregular Fruitless and Wasteful Expenditure

Disclosure of Unauthorised, Irregular, Fruitless and Wasteful Expenditure Sections 33 and 116 of the MFMA 08 July 2019 Presenter: Office of the Accountant- General: MFMA Implementation

Progress Status on Unauthorised, Irregular, Fruitless and Wasteful Expenditure

4 -Year Trend: Unauthorised Expenditure • • • The unauthorised expenditure was mainly due to overspending of the budget or main sections within the budget which was caused by poorly prepared budgets, inadequate budget control, and a lack of monitoring and oversight There has been a year-on-year decrease in unauthorised expenditure of approximately R 800 million Pervasive findings on non-cash items (planning, projections, estimations need attention) – Are actual expenditure and actual revenues from previous years reviewed when budgeting - deeper understanding and analysis of cost drivers 3

4 -Year Trend: Irregular Expenditure • • There was a year-on-year decrease in irregular expenditure of approximately R 8 billion in the 2017/18 financial year audit. Irregular Expenditure - largely due to non compliance with the SCM Regulations - again pointing to weak internal controls, failure to adhere to policies and complete processes 4

4 -Year Trend: Fruitless and Wasteful Expenditure – Cash-flows - ability to pay. – municipalities falling behind with their payments for bulk purchases of electricity and water. – municipalities incurring penalties and interests for late payment. – significant electricity and water distribution losses over R 1 billion. – Why is this still happening? Are adopted budgets funded? Why not? 5

2017/18 Unauthorised Expenditure per Province R 11. 8 billion • Limpopo followed by Gauteng Municipalities were the highest contributors, while WC and NC municipalities the lowest - unauthorised expenditure in 2017/18 financial year. 6

2017/18 Irregular Expenditure per Province R 20. 4 billion • • EC municipalities contributed the largest amount to irregular expenditure in 2017/18 with just over R 7 billion, followed by GP municipalities with R 3. 2 billion. NC, FS and WC municipalities’ contributions were less > R 1 billion. 7

2017/18 Fruitless and Wasteful Expenditure per Province R 1 billion • MP, GP, KZN and FS municipalities were the highest contributors to the R 1 billion fruitless and wasteful expenditure in 2017/18 financial year. 8

General Observations • All municipalities not implementing section 32 of the MFMA correctly or not at all. • MPACs’ reports are not tabled in council for conclusion and resolution, which resulted in the amounts attributed to UIF&W either static or increasing. • Municipalities internal processes, reporting and control measures do not seem to be effective to mitigate the risk of non-compliance in-year. How is the internal audit unit used to assist with mitigating non-compliance? • Internal audit not playing an effective role in assisting municipalities identify and timeously address UIF&W expenditure. Probity audits of procurement processes must be introduced since procurement seems to be the largest root cause of UIF&W. • What actions have been taken to hold relevant officials that were responsible for the transgressions accountable for their actions? • The implementation of consequence management has been flagged as an area needing urgent attention – Mayors, MM, CFOs to understand 9 what the amendments to PAA mean.

Investigating Recovery of UIF&W Expenditure • • • NT has published MFMA Circular 92 which is underpinned by a MPAC Guide and Toolkit aimed at assisting MPAC to perform their oversight and related responsibilities. Most municipalities have opted to use the MPAC to investigate the recoverability of the UIF&W Expenditure as required in terms of section 32(2) of the MFMA. When investigating the recoverability of UIF&W Expenditure, the MPAC must consider the following factors as outlined in Regulation 74 of the Municipal Budgets and Reporting Regulations: – The measures already taken to recover such expenditure; – The cost of the measures already taken to recover such expenditure; – The estimated cost and likely benefit of further measures that can be taken to recover such expenditure. MPAC will then make its recommendations based on the above facts and table a report to council with recommendations whether to: – Recover the UIF&W Expenditure or – Write-off the UIF&W Expenditure The UIFW register, MPAC report and the council resolution will inform the disclosure in terms of section 125(2)(d) of the MFMA. NT has issued MFMA Circular 68 which provides further guidance on the process to be followed to address UIF&W Expenditure. 10

Allegations of Financial Misconduct • • In its recommendations MPAC may recommend that the actions that led to the incurrence of the UIF&W Expenditure be investigated for financial misconduct. All allegations of financial misconduct must be dealt with in accordance with Chapter 15 of the MFMA read together with the Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings. Purpose of regulation is to set out processes and procedures to deal effectively and expeditiously with allegations of financial misconduct. Regulations apply to all officials and political office bearers in municipalities and municipal entities. Municipalities are required to establish a disciplinary board to investigate allegations of financial misconduct and to monitor the implementation of disciplinary proceedings against an alleged transgressor. NT has issued MFMA Circular 76 in support of the regulations - accompanied by a flow chart setting out the process for dealing with allegations of financial misconduct and financial offences. Note separation of processes for official and councilors, as well as reporting requirements. 11

Revised MFMA Circular 68

MFMA Circular 68 Updates • MFMA Circular 68 issued in May 2013 provides clarity on the procedures to be followed when dealing with Unauthorised, Irregular or Fruitless and Wasteful expenditure • MFMA Circular 68 - updated March 2019 to address the following matters: – Non-cash items in the adjustment budget – Disclosure on non-cash items – Consequence management for UIF&W Expenditure in terms of Chapter 15 read together with Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings and criminal charges (refer to MFMA Circular 76) – Clarifying MPAC and council’s role in addressing UIF&W Expenditure (refer to MPAC toolkit and MFMA Circular 92) – Wording of Council resolution – Recovery of irregular expenditure resulting from breaches of the Public Office-Bearers Act from Public Office Bearers – The issuance of certificate of debt in terms of the Public Audit Amendment Act – Quantifying the full extent of irregular expenditure – Clarifying unauthorised expenditure for municipal entities – Disclosure of UIF&W Expenditure in the Annual Financial Statements 13

MFMA Circular 68 Updates cont… • Circular is accompanied by 4 Annexures: – – Annexure A: Register of Unauthorised, Irregular, Fruitless and Wasteful Expenditure Annexure B: Pocess Flow to address Minor Breaches of the SCM Policy Annexure C: Process Flow Chart for Treatment of Irregular Expenditure (Amended) Annexure D: Accounting Treatment of Unauthorised, Irregular, Fruitless and Wasteful Expenditure (Replaces Annexure D: Process Flow to address Accounting Transactions for Irregular Expenditure) • This Circular is available on the MFMA Webpage and can be accessed using the following link: http: //mfma. treasury. gov. za/Circulars/Pages/default. aspx 14

Internal Reporting UIFW Expenditure • Escalation measures: – Municipal CFO – Municipal Manager – Municipalities are encouraged to contact the Provincial Treasury. MFMA Coordinator in the Provincial Treasury and Provincial. Accountant General – Approach the National Treasury (timeously), to engage on common understanding and areas needing support – Use the MFMA helpdesk - all enquiries related to the MFMA should be sent to MFMA@treasury. gov. za 15

Flowchart: Procedure to Address Irregular Exp. Irregular expenditure discovered by Accounting Officer & the Auditor-General yes Accounting Officer to report in terms of section 32(4) of the MFMA Was Expenditure written off by the Municipal Council in terms of section 32(2) of MFMA? Disclose in AFS and update Irregular Expenditure Register yes no yes Debt recoverable yes no Expenditure to be recovered and should remain as an entry in the register until recovered Amend/remove the irregular expenditure on the register If Council Committee recommends as irrecoverable, Council certifies as irrecoverable and write-off expenditure in terms of section 32(2)(b) of MFMA Recover debt? If not written off by Council, recover expenditure from person liable and Accounting Officer to take Disciplinary and Criminal Steps Written off yes Municipal Council to refer expenditure to Council Committee for investigation in terms of section 32(2)(b) of MFMA read with regulation 74 of the MBRR Institute Debt Collection proceedings Debt irrecoverable yes Write off debt yes Recover debt Consider Financial Misconduct charges 16

Annexure D: Accounting Treatment of Unauthorised, Irregular, Fruitless and Wasteful Expenditure • • Section 125(2) requires municipalities to disclose any material losses and any material unauthorised, irregular or fruitless and wasteful expenditures, criminal and disciplinary steps taken, whether recovered or written off. NT has replaced Annexure D to MFMA Circular 68 to ensure uniformity across all municipalities. – assist with accounting treatment and completion of disclosures. – provides information on the applicable GRAP standards where: • Irregular expenditure is identified after the AFS was authorised for issuance • Prior period errors – includes disclosure notes for UIF&W expenditure and includes examples on how to deal with different scenarios relating to the disclosure of UIF&W expenditure. – includes journal entries where council has resolved to recover UIF&W expenditure. 17

Section 33 of the MFMA

Objective • The MFMA Sets legal framework within which municipalities must conduct their financial affairs • The MFMA prescribes processes that must be followed by municipalities when they intend to enter into agreements that may have financial and legal implications beyond 3 years: – Section 33 of the MFMA requires community and stakeholder consultation, consideration of the projected financial obligation over the full term of the contract and its impact on future tariffs and revenue. 19

Section 33 of the MFMA • A municipality may enter into a contract which will impose financial obligations on the municipality beyond a financial year, but if the contract will impose financial obligations on the municipality beyond the three years covered in the annual budget for that financial year, it may do so only if— a) the municipal manager, at least 60 days before the meeting of the municipal council at which the contract is to be approved— i. has, in accordance with section 21 A of the Municipal Systems Act— (aa) made public the draft contract and an information statement summarising the municipality’s obligations in terms of the proposed contract; and (bb) invited the local community and other interested persons to submit to the municipality comments or representations in respect of the proposed contract; a) has solicited the views and recommendations of— (aa) the National Treasury and the relevant provincial treasury (bb) the national department responsible for local government; and (cc) if the contract involves the provision of water, sanitation, electricity, or any other service as may be prescribed, the responsible national department………… 20

Long term projects - beyond three years • • s 33 does not prohibit contracts of more than 3, it prescribes a process that must be followed should a municipality plan to enter into a contracts which will impose financial obligations beyond 3 years covered in the MTREF Therefore municipalities can enter into contracts longer than 3 years e. g. 20 years • The financial obligation on the municipality will play an important role in determining whether s 33 is applicable to a contract • When consulted on s 33, NT will assess the financial obligation of the municipality as well as the affordability of the financial obligation • NOTE: despite s 33 processes, ultimate decision still vests with the municipal council, NT does not approve contracts but provides comments • Municipalities also advised to combine consultation processes to address perceived time delays 21

Section 116 of the MFMA • • Section 116 deals with contract management and requires municipalities to ensure that all contracts procured through SCM system to: – be in writing; and – stipulate the terms and conditions of the contract or agreement Section 116(2) requires a municipality must ensure enforcement of the contract, monitor a contract on a monthly basis. Section 116(3) prescribes a process that must be followed when a municipality amends a contract. Section 116(3) of the MFMA must be read together with MFMA Circular 62 which provides sets out the thresholds for variation orders. – contracts may be expanded or varied by not more than 20% for construction related goods, services and/or infrastructure projects and – 15% for all other goods and/or services of the original value of the contract. 22

Thank You 23