Progress Report on Msunduzi Municipality's Financial Challenges

1. Msunduzi Municipality Presentation toCity Stakeholder Forum31 January 2011 Progress Report in terms of Section 139(1)(b)

2. PRESENTATION OUTLINE • Introduction • Background • Financial Overview • Electricity • Water • Sanitation • Waste • Fleet • Roads • Planning & Human Settlement • Risk Analysis • Operationalisation • Exit Principles

3. INTRODUCTION • The serious financial challenges in Msunduzi Municipality have necessitated an intervention in terms of section 139 of the MFMA. • The financial crises came to be because of poor controls, rampant corruption amongst senior staff, failure to prepare the mid-year Adjustments Budget and the 2010/11 Budget in time.

4. BACKGROUND • By mid March 2010 when the Provincial Intervention Team (PIT) was appointed, the budget deficit for the budget 2009/10 was estimated at R162 million. • The mid-year Adjustments Budget, however, indicated a deficit of R252 million. • A further deficit of R50 million will arise from internal funded capital.

5. BACKGROUND The deficit as reflected on the budget has resulted in serious cash flow shortages to maintain adequate operations in the Municipality. The major contributors are amongst others: • The funding of Roads projects close to R111 million out of operations • The funding of a remote metering system (not at all budgeted for) of R240 million • Illegal expenditure of at least R19 million

6. BACKGROUND • Non-payment for services close to R 423 million as a result of poor revenue collection processes • High Eskom accounts during the summer • Eskom accounts treble during the winter months • The high electricity demands are negatively influenced by high increments of electricity tariffs • Illegal connection to services • Financial sustainability with regards to the Rates base

7. FINANCIAL SUSTAINABILITY There is a clear indication that proper planning must be done for future years in order to balance Revenue and Expenditure There is a need for strategies which will enhance Revenue and Contain Cost • Revenue enhancement Strategy • Cost Containment Strategy • Cost Benefit Analysis and Strategy

8. STATUS QUO ANALYSIS The PIT commenced with the identification of poor service delivery, inadequate controls, failure to conform to legislative requirements, policies, procedures, processes and in general governance.

9. STATUS QUO ANALYSIS General • Finding an esteemed City like Msunduzi in disarray politically and administratively, this is what one experienced in general when you entered the city. • Streets filled with refuse, visible illegal connections of electricity, potholes in roads, uncut grass, parks and open spaces filled with refuse. • A city lamed by the hands of its political leaders and its officials. • The state of the municipality has deteriorated to an extent that has rendered the municipality unstable and inoperable.

10. STATUS QUO ANALYSIS Political Instability • Politicians operated in different camps • Allegations of dictatorial rule • Spending of money on luxuries and parties as if the municipality had enormous cash funds, this is evident from information gathered by the PIT. • Allegations that the top politicians ignored the Supply Chain Management policy of the municipality were confirmed by the PIT.

11. STATUS QUO ANALYSIS Administrative Instability • Whilst all the illegitimate issues occurred the municipality became leaderless and officials started to side with politicians and failed their responsibilities. 62 outstanding reports, some urgent were not presented to the council. • Some of these matters related to forensic investigations and implicated some top officials. • The forensic report was tabled before council during 2007, but up to now the resolution by council was not adhered to by the Municipal Manager; this was confirmed by the PIT. • Immediate action with regard to this had to be taken. • The intervention was focusing on all areas of Msunduzi Municipality’s operations, namely Governance and Management control, Financial Management, Sustainable Service Delivery and Infrastructure Development and Maintenance.

12. SWOT ANALYSIS • A complete SWOT analysis was done in order to be able to develop and introduce a turnaround strategy. • Strengths • Weaknesses • Opportunities • Threats

13. SWOT ANALYSIS • Vision • A City of Choice • Mission • To stabilise the affairs of the municipality and ensure that the municipality functions effectively and in a sustainable manner in delivering services to the community.

14. SWOT ANALYSIS • Objectives of Local Government • Provide accountable government for local communities • Promote social and economic development • Promote a safe and healthy environment • Encourage the involvement of communities and community organisations in matters of local government

15. FINANCIAL ANALYSIS • The Municipality did not adhere to required Financial reporting • A financial analysis was performed to calculate the cash flow status and the current budget vs. actual • It was determined that funds were mixed and no proper fund controls was in place • Supply Chain Management was non-existent • The municipality was almost bankrupt • An eminent shortfall of cash (R 162 million) • A Budget deficit of close to R 252 million

16. SHORT TERM STRATEGIES Bank and Cash Management • Daily cash flow is drafted based on actuals and estimated amounts for the period concerned. • All funds must be kept separately in order not to mix capital and operational funding. • Matching of expenditure with the month concerned and ensuring that the bank reconciliation is performed on a monthly basis. • Creditors are being scheduled according to best practises and payments are made in accordance with the scheduling. • At this stage no investments should be made and all possible management information must be submitted in order to control funds. Expenditure management • An Expenditure Evaluation Committee for all Operating expenditure requests has been set up

17. FUNCTIONAL ANALYSIS • A Functional analysis was performed in order to establish service delivery performance. • It was clear that services rendered was at its lowest level and in some cases non-existent

18. FUNCTIONAL AREAS The functional turn around strategies are concerned with the restructuring of the functional areas, which will enable business units to deliver a more effective and efficient service. The functional strategies are built on the following pillars: • Financial • Infrastructure Development and Maintenance • Community Service • Corporate Services & Planning • Internal Audit • Performance Management

19. FUNCTIONAL STRATEGIES UNDERLYING PRINCIPLES OPTIMAL SERVICE DELIVERY INCREASED REVENUE COST BENEFIT ANALYSIS – BALANCED BUDGET ONGOING PROCESS DECREASED EXPENDITURE

20. FUNCTIONAL STRATEGIES Audit and Performance Management / Review

21. FINANCIAL STRATEGY • To provide end-to-end financial governance and support, in order to ensure optimal utilisation of financial resources. • The financial strategy has been divided into various Key Performance Areas to ensure optimal performance. • This will be achieved by: • Designing organogram and related KPA’s and KPI’s • Ensuring financial resources are in accordance with the human resource structures of the business units • Introducing Revenue enhancement processes • Revision of Policies • Online auditing of active accounts

22. FINANCE Financial Performance • Municipality under severe financial pressure DebtorManagement • Credit control & debt collection policy introduced • Measures introduced to speed up payment rate • Connections & disconnections of services • Collection rate currently 75% Creditor Management • Payment terms of 30 days after statement introduced to capitalise on free credit availability Management Accounting • Introduced to track & analyse financial performances

23. FINANCE • The Outdated financial system does not provide online, integrated reporting, nor adequate Management Accounting information to enable management to analyse operating and financial performance • Continuous software changes create a very unstable information environment • A System is still to be designed and implemented before the new financial year

24. BUDGETING • The newly adopted budget policy and principles are in accordance with the Municipal Finance Management Act No.56 of 2003 (MFMA), the Municipal Systems Act, No. 32 of 2000 (MSA) and the Municipal Budget and Reporting Regulations, which have been designed to achieve a range of objectives, including improving the local government sphere’s ability to deliver services by facilitating improved financial sustainability and better medium term planning. • The municipality will also adhere to MFMA circulars issued by National Treasury that provide up to date guidance on budgetary policy, budget process and submissions, etc. • The National Treasury will also provide further guidelines on budget formats and sample budgets.

25. SUPPLY CHAIN MANAGEMENT • The existing purchasing system is to be revived so that all SCM processes will be fully automated thus removing the human element and combating manipulation. • SCM personnel will receive full training on Intenda thereby adding value to the whole SCM process, the creditor’s data base will simultaneously be scrutinized. It is envisaged that the fully automated process will be a reality by 1 July 2011. • Order clerks have been centralised to the SCM unit to combat irregular and wasteful expenditure. • The existing SCM policy has been revised and adopted by Council enforcing stricter controls and compliance with the Municipal Finance Management Act (MFMA) and related regulations. • In future business units will only submit online purchasing requests to the SCM Unit so that they may be dealt with professionally and in line with the new policy.

26. SUPPLY CHAIN MANAGEMENT • No orders will be processed unless budget is available for such request. • Service providers who provide services without an official order will not be paid by the municipality. • Employees, who obtain services without the proper process being followed, will become personally liable for the payment thereof. • Goods received from service providers must be signed for in order to confirm delivery, such Goods Received Notes (GRN) will form the first basis for the payment of services provided and will be linked to the requisition and invoice (three way match principle).

27. EXPENDITURE MANAGEMENT • The majority of expenditure was reduced during the budget process in order to produce a balanced budget as required by the Municipal Finance Management Act. • Nice to have items were not included in the budget. A surplus achieved in the second quarter will be used to cover for these reductions in expenditure incurred during the budget process. • Introduction of cost containment by the PIT has yielded positive results in the control of unnecessary expenditure. • Also included in the adjustment budget are service delivery items e.g. grass cutting programme, maintenance of roads, provision made for the landfill sites legislative requirements etc.

28. MANAGEMENT ACCOUNTING • The Msunduzi Municipality has introduced Management Accounting whereby the results of the analysis of key financial and non financial information is communicated to all stakeholders in order to enable informed business decisions and sustainable operation. Management Accounting will encompass the following: • Obtaining a thorough understanding of the business processes within each business unit. • Implementation of controls that will facilitate accurate financial and non-financial output. • Tracking and analysis of output of all municipal activities. • Consultation with various business units and feedback in respect of variances. • Preparation and submission of reports for Council, Exco, Executives and the Portfolio Committee with corrective recommendations on a monthly basis to assist management with decision making.

29. MANAGEMENT ACCOUNTING

30. INFRASTRUCTURE SERVICESDELIVERY STRATEGY • To ensure that the municipality provides an end-to-end service delivery governance and support in order to ensure optimisation of resources. • All areas must be redesigned to ensure optimal performance • Designing organogram and related KPA’s and KPI’s • Ensuring financial resources are in accordance with the human resource structures of the business units • Introducing Efficient and Effective Human Resources Management (Productivity) • Revision of Policies • Online auditing of actual performance

31. COMMUNITY SERVICES DELIVERY STRATEGY To provide end-to-end community service delivery governance and support to ensure optimisation of resources. • Designing organogram and related KPA’s and KPI’s • Ensuring financial resources are in accordance with the human resource structures of the business units • Introducing Efficient and Effective Human Resources Management (Productivity) • Revision of Policies • Online auditing of actual performance

32. CORPORATE SERVICES AND PLANNING STRATEGY To provide end-to-end community service delivery governance and support to ensure optimisation of resources. • Designing organogram and related KPA’s and KPI’s • Ensuring financial resources are in accordance with the human resource structures of the business units • Introducing Efficient and Effective Human Resources Management (Productivity) • Revision of Policies • Online auditing of actual performance

33. INTERNAL AUDIT STRATEGY To provide an all-encompassing internal audit service to the audit committee and management by: • Covering internal audit functions • Compiling a comprehensive risk assessment of all council systems, processes and procedures • Undertaking or outsource where necessary, concerns raised which require investigation with possible criminal, civil and departmental disciplinary actions • Auditing the organisational score card, individual section 57 performance plans and report thereon to management and the Performance Audit Committee

34. INTERNAL AUDIT PROGRESS A Risk Management register has been developed for each Business Unit: • Managers to develop strategies to mitigate the risks • Managers take full responsibility for managing their risks • Implementation of controls is audited • Effectiveness of Risk management is measured • Opportunity for fraud is prevented • Favourable Annual Audit for Msunduzi

35. LEGAL SERVICES & LEGISLATIVE COMPLIANCE • Corporate and Legal Services Management were not up to standard and a great number of by-laws were lacking as well as the enforcement thereof. • Several by-laws have been adopted since the intervention and we envisage that the process will be concluded by the end of March 2011. • Contract Administration Support was inadequate and not completely supportive of the operational functions of the Municipality. • An appropriate contract administration and support service has been introduced and is fully functional.

36. MARKETING & PUBLIC RELATIONS • A fully integrated Customer Care Call Centre is being set up • This will ensure an efficient Customer service • Phased implementation, with the first phase anticipated to be fully functional by the end of February 2011 • Customers will be able to report on complaints, problems and faults reported on Electricity, Water and Sanitation, Roads and other infrastructure related issues • Service operational for 24 hrs seven days a week • All reported problems and complaints will be referenced and a reference number issued • A follow up process will unfold to ensure that the problem is tracked to a point where it is resolved, all in very good response time

37. INFORMATION SYSTEMS PROGRESS • Information Technology and Systems are outdated with malfunctioning networks. • Infrastructure Management was lacking whereby there was no system and security control. • All systems have been evaluated and certain measures are being introduced to ensure uniformity and standardisation

38. ECONOMIC DEVELOPMENT & PLANNING • Economic Development was part of a broader Business unit called Development Services. • Due to the restructuring it is now a fully focused business unit. • The unit is now focussing on facilitating business opportunities through the re-establishment of a development facilitation committee which interacts directly with prospective developers. • There is now also a focus on Informal Economy and Street Trading, and specific targets have been set for the sub unit. • This unit is also co-ordinating an initiative by the Municipality to clean up the City through the implementation of Municipal By-laws.

39. PERFORMANCE MANAGEMENT STRATEGY To provide an all-encompassing Performance management function for: • The Msunduzi Municipality as a Business • Business Units of the Municipality • Individual performance management • Indicators, Targets and Reporting • Ongoing Monitoring and Evaluation • Corrective Measures – Council Committee System

40. CENTRALISATION AND REGIONALISATION There is a strong indication that the Municipality must have a re-look at the centralisation of some functions, but also to look at the regionalisation of services. The principle of bringing to service nearer to the public All indications is that the following services have to be centralised, due to control, uniformity, etc., namely: • Supply Chain Management • Human Resources Support Services • Finance Support Services

41. CENTRALISATION AND REGIONALISATION All indications is that the following services have to be regionalised, due to improved service delivery, namely: • Parks and Recreational Services • Roads and transport Services • Refuse Service • Fire, Traffic and Public Safety • Health Services • Water • Electricity

42. INFRASTRUCTURE PLANNING & ASSET MANAGEMENT Strategy • Integrated infrastructure development plans (timing, capacities & limitations), to be driven by SDF, and LED and Housing development programmes and available technology. • Prepare a realistic Infrastructure Investment Plan • Work towards an infrastructure-efficient City. • Establish a Fleet Management System for optimum management, maintenance and replacement of fleet. • Put in place an efficient Asset Management System for all infrastructure assets.

43. SERVICE DELIVERY: ELECTRICITY Strategy • Clear maintenance backlogs (cable faults street lights, switch gear) so that maintenance can be planned on 1-year cycle. • Reduce electricity losses by installation of protective structures, including remote meter reading. • Refurbishment programme to replace primary transformers (33kV to 132kV) • Encourage use of alternative energy sources to curb electricity demand.

44. SERVICE DELIVERY: ELECTRICITY A process mapping exercise was conducted identifying all risk areas in the current system which have been addressed Risk Areas: • Application Register • Estimated Cost process • Job Cost finalisation • Reconciliation of Receipts to Requests • Cashier + Filing Clerk • Duplication of Activities • Billing / Finance / Invoicing

45. SERVICE DELIVERY: ELECTRICITY Risk Areas : • Stock Control • Management control • Separate data bases for registration and technician resulting in loss & manipulation of information • Management information • Credit Control and recovery of outstanding Municipal debt • Circuit breaker control • Works Order and Job Card control

46. SERVICE DELIVERY: WATER A Management maintenance plan has been introduced to: • Eradication of basic water and sanitation backlogs • Adequate provision and maintenance of water and sanitation infrastructure • Non-Revenue Water [Water losses] • Infiltration Control Programme • Bulk Water & Sanitation Master Plans

47. SERVICE DELIVERY: WATER A large-scale initiative, with the assistance of the Department of Water Affairs, to reduce the high levels of water losses commenced in December 2010 after the preparation of a detailed intervention plan to be complete the following over the next three years: • Move towards a planned mains replacement program, initially replacing approximately 30km of pipe in those areas most regularly affected by pipe bursts • Carry out leak detection surveys and leak repair on the entire water reticulation system at least twice a year (totally approximately 7000km) • Reduce the maximum supplied pressure to consumers to 60m through the installation of 40 new pressure reducing valves

48. SERVICE DELIVERY: WATER • Repair all leaking reservoirs and improve reservoir security • Ensure that all key infrastructure is placed on a preventative maintenance program • Identify and regularise all illegal connections by ensuring that all connections are metered, registered and not tampered with • Improve the efficiency of meter readings and billing • Undertake a comprehensive consumer awareness and education campaign targeting the responsible use of water and efficient water use habits

49. SERVICE DELIVERY: SANITATION A Management maintenance plan has been introduced to: • Promote free flow of water sanitation • Accurate measures of e.coli at strategic river points • Maintain the existing infrastructure which is outdated • Highlight the lack of available funds for upgrade • Underline challenges facing the Sanitation Department • Understand health hazards

50. SERVICE DELIVERY: WASTE Domestic refuse process was mapped & divided into three regional areas to ensure balancing of volumes of refuse and number of collection points. • Domestic Refuse Collections increased by +- 3000 households as a result of previous of previous private contracts being cancelled • ADHOC overtime totally eliminated • Total overhaul of personal / attendance records – unauthorised absences significantly reduced • Not one day of lost operation in the last 7 months.