National Treasury has released the local government revenue and expenditure report for the first
quarter of the 2022/23 financial year. This report covers the performance against the adopted
budgets of local government for the first quarter of the municipal financial year ending on 30
September 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 prescribes 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 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 a concern but is improving
as the reform is maturing. 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 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; and
  • 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.

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 tools that serves 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

1. On aggregate, municipalities spent 21.0 per cent, or R117.1 billion, of the total adopted
expenditure budget of R557.8 billion as at 30 September 2022 (first quarter results for the
2022/23 financial year). In respect of revenue, aggregate billing and other revenue amounted
to 27.4 per cent, or R153.0 billion, of the total adopted revenue budget of R557.5 billion.

2. Of the adopted operating expenditure budget amounting to R488.0 billion, R109.4 billion or
22.4 per cent was spent by 30 September 2022.

3. Municipalities have adopted the budget for salaries and wages expenditure at R146.6 billion,
representing a 30 per cent of the operating budget of R488.0 billion for the 2022/23 municipal
financial year. As at 30 September 2022, spending on salaries and wages is 6.9 per cent, or
R33.5 billion.

4. In the period under review, capital expenditure amounted to R7.7 billion, or 11.1 per cent, of
the adopted capital budget of R69.8 billion.

5. Aggregated year-to-date operating expenditure for metros amounts to R70.5 billion, or 24.1
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 R31.9 billion, of which 10.6 per cent,
or R3.4 billion, has been spent as at 30 September 2022.

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

  • Billed water revenue billed was R12.8 billion against expenditure of R7.9 billion;
  • Energy sources revenue billed was R27.62 billion against expenditure of R27.61 billion;
  • The revenue billed for waste water management was R3.9 billion against expenditure of
    R1.9 billion, and
  • Levies for waste management billed were R3.6 billion against expenditure R2.2 billion.

7. As at 30 September 2022, aggregated revenue for secondary cities is 22.1 per cent or
R17.7 billion of their total adopted revenue budget of R79.9 billion for the 2022/23 financial
year. The year-to-date aggregated operating expenditure level of the secondary cities is 19.9
per cent or R15.8 billion of the total adopted operating budget of R79.5 billion for the 2022/23
financial year.

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

  • Water revenue billed was R2.3 billion against expenditure of R1.9 billion;
  • Energy sources revenue billed was R7.2 billion against expenditure of R6.9 billion;
  • The revenue billed for waste water management was R976 million against expenditure
    of R471 billion; and
  • Levies for waste management billed were R999 million against expenditure of R497
    million.

9. Capital spending levels are low at an average of 11.0 per cent or R936.2 million of the adopted
capital budget of R8.5 billion.

10. Aggregate municipal consumer debts amounted to R290 billion (compared to R264.7 billion
reported in the first quarter of 2021/22) as at 30 September 2022. Government debt accounts
for 8.0 per cent, or R23.3 billion (R19.6 billion reported in the first quarter of 2021/22). The
largest component of this debt relates to households which account for 70 per cent or R202.4
billion (70.5 per cent or R186.6 billion in the first quarter of 2021/22).

11. If consumer debt is limited to below 90 days, then the actual realistically collectable amount is
estimated at R48.8 billion. This should not be interpreted that the National Treasury by
implication suggests that the balance must be written-off by municipalities.

12. Metropolitan municipalities are owed R147.5 billion (R125.6 billion reported in the first quarter
of 2021/22) in outstanding debt as at 30 September 2022. The largest contributors were the
Cities of Johannesburg at R43.9 billion, Ekurhuleni at R27.8 billion, eThekwini at R21.7 billion
and Tshwane at R17.7 billion.

13. Households in metropolitan areas are reported to account for R107.4 billion or 72.8 per cent
of outstanding debt to metros, followed by businesses which account for R30.9 billion or 20.9
per cent. Debt owed by government agencies is at R8.4 billion or 5.7 per cent of the total
outstanding debt owed to metros.

14. Secondary cities are owed R55.8 billion (R50.6 billion reported in the first quarter of 2021/22)
in outstanding consumer debt. The majority of debt is owed by households, which amount to
R38 billion, or 68 per cent, of the total outstanding debt. An analysis by customer group indicates an amount of R49.3 billion or 88.4 per cent, has been outstanding for more than 90 days.

15. Municipalities owed their creditors R86.2 billion as at 30 September 2022 and provinces with
the highest percentage of outstanding municipal creditors in the category greater than 90 days
include Free State at 90.2 per cent, Mpumalanga at 89.9 per cent, Northern Cape at 88.7 per
cent and North West at 77.2 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.

16. The total balance on borrowing for all municipalities equates to R60.6 billion as at 30
September 2022. This includes long term loans of R45.6 billion, long term marketable bonds
of R8.4 billion, and other long term non-marketable bonds of R1.0 billion. The balance
represents other short- and long-term financing instruments.

17. As at 30 September 2022, the total investments made by municipalities equates to R44.7
billion. Investments includes Bank Deposits of R40.2 billion, guaranteed endowment policies
(sinking funds) of R3.9 billion, Listed Corporate Bonds of R332 million and other smaller
investments.

Conditional Grants

Conditional Grants Expenditure as at 30 September 2022

18. The Division of Revenue Act, 2022 (Act No. 5 of 2022) (DoRA) gazetted on 15 June 2022
provides for the equitable division of nationally raised revenue between the three spheres of
government (National, Provincial and Local Government). DoRA further provides that all
conditional grants allocated to municipalities must be spent subject to the legislated conditions
as articulated in the respective conditional grant frameworks.

19. Section 11 and 12 of the 2022 DoRA requires municipalities to report information on conditional
grants received, withheld or stopped and their performance on their allocations in accordance
with sections 71 and 74 of the MFMA, 2003 (Act No. 56 of 2003) on a monthly and quarterly
basis.

20. The DoRA allocated a total amount of R150.6 billion to local government for the 2022/23
financial year. This allocation includes unconditional transfers in the form of the Equitable
Share (R87.3 billion), direct conditional grants allocated for capacity grants (R2.4 billion), direct
conditional grants for infrastructure projects (R45.5 billion, including of the Urban Settlements
Development Grant (USDG) of R7.3 billion)) and indirect conditional grants (R8 billion – a slight
increase from the R7.7 billion allocated in 2021/22). Transfers to local government continue
to grow above inflation over the medium term, particularly the Equitable Share allocations to accommodate the rising cost of providing Free Basic Services to poor households. These allocations exclude the General fuel levy to metropolitan municipalities to the amount of R15.3
billion (R14.6 billion was allocated in the previous year).

21. As at the 30 September 2022, of the R40.6 billion (excluding USDG) allocated to municipalities
in direct conditional grants for 2022/23, R11.5 billion or 29.1 per cent was transferred to
municipalities. The reported expenditure as at the end of September 2022 by the transferring
officers was a mere R5.2 billion or 13.7 per cent. However, the reported expenditure by
municipalities is significantly low at six per cent.

22. The eight metropolitan municipalities are the largest contributors to the economy in the country
and are therefore allocated the lion’s share of transfers from national government to
municipalities of R11.2 billion in direct conditional grants. From this allocation R3.3 billion or
30.1 per cent was transferred as at 30 September 2022 and R1.0 billion or 29.6 per cent of the
transferred amount was reported as spent. This excludes supplementary grants such as the
Urban Settlements Development Grant (USDG) as the grant is reported as part of the overall
capital budget of the receiving metropolitan municipalities.

23. The highest performing metro was City of Cape Town Metropolitan Municipality having
reported expenditure of R249.8 million or 11.5 per cent of the R2.1 billion allocation in direct
conditional grants. The eThekwini metro followed with reported overall expenditure of R254.9
million or 11.3 per cent of the allocated amount. This expenditure is mainly informed by the
performance of capital grants.

24. The lowest performing metropolitan municipality (similar to the same period last year) was the
Nelson Mandela Bay Metropolitan municipality which reported an overall expenditure of R28.7
million which equates to 3.9 per cent of the allocated amount or 16.4 per cent of the transferred
amount.
Capacity Building and Other Conditional Grants Expenditure as at 30 September 2022

25. A total of R2.4 billion was allocated to capacity building and other grants (including the
unallocated Municipal Disaster Grant and the Municipal Emergency Housing Grant). These
grants are intended to assist municipalities in the development of their management, planning,
technical, budgeting and financial management capabilities in the 2022/23 financial year. This
included the Municipal Disaster Grant which assists municipalities in alleviating the impact of
a disaster, such as the floods that occurred in KwaZulu-Natal and Eastern Cape in April this
year, which resulted in damage to infrastructure, housing, displacement of people, as well as loss of lives. Funding has again in 2022/23 been allocated to affected municipalities to continue with efforts to alleviate the impact of the floods.

26. The highest performing conditional grant under this category during the first quarter was the
Expanded Public Works Programme (EPWP) with reported performance of 26.2 per cent,
followed by the Infrastructure Skills Development Grant (ISDG) at 23.2 per cent and the
Financial Management Grant (FMG) at 18.9 per cent.

27. The lowest performing grant in the first quarter ended 30 September 2022 is the Programme
and Project Preparation Support Grant (PPPSG) introduced in the 2021/22 financial year,
which reported zero expenditure as at the end of the first quarter. This is due to no funds being
transferred to municipalities for the period under review, which may be due to non-compliance
on municipalities’ part to be eligible for the first tranche of their PPPSG allocations. The grant
is fairly new, and the Transferring Officer (TO) of the grant needs to develop measures to
address the challenges associated with the poor performance of the grant, and also provide
support municipalities to enable them to perform better and thus improve the performance of
the grant.

Infrastructure Conditional Grants Expenditure as at 30 September 2022

28. National transfers for infrastructure, excluding indirect or in-kind allocations to Transferring
Officers executing specific projects on behalf of municipalities in the municipal area, amounts
to R38.2 billion in the 2022/23 financial year.

29. The highest performing direct infrastructure grant to municipalities during the first quarter was
the Neighbourhood Development Partnership Grant (NDPG) which reported performance of
17.7 per cent, followed by the Municipal Infrastructure Grant (MIG) at 14.2 per cent, then the
Integrated Urban Development Grant (IUDG) which reported performance of 12.7 per cent.
The Rural Roads Assets Management Systems Grant and the Informal Settlements Upgrading
Partnership Grant (ISUPG) reported performance was 10.8 per cent and 10.4 per cent
respectively, while all other infrastructure grants reported expenditure of less than 10 per cent
of their allocations.

30. The lowest spending grant under the infrastructure grants during the first quarter was this time
the Integrated National Electrification Programme (INEP) grant, which reported no
expenditure, followed by the Public Transport Network Grant (PTNG) with expenditure of
R359.5 million or 6 per cent from the R6 billion allocation. The low levels of expenditure on
the infrastructure grants are a concern, given the economic growth of the country depends on the much-needed infrastructure development, which also creates employment opportunities, given the high unemployment rate in the country.

31. Indirect grants (Infrastructure and capacity) allocated to municipalities increased from R7
billion in the 2021/22 financial year to R8 billion in the 2022/23 financial year. Indirect grants
are allocations whereby the National Transferring Officers are responsible for the
implementation and administration of the grants on behalf of and for the benefit of
municipalities. Performance monitoring for these grants is not included as part of the Section
71 publications because municipalities do not receive these allocations directly (allocations in-kind).

Further details on this report can be accessed on the National Treasury’s website:
www.treasury.gov.za

NOTE TO EDITORS:

  • This information is published in terms of Sections 71 of the Municipal Finance Management
    Act, 2003 (Act No. 56 of 2003) (MFMA), and 30(3) of the Division of Revenue Act, 2022 (Act
    No. 5 of 2022) (DoRA). The budgeted figures shown are based on the 2022/23 adopted
    budgets approved by municipal councils.
  • In terms of the process, Municipal Managers and Chief Financial Officers were required to sign
    and submit data to the National Treasury by 02 November 2022. Any queries on the figures
    in these statements should be referred to the relevant Municipal Manager or Chief Financial
    Officer. Queries on conditional grants may be referred to the national department responsible
    for administering the grant.
  • A municipal budget must be funded in terms of Section 18 of the MFMA before a Municipal
    Council can adopt that budget for implementation. A funded budget is essentially a budget
    that is funded by a combination of cash derived either from realistically anticipated revenues
    to be collected in that year, and cash backed surpluses of previous years. It is a common
    practice amongst most municipalities, when preparing their annual budgets, to overstate or
    inflate revenue projections, either to reflect a surplus, or on the surface to show that excess
    expenditure requirements are adequately covered by revenues to be collected. Therefore, the
    revenue estimates are seldom underpinned by realistic or realisable revenue assumptions
    resulting in municipalities not being able to collect this revenue, and as a result finding
    themselves in cash flow difficulties. Should such situations arise, municipalities must adjust
    expenditure downwards to ensure that there is sufficient cash to meet these commitments.
  • This first quarter publication covers 257 municipalities on financial information and conditional
    grant information.

Issued by National Treasury
Date: 12 December 2022

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