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Public Financial Management

Introduction to Public Financial Management

There are in total three municipalities, namely, Midvaal Local Municipality, Lesedi Local Municipality and Emfuleni Local Municipality that constitute as the part of Sedibeng District Municipality. The southern boundary of Emfuleni Local Municipality is formed by the Vaal River and this strategic location provides many opportunities for tourism and several forms of economic development. (Annual Report 2015). The main purpose of this report is to analyse the responsibilities of the Municipal manager and Mayor along with evaluating its financial performance. There are two main districts in which the Emfuleni municipality carry out its business operations, namely, Vanderbijlpark and Vereeniging. It is amusing in history as it captures South African War with the adoption of the peace treaty in Vereeniging through which the Second Boer War ended. It consists of several heritage assets like Exhibition Centre and Sharpeville Memorial. In this report, different budgetary systems are to evaluated to recommend the best system out of them for the Emfuleni Municipality.

The major fiduciary responsibilities of the municipal manager of Emfuleni is to establish effective customer care management systems, credit control and debt collection related policy. It is his/her duty to maintain and install adequate accounting system and to bill the customers accurately and on time. Penalties must be raised on defaults and must provide various payment methods to receive the payments in an appropriate manner. Relevant staff members must be appointed to execute the policy of Council and by laws. Appropriate control procedures must be identified and performance targets are being set by him to measure the variance in their performance (Emfuleni Local Municipality 2020). He is responsible for developing and monitoring the service level agreements and provide a report on the potential risks with regard to the delivery of basic services and also recommend remedial actions when desired.

Chief Financial Officer is basically responsible for annual budget of the municipality. He ensures the effective and economical use of resources of the overall Municipality (Emfuleni Local Municipality 2020). Proper and complete records of all the financial affairs of the municipality are required to be maintained as per prescribed norms and standards.

Mayor is basically responsible for ensuring the meeting up and proper execution of council’s budget, targets for debt collection and cash flow in accordance with the policy and relevant legislations. The performance of the Municipal Manager is monitored by the Mayor and he also review and evaluates the by-laws and policy to enhance the efficiency of the customer care of Council, debt collection procedures, credit control, processes and mechanisms (Emfuleni Local Municipality 2020). Council is required to reported by him as per the relevant legislation.

The mayor plays an oversight role to ensure that all the operations of the Municipality are comply with the legislations. He / she ensures that the things are going as per the set targets and the expenses are being incurred as per the planned figures (Manyane 2020).

Four different types of different budgeting systems -

Incremental budgeting – This system is concerned with taking the actual figures of the last year and adding or subtracting a specific percentage to get the budget of the current year. It is simple and easily understandable; thus, it is considered appropriate for using in case the basic cost drivers do not fluctuate much from year to year. However, this method may perpetuate inefficiency in the system.

Activity based budgeting – This budgeting approach is concerned with identifying the amount of inputs that is needed to support the outputs established by the company. Under this method, the firm is required to first identify the activities and then determine the costs of carrying out such activities.

Value proposition budgeting – This method takes into consideration various questions like, why the particular amount is included in the budget, if the particular figure will produce value for staff, customers and other major stakeholders, etc. This method aims to avoid irrelevant expenditures.

Zero based budgeting – This method is based on assumption that the budgets of all the departments is zero and are to be established from the very start. This is regarded as an effective approach when there is urgent need for containment of cost. However, this is time consuming approach.

It is recommended that the Mayor must adopt Value proposition budgeting method as this will help in including everything so that budget will deliver value to the business.

The budget is defined as a major statement of policy of the government comprising of 1 national budget, 9 provincial budgets and 278 municipal budgets. The allocation that are made to provinces and municipalities (conditional grants, equitable share and grants in kind) are all form part of the annual division of revenue bill. Every municipal council make a decision with regard to allocation of resources whereas in provinces, every provincial legislature undertakes the decision with regard to adequate allocation of resources (National Treasury 2014). Municipalities generally raise large proportion of their revenue from own sources whereas provinces raise very small amount of own revenue. Equitable shares are received by municipalities to provide basic services to the poor people along with some conditional grants for national approved to priorities. On the other hand, provinces are mainly financed through provincial equitable share and receive some conditional grants. The funds from the national share of resources are assigned to provinces, national departments and municipalities under the Division of Revenue Act.

 

2014/15 allocation

Examples of operations funded

National allocations

R489 billion (48%)

Funds for national operations like universities, police, social grants, railways

Provincial allocations

R444 billion (43%)

Funds for hospitals, social development, roads, schools, housing

Local government allocations

R91 billion (9%)

Electricity, sanitation, roads, refuse removal, water

The local government equitable share is allocated with a help of formula that have two objectives, namely, enabling the municipalities to ensure basic services to the poor households and enabling the municipalities to afford basic governance and administrative capacity and carry out core municipal operations.

An operating deficit of R353 million has been reported by the Municipality at the end of the financial year. It has been estimated that there is a decline of 4% in the total revenue as compared to the previous year. The revenue of the municipality mainly increases with the increase in services charges or tariffs, property rates and with the rise in the grants being received from the government (Annual report 2015). Under the policy framework meant for municipal borrowing and financial emergencies, it has been mentioned that the municipalities that do not have the adequate amount of resources or the capacity to make the repayment of debt on maturity must not borrow. Borrowing is considered as reasonable for well – managed municipality including poor municipality that depend basically on intergovernmental transfers to meet its constitutional responsibilities. Municipalities can now borrow from the private sector as per the legislation without any guarantees from the central government. Under this, the lenders are answerable for investigating the financial capacity of those who are borrowing funds from them and undertake wise decisions for lending purposes. Municipal manager is responsible for effective management of their funds comprising of sustainable debt levels. To finance the investment for local infrastructure, it has been suggested that the cities must borrow long term investment resources from financial and capital markets (Final draft 2017). This will help in achieving fiscal discipline in the cities. It is advised that the municipalities must establish participatory, long term strategic and financial processes for planning. Municipalities must determine and prioritize among different investment projects that will fetch enough support to the inclusive growth of the national and local economy.

All the entities that prepare their financial statements on the accrual basis of accounting as per the prescribed standards of GRAP, GRAP 1 is applicable to those firms. There are various considerations that must be taken into account by the firms while preparing their financial statements (Accounting guideline 2020). To fairly present the financial statements, the effects of events, transactions and conditions must be accurately and truthfully represented as per the definitions and recognition criteria for revenue, assets, expenses and liabilities. Management of the business entity must make evaluation of the ability of the entity to carry out its operations as a going concern while undertaking the reparation of financial statements. The financial statements under GRAP are required to be prepared on the accrual basis of accounting.

Classification and presentation of different items in the financial statements should be consistent to undertake comparison between them. Every material class of identical items must be presented in a separate manner in the financial statements. Consideration must also be given to those items that may not be enough material to warrant distinct disclosure on the face of statement but are sufficiently material to be accounted in the notes separately. The comparative information should be disclosed with regard to the previous period for all the amounts that have been recorded in the financial statements (Accounting guideline 2020). This type of information is also required for narrative and descriptive information in case it is considered relevant to obtain understanding with regard to financial statements of the current period.

Emfuleni Municipality has undertook going concern assumption while preparing the financial statements at the end of the financial year. Under this assumption, it assumes that the adequate amount of funds will remain available to meet the financial requirements and various commitments with regard to future operations. At the time of realization of assets and settling down the amount of liabilities, commitments and contingent obligations will arrive in the going course of business. Moreover, accrual basis of accounting has been adopted by municipality to record its revenue based transactions and expenditure items (Annual report 2015). Approved statements of GRAP has been adopted to make an effective record of all its financial transactions.

The goods and services having the transaction value of over and above R200000 were procured by Emfuleni municipality without making any invitation for competitive bids. Inviting the competitive bids is required under the regulation of Supply Chain Management 19 (a) (Annual report 2015). Various deviations were being approved by the accounting officer even after it was considered as impractical to invite any competitive bids in contravention of SCM regulation 36(1). Moreover, various contract has been awarded to those providers whose tax related matters were not declared by the South African Revenue Service in order as mentioned in the SCM regulation 43. The major aim of reviewing the SCM policy and procedure manual was to report the inefficiencies that are recorded within the system of procurement and also to make sure that it re – aligns with the legal framework and delegation of systems.

The major responsibility of auditor general is to provide an opinion on the financial statements of the municipality. He ensures that the audit of financial statements must be one in accordance to the International Standards of Auditing. The auditor general has to comply with various ethical based requirements and perform the audit to accomplish reasonable level of assurance that there is no material misstatement in the financial statements (Annual report 2015). He is required to perform the procedures to acquire audit evidence with regard to amounts and disclosures in the financial statements. Internal control is duly considered by the auditor while making risk assessments in preparing the financial statements of municipality in order to establish audit procedures that can be considered adequate in the circumstances. Auditor general also evaluates the adequateness of the polices of accounting that are being used and the fairness behind the accounting estimates being made by the management.

The auditor opinion is defined as the certification that accompanies to the financial statements of the Emfuleni Municipality. The auditor provides the opinion on the basis of procedures and records maintained in the financial statements. This may also be known as accountant’s opinion. This opinion is duly presented in the auditor’s report. The opinion of the auditor with regard to the financial statements of Emfuleni Municipality is that there is fair presentation of the financial statements in all the material aspects. They are helpful in evaluating the financial position of the municipality and its financial performance and the statement of cash flows for the year ended as per standards defined in GRAP.

There are various issues that have been raised by the auditor general. He claimed that the municipality is the suspect in various legal cases. No provision for such legal cases has been made in the financial statements. Material losses of R227503649 have been resulted due to losses in water distribution and electricity distribution in the financial year (Annual report 2015). The auditors are required to have adequate systems to collate, collect, verify and record the performance information to make sure that reliable reporting of actual achievements must be established as against the planned objectives, targets and indicators. Internal control disciplines must be designed and implemented in order to ensure reliable financial reporting, guarantee compliance with regulations and laws (General report 2012). The administrative and political leadership is required to build momentum in the drive to achieve clean administration. All the procurements must be approved by the centralised committee in order to control the expenditure incurred by the municipality.

Conclusion on Public Financial Management

It can be concluded that the major fiduciary responsibilities of the municipal manager of Emfuleni is to establish effective customer care management systems, credit control and debt collection related policy. Chief Financial Officer is basically responsible for annual budget of the municipality. He ensures the effective and economical use of resources of the overall Municipality. The performance of the Municipal Manager is monitored by the Mayor and he also review and evaluates the by-laws and policy to enhance the efficiency of the customer care of Council, debt collection procedures, credit control, processes and mechanisms. After evaluating the four budgetary systems, it is recommended that the Mayor must adopt Value proposition budgeting method as this will help in including everything so that budget will deliver value to the business. Management of the business entity must make evaluation of the ability of the entity to carry out its operations as a going concern while undertaking the reparation of financial statements. The financial statements under GRAP are required to be prepared on the accrual basis of accounting. It has been found that the goods and services having the transaction value of over and above R200000 were procured by Emfuleni municipality without making any invitation for competitive bids. The auditors are required to have adequate systems to collate, collect, verify and record the performance information to make sure that reliable reporting of actual achievements must be established as against the planned objectives, targets and indicators.

References for Public Financial Management

Annual Report. 2015. Emfuleni Local Municipality. [Online]. Available at: http://www.emfuleni.gov.za/images/docs/reports/ar1516/annual_report_201516.pdf [Accessed on: 25th August 2020].

Emfuleni Local Municipality. 2020. Financial Services. [Online]. Available at: https://www.emfuleni.gov.za/index.php/about-emfuleni/the-council/clusters/50-financial-services.html [Accessed on: 25th August 2020].

Emfuleni Local Municipality. 2020. Basic Services. [Online]. Available at: https://www.emfuleni.gov.za/index.php/about-emfuleni/the-council/clusters/49-infrastructre-and-basic-services-ibs [Accessed on: 25th August 2020].

Manyane, M. 2019. Midvaal and Emfuleni reveal divide in financial auditing results. [Online]. Available at: https://www.iol.co.za/sundayindependent/news/midvaal-and-emfuleni-reveal-divide-in-financial-auditing-results-28213994#:~:text=The%20mayor%20plays%20an%20oversight,development%20was%20a%20top%20priority. [Accessed on: 25th August 2020].

Emfuleni Local Municipality. 2020. Office of the executive Mayor. [Online]. Available at: https://www.emfuleni.gov.za/index.php/about-emfuleni/the-council/mayor-33807 [Accessed on: 25th August 2020].

National Treasury. 2014. Division of revenue to provinces and local government. [Online]. Available at: https://static.pmg.org.za/140715division.pdf [Accessed on: 26Th August 2020].

Final draft. 2017. Policy framework for municipal borrowing. [Online]. Available at: https://csp.treasury.gov.za/Resource%20_Centre/Conferences/Documents/DFI%20Day/DRAFT%20Municipal%20Borrowing%20Policy%20Framework%20update%2030%20Dec%202017.pdf [Accessed on: 26th August 2020].

Accounting Guideline. 2020. GRAP 1 Presentation of financial statements. [Online]. Available at: https://oag.treasury.gov.za/Publications/06.%20GRAP/02.%20Manuals/Accounting%20Guideline%20on%20GRAP%2001%20Issued%20February%202020.pdf [Accessed on: 26th August 2020].

General report. 2012. General report on the audit outcomes of local government. [Online]. Available at: https://www.agsa.co.za/Portals/0/MFMA2011-12Extracts/MFMA_2011-12_provincial_reports/AGSA_MFMA_GAUTENG_2011_12.pdf [Accessed on: 26th August 2020].

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