The dangerous state of provincial finances

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

It’s hard to find a kernel of good news in the auditor-general’s (AG) 2018 report on provincial and national departments, other than the Western Cape and Gauteng leading the way in terms of financial accountability.

Elsewhere, the results are mostly dreadful. Only 23% of the entities audited had clean audits. The Western Cape is way ahead of everyone else with 83% of audits in the province proclaimed “clean”, but even here there was some slippage.

In Gauteng, where irregular expenditure remains a problem, the figure was 53%. This does not necessarily mean money spent was wasted or the result of fraud – it could mean that correct processes were not followed.

One has to empathise with AG Kimi Makwetu’s near-impossible task of pointing out and curtailing misspending at government level. Being an auditor is no longer a safe occupation in SA. A female auditor working as part of a team dispatched by the AG to clean up maladministration in Emfuleni Municipality, south of Joburg, was shot twice in the leg two months ago in the guest house where she was staying. The assailants made off with two laptops and a cell phone, all presumably containing vital information on wrongdoing at the municipality. Makwetu decided to withdraw his team.

Last month two AG staff members were held hostage by subcontractors in Tshwane when they were conducting routine asset verifications. An audit team sent to eThekwini was withdrawn in May after one of its staff members received death threats. Police must now accompany audit staff on dangerous assignments.

It’s clear from the report released on Wednesday that Makwetu is not the most popular man in SA’s administrative ranks. In his report, he says provinces and administrators prefer to contest his audit results rather than address the problems identified.

The number of departments reporting fruitless and wasteful expenditure was up 10%, and most of these have been on the list for the last three years. Even more disturbing is the 200% increase in fruitless and wasteful expenditure over the last year to R2.5 billion. Audited irregular expenditure came to R51 billion, but nearly R80 billion when entities not audited are included.

Eastern Cape and Limpopo slip back into old habits

The Eastern Cape, which had shown improvement in recent years, slipped back into its old ways. It just has not managed to get to the root causes of the problem and implement the findings of previous AG reports.

It’s the same story in Limpopo. It was placed in administration several years ago, the equivalent of insolvency in the commercial world, and appeared to be clawing its way out. Not this year. The number of clean audits regressed, primarily because financial managers did not act timeously and decisively to handle audit problems raised the previous year.

Good news from Mpumalanga, though. It was the only province where audit outcomes improved.

The audit outcomes in the Northern Cape and KwaZulu-Natal were erratic over the past four years – improvements in the one year were offset by regressions in the following year. This was the result of a lack of urgency from the leadership in responding to the root causes of previous poor audit results.

North West and Free State are the worst of the lot

Worst of the lot were North West and the Free State. Makwetu singled out “lack of accountability and commitment towards clean administration” as factors that influenced the poor showing of these provinces. Their audit outcomes continued to worsen and they were the only provinces with disclaimed and adverse opinions.

Makwetu says provinces and administrators prefer to contest the results rather than address the problems identified.

Slight improvement in the state of SOEs

There was a slight improvement in the financial health of state-owned enterprises (SOEs), but the SABC, the Petroleum Oil and Gas Corporation and the South African Post Office disclosed that there is significant doubt as to whether they can continue with their operations in future without financial assistance.

There were weaknesses in the performance reporting processes and an increase in non-compliance at the 16 SOEs audited by the AG – 88% had material findings in this regard. These entities also disclosed R1.9 billion in irregular expenditure, but the amount could be even higher as three SOEs – the SABC, South African Forestry Company and Komatiland Forests – were qualified on the completeness of their irregular expenditure disclosure.

The unaudited irregular expenditure of the SOEs came to R28.4 billion, which included R19.6 billion at Eskom and R8.1 billion at Transnet.

Education, health and public works drive trucks through their budgets

The departments of education, health and public works continued to have the poorest audit results of all departments – 33% of these departments received qualified opinions, compared to only 16% of the other departments.

These three departments are responsible for over half the budget spent on all departments. Technical and vocational education and training (TVET) colleges continued to struggle to account for their finances. Of the 48 colleges audited by the AG, only three received clean audits compared to nine in the previous year.

“These colleges cannot accurately account for the money they receive or for what is owed to them and for their assets. Questions should be asked about the potential loss of money through the poor management of assets, revenue and debtors at these colleges at a time when funding is desperately needed for tertiary education.”

The total deficit of health departments audited was R8.4 billion, with the worst being in the Eastern Cape, Free State and the Northern Cape.

Some highlights from the report

* The quality of performance reports improved slightly to 65% of auditees now publishing credible reports. However, the AG received performance reports for auditing with substantial misstatements at national level, and there was a regression in audit outcomes, with the number of clean audits decreasing to 23% of the total audited population compared to 30% in the previous financial year.

* There were serious weaknesses in the financial management of national and provincial government that had not been addressed over the last four years.

* Unauthorised expenditure increased by 38% from the previous year to R2.1 billion, 86% of which was a result of overspending.

* Fruitless and wasteful expenditure increased by over 200% from the previous year to R2.5 billion.

* The financial health of auditees continued to deteriorate.

* There was an emerging risk of increased litigation and claims against departments. Almost a third of the departments had claims against them in excess of 10% of their next year’s budget. “Departments do not budget for such claims, which means that all successful claims will be paid from funds earmarked for the delivery of services, further eroding the ability of these departments to be financially sustainable,” warned Makwetu.

* A total deficit of R35.1 billion was incurred by the 41% of public entities whose expenditure exceeded their revenue – 75% of this was the deficit of the Road Accident Fund. The AG’s report cautioned that “even though the majority of public entities that incurred deficits would be able to continue their operations, these negative indicators raise concerns about their financial viability, which could result in pressure to acquire additional funding from government”.

* The entities audited which substantially did not comply with legislation increased from 64% to 72%. The AG said the lapse in oversight and controls related to compliance was evident in a number of areas, including supply chain management, and led to increased irregular expenditure.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.