Recommend: More complex reporting or back to basics?

Preparers of financial statements

While sustainability factors are becoming an important part of investment decision-making and there are increasing calls for companies to provide high-quality, globally comparable information on sustainability-related risks and opportunities, the relevance and feasibility of this in the South African local government context needs to be carefully considered.

International perspective

The trustees of the International Financial Reporting Standards (IFRS) Foundation announced the formation of the International Sustainability Standards Board (ISSB) on 3 November 2021, following strong market demand for its establishment. The ISSB is developing − in the public interest − standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. The ISSB builds on the work of market-led investor-focused reporting initiatives, including the Climate Disclosure Standards Board (CDSB), the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation’s Integrated Reporting Framework and industry-based SASB Standards, as well as the World Economic Forum’s Stakeholder Capitalism Metrics.

The International Public Sector Accounting Standards Board (IPSASB) also issued a consultation paper1 on ‘Advancing Public Sector Sustainability Reporting’ in 2022, and in December 2022 a decision was made to progress work on sustainability reporting in the public sector. It is therefore naturally assumed that the South African public sector will follow suit.

The overall concept of sustainability

According to an article2 published by Santander Universidades in April 2022, sustainability refers to the means of an entity/organisation to meet their needs without compromising the ability of future generations to meet their own needs. In addition to natural resources, social and economic resources are also required. Embedded in most definitions of sustainability there are also concerns for social equity and economic development. The motivations behind sustainability are often complex, personal and diverse. Yet, for most people, sustainability comes down to the kind of future we are leaving for the next generation.

The concept of sustainability can be further unpacked into three distinct pillars:

• Environmental sustainability − This is the notion that ecological integrity is maintained. All of Earth’s environmental systems are kept in balance while natural resources within them are consumed by humans at a rate which enables replenishment.
• Economic sustainability − Economic sustainability considers the social and ecological consequences of economic activity. Human communities across the world should be able to maintain their independence and have access to the resources that they require, financial and other, to meet their needs.
• Social sustainability − Social sustainability is achieved when universal human rights and basic necessities are attainable by all people, and they have access to enough resources to keep their families and communities healthy and secure.

With these pillars in mind, do local government practitioners need to start addressing the issue of sustainability and its value in reporting?

Sustainability status of South African municipalities3

In an online article4 (businesslive.co.za, 25 May 2022), the then Director-General of National Treasury, Dondo Mogajane, said that 170 (about two-thirds of South Africa’s 257 municipalities) are in financial distress and require assistance from National Treasury. The Treasury is unable to cope with the situation. This statement re-affirmed the Auditor-General’s 2020/21 General Report on Local Government audit outcomes in which it was stated that:

Local government finances continue to be under severe pressure due to non-payment by municipal debtors, poor budgeting practices, and ineffective financial management. The financial position of just over a quarter of municipalities is so dire that there is significant doubt that they will be able to continue operating as a going concern in the near future. This effectively means that such a municipality does not have enough revenue to cover its expenditure and owes more money than it has. Almost half of the other municipalities are exhibiting indicators of financial strain, including low debt recovery, an inability to pay creditors, and deficits. The impact of municipal creditors not being paid is well-known – it severely affects Eskom and the water boards but is even more devastating for smaller suppliers. Some municipalities do not even pay over taxes such as pay-as-you-earn and value-added tax to the South African Revenue Service or transfer contributions to the pension funds of their employees. Local government loses billions of rand annually because of interest and penalties. In 2019/20 alone, the resulting fruitless and wasteful expenditure totalled R3,47 billion.

The Auditor-General, Tsakane Maluleke, stated in a media release dated 15 June 2022 that the lack of improvement in municipal outcomes is an indictment on the entire local government accountability ecosystem, which failed to act and arrest the decline that continued to be characterised by service delivery challenges in municipalities. The AGSA emphasised the need to strengthen basic financial and performance management disciplines and to safeguard and maintain municipal infrastructure to prevent mismanagement, transgressions, non-performance, fraud and financial loss.

The financial deterioration noted in the 2020/21 General Report has continued in the 2021/22 financial year, as reported in the 2021/22 Auditor-General’s General Report on Local Government audit outcomes. In this report, it was stated that local government is financially distressed due to reduced revenue and funding and because municipalities are not prudently spending the limited funds available.

The below image presents the 2021/22 overall audit outcomes of municipalities:

Analysis and observations

It is clear from the above statistics that the majority of South African municipalities are in a state of disrepair. The situation is untenable and unstainable, from a social, environmental and economic perspective. In order to effect improvement, it is critical to interrogate the root causes which led to the regression and collapse of so many municipalities in the country. Whilst a plethora of reasons may have contributed to the current dilemma, a few transversal issues are evident:

• There is a general lack of alignment between municipalities’ IDPs (integrated development plans) and their financial plans (budgets).
• Reporting is mostly done retrospectively, without clear projections or forward-looking planning − that is, no assessment of financial or overall sustainability is done.
• Non-payment of municipal rates, taxes and charges due to poor service delivery and declining municipal infrastructure result in even poorer service delivery and further infrastructure decline. This is a destructive cycle.
• The economic conditions in the country are not conducive to support growth. The unemployment rate is continuously increasing.
• Municipal officials are not always suitably qualified to perform their duties.
• There is a complete lack of accountability.
• Administrative processes are politicised.

Recommendations and the way forward

‘Sustainability goals’ and ‘sustainability reporting’ have become concepts to which many entities and individuals globally subscribe. Very little in this regard is done at local government level in South Africa and there is currently no legislative requirement which forces municipalities to report on their sustainability. That begs the question, must this be introduced as a requirement for all municipalities? When taking the above facts, figures and observations into consideration, the reality is quite sobering – municipalities are not yet ready to effectively report on sustainability. It is imperative to consider the specific context and position of the affected entities before imposing such requirements. Adding yet another cumbersome reporting requirement on already burdened municipalities is not conducive.

That being said, what is the way forward to achieve sustainability?

Getting back to the basics is the simplest way to find calm in the chaos!

Municipalities will not become sustainable until they get the basics right, which include:

• Qualified and competent staff should be employed. Professionalisation of the sector will be a key driver in this regard.
• There should be a move towards accurate and complete financial reporting.
• Development of realistic targets and honest reporting thereon.
• A focus on compliance and good governance.
• Accountability for any transgression should take place on both an administrative and political level.
• There should be an increased emphasis on forward planning.
• There should be a focus on green initiatives and consciousness of the impact of municipal activities and projects on the environment.
• There should be a concerted effort towards alignment between the integrated planning and budget offices.
• Political interference in administration processes should not be tolerated.

When the above principles are implemented, there will be a natural shift towards improved and more valuable reporting. Improved, accurate and ‘honest’ reporting will enable municipalities to develop strategies to reach sustainability.

Notes

1 https://www.ipsasb.org/publications/consultation-paper-advancing-public-sector-sustainability-reporting.
2 https://www.becas-santander.com/en/blog/what-is-sustainability.html.
3 Information and statistics obtained are time sensitive.
4 https://www.businesslive.co.za/bd/national/2022-05-25-treasury-throws-up-its-hands-over-politics-in-collapsing-municipalities/.

Author
Annalene Marais CA(SA), Deputy Chairperson: SAICA Central Region Public Sector Committee