BACKGROUND

1. PRESENTATION TO NCOP ON INTERVENTIONS IN TERMS OF SEC.139(1)(b)OF THE CONSTITUTION BY MEC COGTA-KZN

2. BACKGROUND • On 24 November 2009 the Provincial Executive Council of KwaZulu-Natal (“Executive Council”)resolved to intervene at Indaka and Okhahlamba in terms of section 139(1)(b) of the Constitution as a result of failures to fulfill various executive obligations; • The MEC for COGTA was authorised by the Executive Council to appoint administrators at the aforementioned municipalities; • The administrators were appointed to undertake the functions in terms of section 51 of the Systems Act to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government as set out in section 152 of the Constitution; • On 18 July 2012, the Executive Council resolved to terminate the intervention at Okhahlamba municipality and to extend the intervention at Indaka municipality for a period of 6 months ending 31 December 2012; • On 19 September 2012 the Executive Council resolved to intervene in terms of section 139(1)(b) of the Constitution at Mtubatuba municipality for its failure to fulfill various executive obligations; • The MEC for COGTA was authorised to appoint a representative to undertake the function in terms of section 51 of the Municipal Systems Act to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government as set out in section 152 of the Constitution.

3. REASONS FOR INTERVENTION OKHAHLAMBA DATED NOVEMBER 2009 • The municipality did not have a functional management team which contributed to the municipality’s dysfunctional state; • The AG reports for the 2004/2005 financial year, 2005/2006 financial year, 2006/2007 financial year and the 2007/2008, indicated that there were serious deficiencies in management systems and other accounting and financial controls and the Auditor-General issued disclaimed audit opinions in respect of two financial years and an adverse opinion in respect of the last year; • The annual report for the 2007/2008 financial year did not comply with section 121 of the MFMA, as no performance report evaluating the performance of the Municipality or Section 57 employees was attached. Council did not table or submit an oversight report as required in terms of section 129 of the MFMA. The Council did not have an established internal audit unit and audit committee as required in terms of sections 165 and 166 of the MFMA; • The municipality experienced serious financial problems evident from the poor cash flow and posted a deficit of R17 963 025.00 (un-audited) in the 2008/2009 financial year the Municipality. The accumulated deficit as at June 2009 totaled R24 517 042.00. Grant funding allocated for Housing was utilised irregularly to finance the operations of the Municipality. Unspent conditional grants to the sum of R20 196 551.00 were not cashed backed; • As reflected in the 2008/2009 Annual financial statements, general expenses increased from R11 306 725.00 in the 2006/2007 financial year, to R57 294 633.00 in the 2008/2009 year, resulting in a percentage increase of 407%. The Municipality failed to make payments to its creditors as and when due.

4. REASONS FOR INTERVENTION INDAKA DATED NOVEMBER 2009 • The AG reports for the 2005/2006 financial year, 2006/2007 financial year and the 2007/2008 financial year, indicated that there were serious deficiencies in management systems and other accounting and financial controls and the AG issued qualified audit opinions in respect of the three consecutive financial years. The Council has failed to address recurring issues adequately; • As reflected in the AG report for the 2007/2008 financial year, the municipality had experienced serious financial problems evident from the poor cash flow, an accumulated deficit of R8,4 million was incurred as at June 2008. During this period the entity’s total liabilities exceeded its total assets by R1,9 million. Further reserves amounting to R6,5 million was not supported by cash; • Despite the Municipality being 99.7 percent grant dependant and not providing any services, the Municipality has appointed seven Section 57 managers. The total salary cost incurred by the Indaka Municipality was 51 percent of the total operating expenditure; • The council was not able to exercise effective oversight over the administration and council decisions were negatively impacting on the finances and functioning of the municipality. This was evident in the over expenditure on the budget and poor grant management. Further, the municipality was not implementing an effective debt collection and credit control policy. This was evidenced by the increasing outstanding debt.

5. REASONS FOR INTERVENTION AT MTUBATUBA DATED OCTOBER 2012 • In June 2012 Cabinet resolved to institute a discretionary intervention at Mtubatuba Municipality in terms of sec. 136-138 of the MFMA (56 of 2003), for a period of three months as a result of unfavourable financial conditions (assessment findings are contained in the annexure to the report); • The Financial Administrator appointed in terms of the discretionary intervention drafted and commenced implementing a financial recovery plan which sought to address the causes of the financial crisis; • There appeared to be an extremely low probability of the intervention support team achieving its objectives in the area of financial recovery and implementation of internal financial controls as the council was failing to fulfil its executive obligations necessary for the effective functioning of the municipality; • Despite the municipality being in a precarious situation in respect of finances and operating on a deficit budget, certain councillors were attending seminars in other provinces, incurring unnecessary expenditure which impacts on the financial crisis; • The municipality had failed to appoint a service provider timeously to undertake the compilation of the second general valuation roll, which may lead to the municipality incurring a loss of property rates income; • The council had failed and/or neglected to conduct performance assessments on senior managers.;

6. REASONS FOR INTERVENTION AT MTUBATUBA DATED OCTOBER 2012 CONTINUED • The council had entered into unsustainable contracts with certain service providers and is heavily indebted due to contracts that were signed and which currently bind the municipality; • The municipality has neglected to pay creditors within 30 days as stipulated in the MFMA, which exposes the municipality to the risk of legal action; • The Department has recently received correspondence from the legal representatives of a judgment creditor advising, that after obtaining default judgment against the municipality, the creditor has instructed to proceed with the attachment of municipal assets for the liquidation of the judgment debt; • The municipality is currently facing litigation due to cancellation of a contract with a security company for R1 400 000. In terms of section 136(4) of the Municipal Finance Management Act, 56 of 2003, if a municipality as a result of financial crisis, is unable to meet its financial commitments, as a result of which the conditions for an intervention in terms of section 139(5) are met, then the Executive Council must intervene in the municipality in terms of section 139 of the Constitution.; • Based on the current cash flow, it appears that the municipality will be without sufficient cash resources to pay debts, as they become due from March 2013, unless negotiations to reduce monthly payments succeed; • Based on the current cash flow, it appears that the municipality will be without sufficient cash resources to pay debts, as they become due from March 2013, unless negotiations to reduce monthly payments succeed; • The municipal public accounts committee is still not functional within the municipality; • For these reasons, amongst others the Executive Council resolved to intervene at Mtubatuba municipality in terms of section 139(1)(b) on 19 September 2012.

7. SCOPE OF ADMINISTRATORS INDAKA AND OKHAHLAMBA The scope of administrators appointed at Indaka and Okhahlamba in undertaking the function in terms of section 51 of the Municipal Systems Act to establish and organise the administration in a manner that would enable the municipality to achieve the objects of local government as set out in section 152 of the Constitution were required to - • Devise a turn - around strategy for the municipality • Ratify all decision of the municipal council and /or its committees, prior to implementation • Ratify all decisions taken by Municipal Manager and section 57 Managers in terms of delegated or original authority • Ensure implementation of council resolutions by the Administration. • Implement a system to control and approve all expenditure. • Implement all governance systems and procedures including appropriate councillor oversight mechanisms • Ensure implementation of financial systems, policies and procedures • Ensure implementation of the Municipal Property Rates Act • Set out a specific strategy for addressing the municipalities financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection revenue. • Prepare of the adjustment budget for the 2009/2010 financial year • Review the organisational structure of the municipality

8. SCOPE OF ADMINISTRATOR MTUBATUBA • The appointed representative, in undertaking the function assumed by the Provincial Executive Council must, inter alia: • Undertake all fiscal and financial management functions at the municipality, including him/her being a signatory on the municipal banking account; • Ratify all decisions of the municipal council and its committees, prior to implementation; • Ratify all decisions taken by Municipal Manager and section 57 Managers in terms of delegated or original authority; • Devise a turn - around strategy for the municipality; • Ensure implementation of council resolutions by the Administration; • Implement a system to control and approve all expenditure. • Implement all governance systems and procedures including appropriate councillor oversight mechanisms; • Ensure implementation of financial systems, policies and procedures; • Ensure implementation of the Municipal Property Rates Act; • Set out a specific strategy for addressing the municipalities financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection revenue; • Prepare of the adjustment budget for the 2012/2013 financial year; • Review the organisational structure of the municipality; • Implement the findings of any forensic investigations undertaken by the municipality or the MEC in terms of section 106 of the Local Government: Municipal Systems Act 32 of 2000, including criminal, disciplinary and civil action;

9. PROGRESS WHICH RESULTED IN TERMINATION OF INTERVENTION AT OKHAHLAMBA • The verification and assessment of the existing Valuation Roll and the compilation of the supplementary Valuation Roll for 2011/2012 was done and completed in April 2011, with very few objections received, and were all subsequently resolved. For continuous maintenance of the Valuation Roll, a service provider has been retained by the Municipality and an advert for a service provider to assist with the new process was already out, for the 2013/2014 financial year assessments; • The debt book of over R18 million in the financial year 2010/2011, was drastically reduced to the extent of at least 50%; • The collection rate had increased from the 36% collection rate recorded during the financial 2010/ 2011 to 61,44% accumulatively, as at 30 April 2012 against the annual target is 75%; • Strict Expenditure Management measures resulted in the Municipality having a total R81 million in cash reserves including all cash-backed conditional grants totaling just over R40million; • The Municipality is now able to accurately report on a monthly basis on revenue, expenditure, cash flow, debt recovery and creditors; • All Council statutory, administrative and functional structures have been established and are all operational. Therein included is a fully functional audit committee and internal audit unit as well as IDP, Budgeting and PMS procedures • Whilst the Municipality took a resolution binding itself to the achievement of Clean Audit by 2013/2014, it is highly likely that all queries raised by the AG during the last financial year may be resolved by this financial year, which may result in the municipality obtaining a clean audit in 2011/2012;

10. PROGRESS WHICH RESULTED IN TERMINATION AT OKHAHLAMBA CONTINUED • The Municipality has compiled a Infrastructure Maintenance Plan which is being implemented since June 2012, where all plant and equipment is sent to each ward for a period of 10 days to ensure that all existing infrastructure is maintained; • The Municipality experienced difficulty in spending grants relating to MIG-funded and Small-Town Development-funded projects during the period of between October 2011 and March 2012, with assistance from Cogta where a dedicated project manager was sourced, all these projects are now moving, and are fairly within the acceptable expenditure levels; • Electrification project funding which was nearly lost due to non-expenditure and reporting has now been re-secured with the Implementing Agent already appointed; • All senior posts are filled, to the exception of a Director Corporate Services; • Based on investigations by PWC irregular payments have been identified and criminal cases have been instituted; • The main reason for the extension of the intervention on 13 December 2011 was the fact that the municipality lacked a senior management team to sustain the progress and to implement any outstanding intervention priorities and sustain progress made; • Based on the fact that the senior posts were filled and that there was considerable progress in respect of the intervention priorities, the intervention was terminated on 13 December 2012.

11. PROGRESS INDAKA AND REASONS FOR EXTENSION • The status on Financial Management was fair. The secondment of the COGTA’s Financial Expert has had a major positive effect on the implementation of the Recovery Plan on financial management. The expert together with the administrator was in the process of reconstructing the financial records of Indaka, going as far back as 2009/10 on certain transactions to date.; • Various financial irregularities had been reported and because it is obvious that certain activities were done, deliberately without the administrator’s knowledge, the intention of the administrator is to issue civil summons to recover all the irregular and fruitless expenditure from the former Municipal Manager and affected Councillors; • The majority of priorities in respect of governance as identified in the recovery plan have been met. • The Internal Auditor was effective, but was stifled by the management’s failure to either respond to the audit findings or failure to implement the recommendations. It appears that there is poor leadership in this municipality, although, all the necessary Policy Frameworks are in place. The problem, however, is a lack of implementation; • According to the administrator’s assessment, the Council’s Oversight and Performance Management and Reporting, remain a concern and much work is yet to be done, despite efforts being made by the administrator in this regard;

12. PROGRESS INDAKA AND REASONS FOR EXTENSION CONTINUED • Despite some improvements, it was clear that there were still serious challenges which had been confirmed by the administrator. He further illustrated as follows:- • In the year ended in June 2011, the Municipality incurred unauthorised expenditure of R4.644 millions and irregular expenditure of R22.500 millions; totalling R27.2 million. • In January 2012, the Mid-Year Review established a number of irregular, unauthorised and fruitless and wasteful expenditure which were reported to the Council as part of the Mid-Year Review report. The copy of the report was forwarded to the Department as part of monthly reporting. The administrator advised the then Acting Municipal Manager (Mr. Maphanga) to report the said expenditures in terms of section 62 of MFMA for general failure of the system and section 32(4) of the MFMA, to the MEC responsible for Local Government in the Province and the Office of the Auditor-General. The administrator reports that such irregular expenditures have not been reported to the MEC and the AG. • There has been various irregular financial activities resulting in an increase in unauthorized, irregular, fruitless and wasteful expenditure, which continued under the stewardship of the Administrator, without his knowledge. This reflected defiance by the administrative and political leadership of the municipality and undermined good governance. • In addition, the administrative leadership of the municipality is still unstable with key senior positions of CFO and Director: Technical Services remaining vacant. • The Mayor and council are still unable to exercise effective political oversight and strong leadership to promote financial prudence and good governance. • Consequently, the intervention was extended at the Indaka Municipality.

13. PROGRESS MTUBATUBA • The MEC met with the council of the municipality on 28 September 2012, informing the municipality of the reasons for the intervention and the appointment of her representative and his role in respect of the intervention; • The representative, Mr. K. Mpungose was introduced to the council and the senior management on 03 October 2012; • The representative is in the process of assessing the status of the municipality and preparing a sustainable recovery plan with measurable objectives attached to reasonable time frames.

14. THANK YOU

15. 14th Floor, North Tower Natalia Building 330 Langalibalele Street Pietermaritzburg, 3200 Tel: +27(0) 33 395 2831 Fax: +27(0) 33 345 6432 E-mail: hodenquiries@kzncogta.gov.za Website: www.kzncogta.gov.za