Viability of amalgamated municipalities in KZN & Northern Cape

Meeting report

Opening Remarks
The Chairperson said this was a continuation of the 13 November 2020 meeting on amalgamated municipalities. The Committee has held interactions with various municipalities and has noted that there is a lack of support to amalgamated municipalities which has caused poor service delivery and governance challenges. The previous day, North West and Gauteng Provinces presented on their amalgamated municipalities. One of the challenges highlighted in the KwaZulu-Natal presentation was the unresponsive allocated budget to the demands of the amalgamations. Ray Nkonyeni Municipality received seven additional wards and the equitable share allocation did not match the provision of services to the additional wards. The Umdoni Municipality took on a lot of wards with no change in the equitable share. Another challenge was the unauthorized, irregular, fruitless and wasteful (UIFW) expenditure incurred before amalgamations took place. This presents a lack of accountability and consequence management as there is no one to hold accountable for the UIFW expenditure and it presents a challenge for the newly amalgamated municipality that will inherit the irregular expenditure and is then vulnerable to poor audit outcomes. The Umdoni Municipality faces R100 million irregular expenditure as a result of the merger with Vulamehlo Municipality.

The Chairperson stated that a merger with a financially irresponsible municipality will not improve the audit outcomes of the new entity. The KZN COGTA presentation noted the merged Inkosi Langalibalele Municipality has received continual audit disclaimers. In the Northern Cape, the Dawid Kruiper Local Municipality case the amalgamation are two municipalities that were not dysfunctional. The Dawid Kruiper Municipality amalgamation received support from National Treasury but it has also brought unintended consequences that resulted in the municipality having more wards and increased service delivery costs. Presentations had been provided from SALGA, National Treasury and the Provincial COGTA Departments and National COGTA on the amalgamated municipalities.

Northern Cape COGHSTA briefing
Mr Bentley Vass, Northern Cape MEC for Cooperative Governance, Human Settlements and Traditional Affairs (COGHSTA), said that after the amalgamation, various challenges have been experienced in service delivery and in the general state of merged municipality.

Mr Bradley Swartland, Senior Manager Department of Cooperative Governance, Human Settlements and Traditional Affairs (COGHSTA): Northern Cape, presented on the management of the amalgamation process and its successes. On performance, he outlined the income rates for the amalgamated municipalities, audit outcomes, MIG performance, legal matters, communication matters and HR matters. The geographic challenges were highlighted, the sustainability/viability of the amalgamations and recommendations were provided (see document).

It is the view of the Province that obviously as a result of Dawid Kruiper having some of the biggest wards in the country; service delivery became more costly due to the unintended consequences of demarcation. The two Municipalities that were amalgamated were not dysfunctional when the process unfolded and this assisted the viability; and the performance of the Dawid Kruiper Municipality compares well to most municipalities given some of the challenges that emerged after the amalgamation.

Dawid Kruiper Local Municipality (DKLM) briefing
Mr Ruaan Straus, DKLM Senior Manager: Finance and Assets Management, outlined the public participation process on the proposed amalgamation. He provided the audit outcomes and a performance analysis before and after the amalgamation. He highlighted the positives and negatives of the merger but the negatives were far more (see document).

Conclusions
• With the distances (275 km) between the two former municipalities it is impossible to render service effectively due to logistical problems
• Insufficient funding was received to drive the process of the merger. The total grants received decreased, yet the expenditure increased
• The revenue generating capacity of the municipality is under severe threat due to economic conditions and high unemployment in the Northern Cape
• High salary bill due to underutilised employees since no retrenchments were allowed as merger agreement
• The merger process were driven by the District Municipality, although it was not a party to the merger and limited to no support was received after the merger
• Decisions were taken on behalf of the merging Local Municipalities that did not benefit the municipality
• The merger process did not benefit the community/rate payers of the former //Khara Hais Municipality due to cross subsidisation of tariffs

Way forward
• Unless constant additional funding in the form of equitable share is received the newly formed Dawid Kruiper Local Municipality will not be financially viable and sustainable to deliver services
• Reduce the salary bill by means of retrenchments of underutilised employees (which was prohibited as part of the merger)
• High unemployment rate must be addressed both locally and provincially through public and private investment within the municipal jurisdiction.

Discussion
Mr G Mpumza (ANC) welcomed the presentations. He said that the transformation team appointed for the pre-amalgamation process did not fulfill its duties and the work was not done thoroughly. The Dawid Kruiper report provided for the placement of staff in post-amalgamation so why were the employees resisting to be placed in the Upington office post-amalgamation. Integrating staff into one entity has not been finalized and the report states that the vastness of the territory in conducting services would erode the revenue capability of the municipality. The report also shows that the Municipal Demarcation Transition Grant was inadequate to finance the process of amalgamation which resulted in a decreased revenue base for DKLM. He asked how the Provincial Department and National Treasury has assisted in mitigating the gap in the municipality’s finances and to ensure that the amalgamation integrates employees without resistance. Aging infrastructure and other data should have been collected and recorded by the transformation teams pre-amalgamation so that information would inform the decision to amalgamate. The province did not do enough to assist municipalities during amalgamation to ensure that newly established municipalities are not confronted by challenges.

Mr K Ceza (EFF) said that the spatial distance between the amalgamated municipalities should have been discussed by the Municipal Demarcation Board especially when it comes to the refusal of employees to be integrated into one entity. The division of revenue should speak to the new expenditure and developments in the newly amalgamated municipalities. More positive experiences should be listed than negative ones if it is to be a success. He asked about the work done by the Provincial Department to address the challenges and what the Department foresees about the division of revenue. The presentation showed that the infrastructure in technical services is old. He asked the Provincial Department about the amalgamation resolutions.

Northern Cape COGHSTA response
Mr Swartland replied that one of the challenges was the actual placement of staff because job descriptions and job evaluations could not be finalized. People did not want to move to other smaller towns because some of them are former Act 9 rural areas and there is not much to do. It was decided that the staff should remain in their respective municipalities because similar work was being done by the satellite office and the head office. Poor network connectivity was part of the reason processes could not be finalized. The job evaluation process takes two years to finalize and complete. Provincial Treasury will have to be consulted to discuss possible solutions on the state of vehicles which resulted from the long distances travelled and to address the challenges that resulted from the amalgamation. The satellite office needs to reflect the services that are provided and delivered by the head office.  

Mr Vass replied that the provincial government is supportive, in terms of Section 154, to all municipalities to ensure that they can provide services. The challenges of irregular expenditure in municipalities will be addresses through assistance provided by the provincial government. Resolutions on the other matters raised by Members will be responded to in writing.

Mr Ceza asked for the proposals for resolving the challenges in the Dawid Kruiper Municipality.

The Chairperson said that there has been an increase in the number of wards in DKLM and asked if all the citizens receive services. She asked for progress in resolving the labour related concerns, how many labour disputes there are and if any labour disputes have gone to the bargaining council or the Labour Court. The Chairperson asked about the role of the District Municipality in supporting DKLM and said that the money allocated by National Treasury was for three years and the three year period had lapsed. She asked if the municipality will be sustainable considering the salary gaps. She requested honest opinion of the municipality whether the amalgamation has produced positive results.

Mr Vass replied that the Provincial Department’s assessment of the district municipality is that assistance is required considering the financial position of the district municipality. Municipalities need to be supported – and not by district municipalities – to ensure that challenges of service delivery are addressed.

Dawid Kruiper Local Municipality response
Mr Micheal Segede, DKLM Mayor, explained that the extra wards are not from different municipalities but are from one area so services can still be delivered and provided. Support is received from the district municipality but there are not enough funds available to fully assist the local municipality. The equitable share can be improved and extra equitable share made available.

Mr Vass added that the critical issues will be responded to in writing and said that DKLM needs to be supported as the largest municipality under the ZF Mgcawu District Municipality. Vastness is a serious challenge for the province, but services still need to be provided and the challenges facing municipalities are serious. The challenge of low revenue collection in municipalities exists and has worsened during COVID-19 but services must be provided. The same municipalities have high unemployment rates and rely on the municipalities for job creation. The community members in the municipalities have raised concerns about service delivery to the Provincial Department. Sanitation and other matters must be addressed through assistance from the Provincial Department to the municipalities.

National COGTA response
Mr Kevin Naidoo, Executive Manager: Municipal Governance: Department of Cooperative Governance, replied that the transition of amalgamation in the Northern Cape was one of the better managed processes and it was managed by Mr Swartland. Discipline was initiated through the technical committee during the amalgamation process. There are lessons learnt from the amalgamation at the Dawid Kruiper municipality.

DKLM is large spatially and the lesson learnt about this vastness for reduction of councillors in the amalgamation was that a provision has been added to allow a municipality with an area greater than 30 000 km2 to deviate by 20% instead of the applicable 10% for the number of councillors. The second lesson learnt was about the Municipal Demarcation Transition Grant (MDTG). In the first year of the grant, DKLM was allocated R13.4m but only R1.3m was spent so a rollover of R8m was allowed which meant R5m was lost from the grant. In the second year, 20% was spent and a roll-over was approved. A common pattern was reductions in the equitable share were formula driven so further engagements will be held with National Treasury on this after the meeting.

The Chairperson said that the matters raised are ongoing and that engagements will continue between the Committee, Provincial COGTA and National Treasury even after this meeting. The written responses were requested by 7 December and progress in addressing the issues. The Chairperson thanked the Northern Cape for the engagement.

KwaZulu-Natal COGTA on amalgamations
Mr Scelo Duma, KZN COGTA Acting Chief Director: Municipal Governance and Administration, gave background and the anticipated benefits of the amalgamations. He spoke to governance, audit outcomes, cost coverage, employee related costs, grant dependency, gross debtors and the Back2Basics reports of the amalgamated municipalities. Some consequences noted were:
• Oversight structures are functional in all the merged municipalities. However, MPACs generally reflect poor levels of functionality.
• The merger resulted in bloated organograms which placed a strain on municipal financial viability.
• Job descriptions have been finalized and approved at all the municipalities and job evaluation processes are underway.

Mr Lulamile Mapholoba, City Manager: City of uMhlathuze Municipality, agreed with what was presented by COGTA. He reported there are no major issues in the municipality and if there are, they are manageable.

Ms Joey Krishnan, KZN COGTA Chief Director: Municipal Finance, explained the national funding for the amalgamation process and said that in KwaZulu-Natal many municipalities are not better or worse than they were before amalgamation. What required funding was the pay parity issue which continued even after the transition grant was received for three years and the equitable share did not adjust according to what was expected by the municipalities. She said that costs for operating systems and validation of valuation rolls of the disestablished municipalities were not funded through the grants and other major costs included the accounting and financial side. Lessons have been learnt on the cost drivers and in future, mergers should be better prepared for financially.

The important lessons to be learnt from the amalgamation process are:
• Consideration should be given to the limited planning, change management, costing and provision of resources, which appear to have happened during the transition processes;
• Government should bear the transitional costs of an amalgamation;
• A formal due diligence study should be commissioned after boundary decisions have been made to identify the financial situation of the affected municipalities, and what steps should be taken to prevent potential wasteful and duplicate expenditure;
• National Treasury should provide a budget for such restructuring based on a comprehensive costing exercise being undertaken; and
• Funding for at least a 3 year transition period should be provided

The municipal amalgamations have yielded benefits and this is seen in the municipal audit outcomes.

Discussion
Mr Ceza spoke about the problem of merging municipalities that are not financially viable as the Division of Revenue Bill states that revenue allocation depends on municipality size, cost of basic services, low income population and the municipality’s capacity to increase. Small municipalities can generate income but the challenge is the varying funding that is received by these small municipalities from National Treasury. This influences patterns of development and service delivery in the municipality. Another challenge is the amalgamation of rural municipalities because rural development is trapped in a state of rurality. The patterns of funding municipalities must change and that the outcomes of the amalgamations need to be re-evaluated.

He argued that the deliberate act of putting the Municipal Public Accounts Committee (MPAC) in a state of dysfunctionality will result in the MPAC not being able to ensure governance and accountability. He asked about the role SALGA has played in conducting proper training of municipal staff to avoid the cutting of staff and other mismanagement issues. The Big 5 Hlabisa Municipality had received an unqualified audit in 2016/17 but in 2017/18 and 2018/19 it had qualified audits. The audit outcomes do not bring confidence in the municipality and he asked if there are positives that can be observed from the amalgamations.

Ms H Mkhaliphi (EFF) asked for clarity on the Vulamehlo municipality organogram and the Section 189 Labour Relations Act process. It is confusing that municipalities use Section 189 as this dealt with dismissals in private companies and cannot be applied to municipalities. The presentation stated public consultations were held and she asked what KZN COGTA seeks to achieve with the public consultations especially when wards are split and the municipal staff has to be integrated into other municipalities. She asked for the budget to support the amalgamation of the Vulamehlo and Umdoni municipalities, if a due diligence study was conducted and its budget recommendation as everything revolves around the financial costs. She asked about the differences between the Umdoni and KZN COGTA reports on performance trends since amalgamation.

Mr B Luthuli (IFP) asked for clarity on the Ezinqoleni and Vulamehlo municipality building that were built by KZN COGTA and what the status of these structures was. There was a youth development office for skills development at Ezinqoleni and the office was rumoured to have been closed. He asked if the Ezinqoleni equipment had been moved to Port Shepstone. The licensing of cars and licence testing was previously done by Ezinqoleni before amalgamation and he asked if this service still exists. On the R34m divided amongst councillors, he asked if the Department knew about this and if there was consequence management.

The Chairperson asked the Department about the decision of transferring 60% of Vulamehlo municipality equitable share to Umdoni municipality considering that Umdoni took over 60% of Vulamehlo’s wards in the amalgamation.

The Chairperson asked why there was consideration of the anticipated benefits of amalgamations and none for the potential costs of inflated organograms that work against the amalgamation goals because the costs are above the normal standard.

The Chairperson noted that Inkosi Langalibalele Municipality has received disclaimer audit opinions for the past three financial years due to unresolved audit findings from the former Umtshezi Municipality. She asked what the Department’s financial expert are doing differently to improve the audit outcome for 2020/21 and where these financial expert were during the past three financial years.

Ray Nkonyeni Local Municipality response
Mr Maxwell Mbili, Municipal Manager: Ray Nkonyeni Local Municipality, replied that the structures are used as satellite offices for the Ray Nkonyeni municipality. Traffic services, fire and other services are offered at these satellite offices. On the youth development office, he said that Port Shepstone is where the headquarters of the municipality are located and the distance to Port Shepstone is similar to other surrounding areas. The youth development office is based in Port Shepstone and clusters are available in Ezinqoleni for the youth to utilise services and there is a youth council with all the youth offices from former municipalities.

On the equipment moved to Port Shepstone, he said that Ray Nkonyeni has extended services that were previously not available in Ezinqoleni such as law enforcement officers, fire services and cleaning services. Services are still provided even though equipment was moved. The beneficiaries of the merger between Hibiscus Coast and Ezinqoleni are the former Ezinqoleni residents because former Hibiscus Coast residents have not received any services that are foreign. Ezinqoleni had six wards before the merger and Hibiscus Coast had 29 and the budget allocation was more in Hibiscus Coast than in Ezinqoleni.

Mr Mbili said that the former Hibiscus Coast should have absorbed Ezinqoleni because Hibiscus Coast was more financially viable than Ezinqoleni. On the licencing offices, he said that it is not known that Ezinqoleni had a licence office and a project is underway to provide that service to Ezinqoleni residents because the residents use the Port Shepstone and Hibiscus Coast licence departments which is why the municipality had to be merged.

Mr Mbili replied that it was R35m and before the merger Ezinqoleni decided to utilise that amount and the Auditor-General identified that as irregular expenditure. An audit action plan had to be drafted and investigations had to be conducted on the irregular expenditure of R35m. The investigation was complicated and COGTA was requested to assist in concluding the investigation. COGTA then conducted the investigation and in 2018 it was concluded. The COGTA report recommendations included opening a criminal case and this was done. All the recommendations were implemented. Only two were not done including the civil matter where assets were seized from those implicated and the criminal part of the investigation which was handed over to the Hawks. The Hawks reported that an investigation conducted by COGTA could not be used in court and it recommended the municipality appoint an independent external forensic company to conduct the criminal investigation. The investigation is underway and will be concluded by the end of March 2021 and it will be known who the beneficiaries were.

Inkosi Langalibalele Local Municipality
Ms Jabulile Mbhele, Mayor: Inkosi Langalibalele Municipality, replied that the organogram was inflated because the municipality has a lot of employees from the former municipalities and there were a lot of contractual workers who had hopes of being permanently employed.

Mr Patrick Mkhize, Municipal Manager: Inkosi Langalibalele Local Municipality, appreciated the efforts made by government to amalgamate municipalities that were struggling financially. There were not enough observations made on each municipality's separate challenges such as strikes and instability. He said that an amendment to the Labour Relations Act states that employers cannot appoint people for a set period of years unless the employment was linked to a specific project. There were contract hired employees who exceeded the contract period and some employees of the former Imbabazane municipality were permanently employed after legal disputes. Employees from the former Umtshezi municipality also threatened to go to the bargaining council if they were not permanently placed and it was recommended that employees are permanently employed.

A total of 153 employees were absorbed into the municipality which resulted in the inflated organogram and increased salary budget adding to the cash flow challenges. The municipality has not paid its creditors over the years due to the inflated organogram. Salary differences between the former municipalities was also a challenge because workers who were doing the same job were paid differently. This was a challenge as the job evaluations took longer to befinalised in order to determine salaries and the new grades. Previous financial instability of the former municipalities also caused challenges.

Mr Mkhize appreciated that KZN COGTA had positively intervened in the municipalities. He recommended that in future all amalgamation process should clearly outline the different challenges in each municipality before the amalgamation takes place. He said that when the municipalities merged, the equitable share decreased, and it impacted the rural municipalities due to the movement of services. He supported the call for more budget allocation to ensure the positive benefits of amalgamation.

KwaZulu-Natal COGTA response
On the financial modelling for Vulamehlo and Umdoni, Ms Krishnan replied that Vulamehlo was divided between the eThekwini and Umdoni and eThekwini did not receive a funding allocation from National Treasury and the only transfers made were for MIG for specific projects. The majority of Vulamehlo went to Umdoni.

For the finance model, extensive efforts were taken by the Provincial Department to look at the budgets of the municipalities before amalgamation so the cost of operations as well as merger costs can be evaluated and to combine the budgets of the municipalities. Requests were made to National Treasury for funding, but it was not received. As a result the equitable share adjustment was not made.

On the division of revenue and the equitable share formula, the formula was last adjusted in 2012 and since then mergers, municipal growth and development patterns have taken place. For KZN, there is the challenge of misunderstood costs for services especially for rural municipalities as settlement patterns in the province make it difficult to deliver bulk services. There are currently engagements to try and address this.

On the presence of financial experts, KZN COGTA has its own budget constraints and thus much of the work done to assist and support municipalities was done with internal resources from the Provincial Department and municipal staff. The focus of the Inkosi Langalibalele Municipality was on stabilization and, unfortunately, the financial situation got worse but decision making in the municipality improved.

On the Section 189 process, the disputes came to a point where it was either retrench the staff or workers receive a pay cut which was negotiated by labour representatives. A challenge with Section 189 was that employees had requested abnormal salary increases which were illegal which is why Section 189 was initiated.

The Eskom R104m debt came from Umtshezi municipality in 2018 and to date R90m has been settled. It is expected to be debt free by mid-February 2021 and will be financially viable.

On the disclaimer audit opinion, there has been improvement from a disclaimer audit opinion to an adverse one which is not bad. Third party checks were done by the Department in the municipality. Some of the challenges were the integration of the systems and the migration of data to different systems.

On the MPAC dysfunctionality, in KZN a lot of effort and time has been spent on training councillors with the help of SALGA. She noted that some of the investigations are highly technical and complicated. On the job training is being conducted and that there has been a decrease in the unauthorised, irregular, fruitless and wasteful (UIFW) expenditure in KZN and there are hopes to improve. In the training selection of councillors, priority is given to higher ranking officials such as the Mayor, Speaker, Deputy Mayor, MECs and MPACs are the last to be considered.

On the purpose of public consultations, Mr Duma replied that public participation is not a science so predictions cannot be made. However, in Mpofana Municipality, intense public participation resulted in the disestablishment of the municipality not taking place. On the anticipated benefits, additional information could have been added in the presentation. He said risks were considered before mergers took place. Some challenges could be anticipated and others could not. The information will be submitted in writing to the Committee.  

National COGTA response
Mr Naidoo stated that it is important to understand that of the nine redeterminations, eight were confirmed by the Demarcation Board and were not part of the process of redetermination. KwaZulu-Natal had a head start in the redetermination process and had established development committees and provided assistance to National COGTA which included project monitoring, alignment of Section 12 notices and dealing with legal and institutional matters. R135m was made available through the MDTG and each redetermination received R15m each. Some provinces adopted mottos that would make communities aware of the elections and the amalgamations in 2016. The details of the requirements for Demarcation Board compliance had to be published in the gazette as an avenue for public participation.

Follow-up remarks
Ms Mkhaliphi said that the implementation of Section 189 of the Labour Relations Act at the Inkosi Langalibalele municipality was wrong because it was of pressure that the municipality faced. Alternatives should have been used instead of implementing the Section 189. Labour unrest in communities directly affects service delivery and the matter must be addressed accordingly by municipal officials.

The Chairperson said that a detailed report on the implementation of Section 189 in the municipalities which resulted in the inflated organogram must be submitted and discussed. Best practices and labour disputes that happened should be outlined in detail by Inkosi Langalibalele municipality to avoid further labour unrest. She commended KZN for monitoring the issues in the municipalities. It is good that no further mergers will take place but instead the current merged municipalities will be given attention. The challenges in the province will be prioritised because certain matters cannot be ongoing. The Chairperson thanked KZN for the engagement and the assistance provided to the Committee during oversight visits.

Supplementary Budgetary Review and Recommendations Report (BRRR)
The Chairperson noted that the Preliminary BRRR of 4 November had been adopted but the tabled Annual Reports had been outstanding at that time.

The Committee observations and recommendations were outlined by the Chairperson for the Departments of Cooperative Governance and Traditional Affairs (COGTA), Municipal Infrastructure Support Agent (MISA), South African Local Government Association (SALGA), Municipal Demarcation Board (MDB) and CRL Rights Commission.

The Committee adopted the Supplementary BRRR.

Meeting adjourned.