"How can the municipality NOT spend R53.7 million?", was a common reaction to a recent Grocott's Mail article about underspending.
"How can the municipality NOT spend R53.7 million?", was a common reaction to a recent Grocott's Mail article about underspending.
In an attempt to gain an understanding of this situation, Prudence Mini explains some the systemic challenges facing local officials.
As the financial year draws to a close and local elections loom, underspending is the thorny subject at the top of the agenda in most council meetings. Grocott's Mail recently reported on Makana's failure to use its capital expenditure and conditional grant budgets ("Makana had R53.7m and didn't spend it", GM 19 April 2011).
The council's monthly financial report for January had revealed that close on 80% of the total capital expenditure remained unspent. According to the report, by the end of January, both income and expenditure performance should have been around 58%. A recent Budget, Treasury and IDP portfolio committee meeting threw more light on how such a situation could arise.
It turns out that a new way of acquiring vehicles, introduced once the financial year was well under way, and a laborious approval process before projects can take off are the cause of at least some of the spending delays.
The cars
A significant area of spending in the municipality falls under the Asset Finance Fund (AFF). This comes from the municipality's own resources, in other words, it's not grant funding. In the 2010/2011 Capital Budget, R16.3m was to be financed from this source. One of the spending items for the 2010/2011 budget, R4.2 million, was vehicles for all directorates within the municipality.
The practice had been to buy second-hand vehicles, in order to bypass the drawn-out procurement process for new vehicles. Buying second-hand vehicles meant officials could merely get quotes from car dealerships and choose the best deal. This is what had been budgeted for.
Then, in September, concern was raised that buying second-hand vehicles might not make good financial sense, and that the municipality should rather acquire new vehicles on full-maintenance lease. A discussion document tabled to the senior management team by the Chief Financial Officer, Jackson Ngcelwane late last year, explained: "The basis of this approach is the fact [that]vehicles are depreciable assets and about 35% of the current fleet used by the departments have exceeded their lifespan, as a majority of them are far older than 10 years."
It was only when they began exploring this option, though, that new procedural hurdles emerged. "We realised that the process to follow when you are leasing the vehicle/s i.t.o. the [Municipal Finance Management Act] MFMA will have to be the same as going out and raising a loan, as in terms of the MFMA (Section 33). There are stringent processes to follow if you are to bind the municipality with a financial commitment that is great than 36 months or three years, " Ngcelwane wrote.
"In the case of a car, the maintenance lease option could go for a period of 60 or 72 months." Ngcelwane's department had now completed the required procedures, he said. The tender for acquiring vehicles through a full-maintenance lease had been advertised and a decision should be made within the next two weeks.
The projects
A second blockage to spending raised its head again at the meeting, namely the laborious processes that had to be undergone before projects could begin. Earlier in the year, Technical and Infrastructural Services director, Dabula Njilo, reported on the status of the Municipal Infrastructure Grant programme at a council meeting. It was revealed that out of this annual grant of R20 million, only R1.6 million had so far been spent on infrastructural backlogs and creating conditions for local economic development.
To get spending on track, Njilo said, professional service providers would be appointed through the municipal database. Previously, the only means of procuring goods and services for anything worth more than R20 000 had been through a drawn-out tender process. Now thresholds had been revised, so that for items from R10 000 to R200 000, the municipality could simply call for formal written quotations.
The municipality advertises in the local media for businesses to register as potential suppliers. This makes them eligible to quote. But it turns out that even once service-providers have been appointed to carry out projects, there's another set of delays.
For example, tenders for projects that were awarded near the end of the 2009/10 financial year (in other words, just before last July) were only begun in the past two or three months. Environmental impact assessments, required before most developments could begin, and other processes that could begin only after contractors were appointed, took time.
For this reason, Njilo recently proposed to the Land and Housing Portfolio Committee that they consider and approve a great number of projects to be registered for Municipal Infrastructure Grant (MIG) funding. Staggered in this way, there would be better continuity, so that while one project was still undergoing approval processes, another could be already under way.
Njilo listed 18 projects, including the upgrading of the Alicedale water treatment plant, a water harvesting programme, the refurbishment of Grahamstown Central water reticulation Phase 1 and sanitation for rural areas to be registered for MIG funding, all simultaneously.
How the capital budget works
The 2010/11 Capital Budget amounted to R69.6 million and is funded by both the Asset Finance Fund (AFF), which comes from the municipality's own coffers, and Conditional Grants, which are funds from the National Treasury.
When municipal officials draw up the Capital Budget, they have to indicate exactly what the source of funding for each item will be. They have to say whether the money will come from the Municipal Infrastructure Grant, Neighbourhood Development Partnership Grant, National Electrification Grant, the Development Bank of South Africa Loan, or the Asset Finance Fund. It's the last source which is used to fund purchases such as vehicles and office furniture, as well as certain activities to maintain infrastructure such as the re-sealing of roads.
At the beginning of the current financial year (2010/11), in July, the municipality budgeted R16.3 million of the total Capital Budget to be financed from the Asset Finance Fund. The 2010/11 Capital Budget amounted to R69.6 million and therefore the R16.3m from the AFF sources of funding is 23.5% of the total. The conditional grants make up 76.5%.
