South Africa: Plan Presented to Restore Lekwa Municipality’s Financial Position

A financial recovery plan (FRP) has highlighted the need to restore the financial position of the embattled Lekwa Local Municipality in Mpumalanga.

The municipality, according to the National Treasury-developed FRP, had been experiencing perennial political and administration challenges, which had impacted adversely on governance, financial management and service delivery in the municipality.

It was one of the top 10 defaulting municipalities owing Eskom, with its bill standing at R1.3 billion in November 2020.

Lekwa was on 11 October 2018 placed under administration by the Mpumalanga Provincial Executive Council, paving the way for a mandatory FRP, which was approved by the provincial Finance MEC in October 2019.

However, with the provincial FRP not yielding any positive results due to the political and administrative instability in the municipality, a national intervention was approved in May 2021 via a Presidential minute.

The Minister of Finance was delegated the power and functions to ensure the effective implementation of the intervention in terms of section 238(a) of the Constitution.

The FRP states a strong emphasis on improving the cash position of Lekwa to create an availability of resources to address some of the most immediate and visible service delivery challenges.

“Cost cutting measures must be implemented,” the FRP reads.

However, an emphasis on cash and municipal finances did not preclude the municipality from addressing governance and institutional issues.

“In this phase, emphasis also leans towards ‘quick wins’ – what are the issues that require relatively little effort or resources to be addressed, but would make meaningful inroads towards the overall recovery process? The phase is expected to last between eight to 12 months.

“A few critical, high level indicators have been selected to guide this phase of the recovery plan,” the FRP states.

The FRP indicates that progress on these indicators being met would be monitored monthly by the Oversight and Monitoring Committee, as well as the Implementation Team.

The Oversight and Monitoring Committee can also approve the updating of the targets as implementation of the plan progresses, reads the FRP.

The six high level indicators selected for this phase are:

– Progress towards a Funded Budget;

– Daily Cash and Cash Balances;

– Cost Containment;

– Debtors Collection Rate;

– Payment of Creditors and

– Ring-fencing of Conditional Grants.

In addition, says the report, indicators relating to the capital programme and the reduction of unaccounted, irregular, fruitless and wasteful expenditure have been included.

In the report, Treasury said a financial forecasting model has been developed to set financial targets for the Lekwa FRP over the MTREF period.

“The financial model escalation formula used an average annual inflation rate of 4% and local growth of 1.5% per annum over the recovery period. Grounded on adherence to the above budget parameters, it is anticipated that the municipality will progressively move towards a position of improved financial sustainability over the three-year period,” Treasury said.

The report indicates that if key operational efficiencies are achieved in line with the FRP Implementation Plan, it could be expected that the projected cash shortfall of R2.2 million at the end of the 2020/21 financial year will reduce to a cash shortfall of R1.6 billion at the end of the 2022/23 financial year.

After this, the cash position would likely improve to a cash shortfall of R1.1 billion at the end of the 2023/24 financial year. The net increase in cash hold could improve with R20 million in 2022/23 and R260 million in 2023/24.

Treasury said if these positive trends could be achieved and sustained, it could realistically be expected that it will take the municipality a period of five to six years to move to a fully cash-backed funding position.

“The forecasting model is flexible, and figures will be adjusted annually, aligned with the revised FRP activities to facilitate sustained financial health improvement. The municipality’s adherence to the Financial Recovery Plan will be monitored in terms of its achievement of the targets for revenue and expenditure set out in the financial forecasting model,” reads the FRP.


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Publish date : 2021-10-14 14:31:58

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