INTERVENTIONS IN TERMS OF SEC.139(1)(b)OF THE CONSTITUTION BY MS N DUBE, MPL – MEC: CoGTA-KZN

BACKGROUND  On 24 November 2009 the Provincial Executive Council of KwaZulu-Natal (“Executive Council”)resolved to intervene at Indaka, Okhahlamba and Umhlabuyalingana municipalities in terms of section 139(1)(b) of the Constitution as a result of failures to fulfill various executive obligations;  On 10 March 2010, the Executive Council resolved to intervene at Msunduzi municipality in terms of section 139(1)(b) of the Constitution;  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;  In terms of a resolution of the Executive Council dated 06 October 2010 all aforementioned interventions were to end on 30 June 2011.

REASONS FOR INTERVENTION UMHLABUYALINGANA The municipality was subject to a discretionary intervention by the MEC for Co-operative Governance in terms of Section 136 – 138 of the MFMA. The council resolved to accept the discretionary intervention on 26 th June 2009, consequently, a financial administrator was appointed by the MEC. This intervention, however, did not produce the desired results, namely:- It was apparent that the municipality was in serious and persistent breach of legislation and showed a continued decline in financial management and administration particularly attributed to weak performance and a lack of accountability. For two consecutive years the council condoned irregular, fruitless and wasteful expenditure as is evident from the Auditor-General’s report on the 2006/2007 and 2007/2008 financial years. The council failed to exercise oversight over the administration and finances of the municipality. The council made decisions that were not in the best interests of the community. The above mentioned issues as well as the failure by the council to implement the financial recovery plan and the consistent lack of oversight by the councillors, as well as poor decision making led to a situation where the municipality was dysfunctional and financially compromised.

REASONS FOR INTERVENTION OKHAHLAMBA The municipality did not have a functional management team for at least a period of a year prior to the Executive Council intervening., which contributed to the municipality’s dysfunctional state in 2009; The Auditor General 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. Furthermore 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 R (un-audited) in the 2008/2009 financial year the Municipality. The accumulated deficit as at June 2009 totaled R Grant funding allocated for Housing was utilised irregularly to finance the operations of the Municipality. Unspent conditional grants to the sum of R were not cashed backed; As reflected in the 2008/2009 Annual financial statements, general expenses increased from R in the 2006/2007 financial year, to R in the 2008/2009 year, resulting in a percentage increase of 407%. The Municipality has failed to make payments to its creditors as and when due.

REASONS FOR INTERVENTION INDAKA The Auditor General 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 Auditor-General 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 Auditor General’s report for the 2007/2008 financial year, the municipality has experienced serious financial problems evident from the poor cash flow, an accumulated deficit of R8,4 million was incurred as at June 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.

REASONS FOR INTERVENTION MSUNDUZI the non-adoption of the mid-year budget and performance review by 31 January 2010 as contemplated in section 72 of the MFMA which remained outstanding despite the financial crisis; the non-adoption of an adjustments budget as contemplated in section 28 of the MFMA, as a result of the serious financial problems identified in November 2009; the failure to implement the recommendations of the forensic investigation report by “The Firm” commissioned by the MEC COGTA in terms of section 106 of the Systems Act, despite the fact that council took a resolution adopting the recommendations of the report on 21 August 2007; the failure to adopt the IDP Process Plan for 2010/2011, as contemplated in section 28 of the Systems Act; the failure to receive and deal with reports relating to SCM matters, such as the contract variation reports outstanding from November 2008 and quarterly reports on the award of tenders, as contemplated in the SCM Policy of the Municipality, prepared in terms of section 111 of the MFMA; the failure to deal with the issue of excessive overtime and non-compliance with the Labour Relations Act, 1995 (which was reported to Council in the forensic investigation report of the MEC, which was tabled in Council on 21 August 2007, as well as by the Auditor-General reports in respect of the 2007/2008 and 2008/2009 financial years, which has now led to the disruption of the refuse removal service within the municipality; the failure to reallocate Municipal Infrastructure Grant budget allocations outstanding from the 2008/2009 financial year, as contemplated in section 28 of the MFMA; Failure of the council to exercise supervisory authority in relation to the implementation and enforcement of the municipality’s credit control and debt collection policy and by-laws;

SCOPE OF ADMINISTRATORS The scope of administrators appointed at Indaka, Okhlahlamba and Umhlabuyalingana 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

SCOPE OF ADMINISTRATORS CONT… The scope of the administrator appointed at Msunduzi municipality in undertaking the function 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 was required to :- perform all statutory executive functions of the exco; perform all functions delegated to the mayor and exco by the municipal council; perform the functions in terms of section 51 of the Systems Act; devise a turn-around strategy for the Msunduzi municipality; ratify all decisions of the municipal council and its committees, prior to implementation; ratify all decisions taken by the municipal manager and managers reporting to the municipal manager, in terms of delegated or original authority; ensure implementation of council resolutions by the administration; implement a system to control and approve all expenditure recommended by the intervention support team; implement all governance systems and procedures including appropriate councillor oversight mechanisms; ensure implementation of financial systems, policies and procedures; approve a strategy for addressing the municipality’s financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection of revenue; approve an adjustment budget for the 2009/2010 financial year in consultation with the municipal council; implement the recommendations contained in the forensic investigation report commissioned by the MEC COGTA in terms of section 106 of the Systems Act, as well as any other investigation undertaken at the municipality, including criminal, civil recovery, and disciplinary proceedings; address the outstanding matters contained in the exco agenda dated 18 February 2010; and review the organisational structure of the municipality; and

PROCESS At inception, administrators drafted recovery plans with key performance indicators in the areas of governance, finance, infrastructure and planning, service delivery, e.t.c. These included measurable objectives and reasonable time frames; Administrators provided monthly reports to the Department based on the respective recovery plans; Considerable progress was achieved in many instances with some challenges remaining; Considering the period of the interventions, as per the resolution of the Executive Council (i.e. all interventions must end 30 June 2011) administrators were required to put in place exit strategies which were presented to the respective councils; The exit strategies included progress achieved and continuation thereof as well as outstanding matters that required implementation including the capacity requirements (responsible official in the administration of the municipality); The Department assessed the exit strategies and took into account existing capacity at the municipalities and individual circumstances of each municipality, based on which the Department made recommendations to the Executive Council; The progress in respect of the interventions are detailed in the reports and exit strategies. The following slides indicate, briefly, some of the progress that has been achieved;

PROGRESS: UMHLABUYALINGANA AS AT JUNE 2011 Cash balance of R58m in June 2011, thus a total turnaround of the finances of the municipality Performance Management System completed Management ( section 57) Reporting Framework completed 2010/11 IDPs completed Annual Reports up to date ( 2009/10) Quarterly/ Mid Year Reports up to date for 2010/11 Organogram Review completed Audit Committee appointed Internal Audit Function established Institutional and Financial Stability restored/ established Internal Financial Controls Manual completed Implementation of MPRA completed in respect of business and Government properties All outstanding creditors paid up Sufficient cash provision of R37m for all Conditional Grants in June 2011 All Criminal allegations for irregular, fruitless and wasteful expenditure reported to the police for criminal charges; against the former Municipal Manager former CFO Civil Summons for R15.3 Million ( recovery ) issued against the former Municipal Manager and the former CFO in respect of irregular and fruitless and wasteful expenditure before November 2009 Financial Management System ( ABAKUS) upgrade is underway

PROGRESS: OKHAHLAMBA AS AT JUNE 2011 Financial position improved from R16.3m deficit to an anticipated R4,2 m surplus by the end of the financial year; Assessment of Existing VR and Completion of Supplementary VR for 2011/2012 has been completed; A comprehensive revenue enhancement strategy has been adopted; An 80% rates collection rate has been achieved and the rates policy is being enforced; Committees of council have been established, including SCOPA; Process to fill one vacancy on the audit committee was in place in June 2011; Annual Report 2009/2010 finalised; Budgeted vacancies are in the process of being filled ; Various financial, administrative, governance and human resource policies and frameworks have been adopted; Small town development programmes are being implemented;

PROGRESS: INDAKA AS AT JUNE 2011 Unnecessary expenditure was curbed. All financial records neglected for a six month period was updated and is now kept up to date. All outstanding creditors are paid within 30 days as per the MFMA. All reserves and grants are now cash-backed with the accumulated deficit reduced to zero for the 2009/10 financial year; The municipality was able to reinstate the equitable share amounting to R4.3 Million, withheld due to non-compliance in reporting. The Municipality was also able to reconcile and recover outstanding VAT claims to the value of R1.6 million; All financial policies and procedures have been reviewed and implemented; Internal controls have been introduced to detect irregular transactions; 2009/2010 Annual Financial Statements have been submitted to Council and Office of the Auditor General by the 31 August 2010 an improvement on the past financial year; The review of Supply Chain Management resulted in the supplier’s data base being renewed with the correct implementation of Supply Chain Management processes. Although the recovery process has been slow, financial stability has been achieved during the intervention; The organizational review of municipal administration has led to the reduction in the number of section 57 employees from 7 to 5. The un-manned Community Services department was abolished and the function incorporated into the Corporate Services Department;

PROGRESS: MSUNDUZI AS AT JUNE 2011 The cash flow of the Municipality is now analysed daily and improved drastically with the operating deficit being reduced; Payment of overtime was a contentious issue, and has been curbed with only essential services now incurring overtime; Creditors are paid within 30 days after being screened; The municipality has implemented a credit control and debt management policy effectively and is managing outstanding debt, which has improved the rate of payment. The supply chain management policy has been revised and implemented. The municipality has achieved relative financial stability and the systems, procedures and internal controls put in place will assist the municipality in a full financial recovery; The 2011/2012 Operating and Capital Budget and the IDP have been adopted. Improvement has been made in terms of the development of criteria for prioritisation of capital projects on a multi-year basis; A number of policies have since been adopted such as the Budget Policy, Tariff Policy, Rate Policy, Credit Management Policy, etc. to support the budget process. Similarly, by-laws for Special Rating Areas have also been adopted by council to facilitate the implementation of the concept of Urban Improvement Districts and ensure Inner City Renewal; Grant funding is now cash-backed and the Grants Register has been developed to track developments and account for each grant;

CHALLENGES : INDAKA AS AT 06/2011 The Department, after an assessment of the exit strategies, reported progress and challenges outstanding to the Executive Council. Some of the challenges were as follows:- INDAKA Although a new organogram was "agreed to" by council, various senior personnel were suspended and are facing disciplinary action for misconduct, including the MM, the CFO, Senior Accountant, Manager SCM, Manager IDP, Director Corporate Services. There is a clear lack of senior management at the municipality; The review of SCM policies, procedures and procurement was not finalised. Financial processes with the support of Departmental support and the appointment of service providers were proceeding but only in preparation for the Annual Financial Statements and for audit purposes thereafter implementation of financial controls, systems and plans would be left to financial unit which is severely understaffed; A housing sector plan is incomplete, it requires review, adoption and implementation; The level of co-operation from the municipality with regard to the implementation of financial controls and measures put in place by the administrator resulted in the Executive Council extending the scope of the intervention to include fiscal and financial management function in March 2011; The municipality lacked sufficient capacity to implement any exit strategy put in place;

CHALLENGES : OKHAHLAMBA AS AT 06/2011 One member of the audit committee was yet to be appointed; The oversight framework was adopted, however, implementation including appropriate and effective reporting was not in place; Public participation framework had been developed, to be approved and adopted by council. Implementation of this framework is necessary; Organogram has been reviewed, however, key positions are vacant, including MM and Director: Corporate Services; The development of maintenance plan was finalised, implementation of this plan requires technical expertise and proper monitoring; Water service delivery plan has been adopted implementation hampered as a result of IGR challenges; Eradication of electrification backlog plan developed and to be implemented.

CHALLENGES : MSUNDUZI AS AT 06/2011 Draft organisational structure developed, consultation with stakeholders and adoption not achieved; Skills Development Plan taking into account competency requirements and skills gaps is yet to be developed and implemented; Various disciplinary enquiries yet to be finalised, including hearings for senior personnel; The oversight role of council required strengthening; Audit Committee was yet to be established by council; 2011/2012 Operating and Capital budget has been adopted, however, the capital budget is not yet fully funded; Revenue collection has stabilised, however, revenue management is still a major challenge due to high levels of water and electricity losses; Slow progress has been achieved with regard to reducing debtors books, a strategy has been put in place and implementation is critical to achieve success; To address the ongoing challenges of maintenance, an integrated maintenance programme using the principles of the Expanded Public Works Programme has been introduced which requires committed implementation and effective performance management;

RESOLUTION OF THE EXECUTIVE COUNCIL DATED 29 JUNE 2011 Based on the progress made and the existing challenges yet to be resolved, the Executive Council resolved to :- Terminate the intervention at Umhlabuyalingana municipality; Extend the interventions in terms of section 139(1)(b) at Indaka, Okhahlamba and Msunduzi municipalities until 31 December 2011;

TOWARDS 31 DECEMBER 2011 MSUNDUZI Oversight Committees have been established; Increase in the revenue collection rate from 53% to an average of 79% in the 2010/11 financial year; Financial austerity measures introduced as part of the overall cost containment strategy; An Expenditure Committee has been put in place to approve all expenditure before being incurred; Disciplinary processes of Senior Management has been implemented and, if not finalised, in the process of finalisation; and Substantial progress in concluding forensic investigations.

TOWARDS 31 DECEMBER 2011 OKHAHLAMBA Audit committee is in place and functional, the Annual Financial Statements were reviewed and submitted to the AG as per the MFMA; Preliminary findings of a forensic investigation by PWC have been reported to SAPS and the Hawks. The former Mayor, municipal manager and director corporate services have been implicated; The former manager technical services (currently the deputy mayor) is being investigated by the serious crimes unit in relation to charges of rape of municipal officials; Civil recovery against the aforementioned individuals, where necessary, has commenced; The municipal manager and other senior management posts have been advertised and recruitment of the top structure is underway;

TOWARDS 31 DECEMBER 2011 INDAKA Post June 2011, the administrator at Indaka municipality resigned and was replaced with the administrator who was appointed Umhlabuyalingana municipality; Based on a situational analysis of Indaka, considering its history of challenges and non-co- operation, the Administrator devised a recovery plan including key performance areas relating to good governance, finance, financial management (reporting, internal controls, SCM), Institutional development, infrastructure and service delivery and disciplinary matters; Department officials, Provincial Treasury and other stakeholders have met to assist in the identification of resourcing the recovery plan; One of the critical issues is the capacity of the municipality to implement any recovery plan or exit strategy that may be developed for Indaka; In this regard the MEC is considering, around the issue of the suspended municipal manager, an application received by the municipality for her approval of a settlement proposal. The municipality requires strategic and focused direction from a suitably qualified and experienced Head of Administration; Various suspensions of municipal officials, including the CFO and key Finance staff have been effected following a forensic report; The administrator has identified this issue as part of the recovery plan to expedite this process to unblock key posts and fill such posts with the necessary skills and expertise; Positively, the municipality has reviewed/rectified the budget on the 11/10/2011 and approved it accordingly. The exercise achieved a saving of R 10.5 M which was transferred to Capital Investment (ring fenced for service delivery);

CONCLUSION The interventions are progressing at a consistent pace, including at Indaka municipality whereat progress was hindered as a result of the lack of co-operation of the municipality. Indaka municipality is now working with the administrator to ensure the implementation of a sustainable recovery plan, one of the indicators is the unblocking of posts e.g. post of municipal manager;

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