National Treasury has released the local government revenue and expenditure report for the second quarter of the 2022/23 financial year. This report covers the performance against the adopted budgets of local government for the second quarter of the municipal financial year ending on 31 December 2022 and includes spending against conditional grant allocations for the same period.

The report was prepared by using figures from the Municipal Standard Chart of Account (mSCOA) data strings. The mSCOA Regulations were promulgated on 22 April 2014 and prescribe the uniform recording and classification of municipal budget and financial information at a transaction level.

All municipalities and municipal entities had to comply with the Regulations by 01 July 2017. The mSCOA Regulations require that municipalities upload their budget and financial information in a data string format to the National Treasury’s Local Government portal across the six mSCOA regulated segments.

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 challenges in implementing municipal budgets and conditional grants.

The credibility of the information contained in the mSCOA data strings is dependent on the quality of reporting by municipalities, and is continually improving over time. At the core of the problem is:

• The incorrect use of the mSCOA and municipal accounting practices by municipalities;
• A large number of municipalities are not budgeting, transacting and reporting directly in and from their core financial systems. Instead, they prepare their budgets and reports on an excel spreadsheet and then import the excel spreadsheets into the system. Often this manipulation of data lead to unauthorised, irregular, fruitful and wasteful (UIFW) expenditure and fraud and corruption as the controls that are built into the core financial systems are not triggered and transactions go through that should not;
• Many municipalities are not locking their adopted budgets or their financial systems at month- end to ensure prudent financial management. To enforce municipalities to lock their budgets and close their financial system at month-end in 2022/23, the Local Government Portal will be locked at the end of each quarter. System vendors were also requested to build this functionality into their municipal financial systems; and
• Many municipalities are not consistently submitting all the required monthly data strings and also make submissions with errors but to correcting them.

The Section 71 report facilitates transparency in reporting, better in-year management as well as the oversight of the financial performance of municipalities against their adopted budgets. This report is, therefore, a management tool that serve as an early warning mechanism for councils, provincial legislatures and municipal management to monitor and improve municipal performance timeously.

The improvement of the credibility of the data strings is a priority for national and provincial treasuries and the submitted data strings are analysed monthly and errors are communicated to municipalities for correction.

Key trends:

Aggregate trends

On aggregate, municipalities spent 42.3 per cent, or R235.9 billion, of the total adopted expenditure budget of R557.8 billion as at 31 December 2022 (second quarter results for the 2022/23 financial year). In respect of revenue, aggregate billing and other revenue amounted to 48.5 per cent, or R270.3 billion, of the total adopted revenue budget of R557.8 billion.

Of the adopted operating expenditure budget amounting to R488.2 billion, R215.8 billion or 44.2 per cent was spent by 31 December 2022.

Municipalities have adopted the budget for salaries and wages expenditure at R146.6 billion (including remuneration of councillors), which is R8.6 billion more than the adopted budget of R138 billion reported in the second quarter of the 2021/22 municipal financial year. This constitutes 30 per cent of their total adopted operational expenditure budget of R488.2 billion. As at 31 December 2022, spending on salaries and wages is 46.2 per cent, or R67.8 billion.

In the period under review, capital expenditure for all municipalities amounted to R20.1 billion, or 28.8 per cent, of the adopted capital budget of R69.8 billion.

Aggregated year-to-date operating expenditure for metros amounts to R134.3 billion, or 46 per cent, of their adopted budget expenditure of R292.1 billion. The aggregated adopted capital budget for metros in the 2022/23 financial year is R32 billion, of which 26.8 per cent, or R8.6 billion, has been spent as at 31 December 2022.

When billed revenue is measured against their adopted budgets, the performance of metros reflects a surplus for the second quarter of the 2022/23 financial year. This does not take into account the collection rate:

• Billed water revenue billed was R22.8 billion against expenditure of R17.6 billion;
• Energy sources revenue billed was R48.1 billion against expenditure of R45.9 billion;
• The revenue billed for wastewater management was R10.2 billion against expenditure of R4.2 billion, and
• Levies for waste management billed were R6.4 billion against expenditure R4.9 billion.

As at 31 December 2022, aggregated revenue for secondary cities is 44.1 per cent or R35.2 billion of their total adopted revenue budget of R71.4 billion for the 2022/23 financial year. A year-on-year comparison shows that the total revenue on average has decreased by 6.9 per cent when compared to the same period in 2021/22. The year-to-date aggregated operating expenditure level of the secondary cities is 42.6 per cent or R30.2 billion of the total adopted operating budget of R70.9 billion for the 2022/23 financial year.

The performance against the adopted budget for the four core services for the secondary cities for the second quarter 2022/23 also shows surplus position against billed revenue without taking into account the collection rate:

• Water revenue billed was R4.8 billion against expenditure of R4.1 billion;
• Energy sources revenue billed was R12.8 billion against expenditure of R12.1 billion;
• The revenue billed for wastewater management was R2 billion against expenditure of R1.2 billion; and
• Levies for waste management billed were R1.9 billion against expenditure of R1.1 billion.

Capital spending levels for secondary cities reported an average of 29.2 per cent or R2.5 billion of the adopted capital budget of R8.5 billion.

Aggregate municipal consumer debts amounted to R305.8 billion (compared to R261.5 billion reported in the second quarter of 2022/23) as at 31 December 2022. Government debt accounts for 7.5 per cent, or R22.9 billion (R23.3 billion reported in the first quarter of 2022/23) of the total outstanding debtors. The largest component of this debt relates to households which account for 71.1 per cent or R217.7 billion (69.8 per cent or R202.4 billion in the first quarter of the current financial year).

Included in the outstanding debt is an amount of R256.7 billion, which is debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries which may not be realistically collectable by municipalities.

If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R49 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.

Metropolitan municipalities are owed R154 billion (R128.4 billion reported in the second quarter of 2021/22) in outstanding debt as of 31 December 2022. The largest contributors were the Cities of Johannesburg at 28.8 per cent, Ekurhuleni at 19.9 per cent, eThekwini at 14.5 per cent, Tshwane at 11.8 per cent and Nelson Mandela Bay at 9.8 per cent.

Households in metropolitan areas are reported to account for R115.1 billion or 74.7 per cent of outstanding debt, followed by businesses that account for R30.5 billion or 19.8 per cent. Debt owed by government agencies is at R7.6 billion or 5 per cent of the total outstanding debt owed to metros.

Secondary cities are owed R59.3 billion (R52.5 billion reported in the second quarter of 2021/22) in outstanding consumer debt. The majority of debt is owed by households, which amount to R40.5 billion, or 68.4 per cent, of the total outstanding debt. An analysis by customer group indicates an amount of R51.8 billion or 87.3 per cent, has been outstanding for more than 90 days.

Municipalities owed their creditors R86 billion as of 31 December 2022 and provinces with the highest percentage of outstanding municipal creditors in the category greater than 90 days include Northern Cape at 90.4 per cent, Mpumalanga at 90.2 per cent, North West at 83.7 per cent. An increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges and consequently are delaying the settlement of outstanding debt owed.

The total balance on borrowing for all municipalities equates to R59.1 billion as of 31 December 2022. This includes long term loans of R44.3 billion, long term marketable bonds of R8.4 billion, and other long term non-marketable bonds of R5.1 billion. The balance represents other short- and long-term financing instruments.

As of 31 December 2022, the total investments made by municipalities equates to R43.1 billion. This is R4.5 billion more than the R38.6 billion reported in the second quarter of the previous financial year (2021/22). Investments include Bank Deposits of R41.6 billion, guaranteed endowment policies (sinking funds) of R911 million, Listed Corporate Bonds of R316.2 million and other smaller investments.

Conditional Grants

The second quarter performance of the municipalities in relation to the transferred allocations made in accordance with the Division of Revenue Act, 2022 (Act No.5 of 2022) (DoRA), which was gazetted on June 15, 2022, is reviewed. The analysis of the second quarter performance on conditional grants municipalities’ mid-year performance for potential stopping and reallocation of grants from slow spending to fast-spending municipalities.

The MFMA Section 71 second quarter performance report was prepared using information provided by the transferring officers responsible for administering and monitoring various conditional grants and reports received by National Treasury directly from municipalities through the mSCOA reporting system. Sections 10 and 12 of the 2022 DoRA govern reporting by transferring officers and municipalities, respectively.

The 2022/23 municipal performance for the second quarter publication on conditional grants shows an improvement from the previous quarter, but at a slower rate year-on-year, with a considerable performance increase of 64.9 per cent. Municipalities spent 31.9 per cent of their total allocation in the second quarter of 2022/23, a two-percentage point decrease from the previous fiscal year's performance of 33.5 per cent during the same period.

As at 31 December 2022, R22.5 billion, or 55.3 per cent, of the R40.6 billion allocated to municipalities in direct conditional grants for 2022/23 had been transferred to municipalities. The reported expenditure by transferring officers as of 31 December 2022 was R13 billion, or 31.9 per cent. This is a slight decrease from the 33.5 per cent reported in the same period of the previous financial year. However, municipalities' reported expenditure is significantly lower, with a 5 per cent difference between what transferring officers reported and what municipalities reported.

The metropolitan municipalities have a total allocation of R11.2 billion in direct transfers of which R5.4 billion was transferred, representing 45.6 per cent. As at the end of December, a total of R3 billion (according to the transferring officer), or 56.1 per cent of the total R5.4 billion transferred to metropolitan municipalities, had been spent. This represents a slight improvement when compared to the performance in the previous financial year of 28 per cent expenditure against the transferred amount.

The second quarter performance publication shows a slight improvement over the performance reported during the first quarter of the current financial year, however the improved expenditure is at a declining rate compared to the previous financial year. This is a clear indication that municipalities' project implementation planning is deficient, and it is one area that needs improvement.

This must be coupled with realistic procurement planning, along with timely bid adjudication committee meeting and proper contracts management.

Capacity Building and Other Conditional Grants Expenditure as at 31 December 2022

Municipalities received a total of R2.6 billion in capacity building and other grants (including the unallocated Municipal Disaster Grant and the Municipal Emergency Housing Grant). The capacity grants are intended to help municipalities develop their management, planning, technical, budgeting, and financial management capacity over time.

The Expanded Public Works Programme (EPWP) as reported by the transferring officer had the best performance in this category during the second quarter similar to the previous financial year’s second quarter publication, with a reported performance of 53.7 per cent. Followed by the Infrastructure Skills Development Grant (ISDG) at 47.6 per cent and the Financial Management Grant (FMG) at 40.5 per cent.

The performance against the Programme and Project Preparation Support Grant (PPPSG) introduced in the 2021/22 fiscal year was the lowest performing grant in the first quarter with zero expenditure, which continued to the end of the second quarter. This is because no funds were transferred to municipalities as at end of second quarter.

Infrastructure Conditional Grants Expenditure as at 31 December 2022

National transfers allocated to municipalities to fund government infrastructure programmes amounted to R38 billion. This is a significant increase from the previous fiscal year's allocation of R35.5 billion. The R38 billion allocation does not include indirect or in-kind allocations in which transferring officers carry out specific projects on behalf of municipalities in the municipal area.

The Municipal Infrastructure Grant (MIG) was the highest performing direct infrastructure grant in the second quarter, with a performance of 37.6 per cent which is lower than the 46 per cent reported for the same period in the previous financial year. The Neighbourhood Development Partnership grant (NDPG) and the Integrated Urban Development Grant (IUDG) were the second and third highest performing grants with a performance of 34.2 per cent and 32 per cent respectively.

The Municipal Disaster Recovery Grant (MDRG) had the lowest spending during the second quarter, with a 22 per cent expenditure, equivalent to R5.9 million against an allocation of R26 million. The Integrated National Electrification Programme (INEP) grant is the second lowest performing grant.

Indirect grants (infrastructure and capacity) to municipalities increased from R7 billion in the fiscal year 2021/22 to R8 billion in the fiscal year 2022/23. Indirect grants are allocations in which National Transferring Officers oversee grant implementation and administration on behalf of and for the benefit of municipalities. Because municipalities do not receive these allocations directly, performance monitoring for these grants is not included in the Section 71 publications (allocations in-kind).