• No results found

LONG TERM FINANCIAL PLAN FOR THE 5 YEAR PERIOD 1 JULY JUNE 2019

N/A
N/A
Protected

Academic year: 2021

Share "LONG TERM FINANCIAL PLAN FOR THE 5 YEAR PERIOD 1 JULY JUNE 2019"

Copied!
33
0
0

Loading.... (view fulltext now)

Full text

(1)

LONG TERM FINANCIAL PLAN

FOR THE 5 YEAR PERIOD 1 JULY 2014 – 30 JUNE 2019

AUTHOR:

STEFAN VORSTER

DATE:

13 MARCH 2014

FILE NO:

5/1/B

(2)

Table of Contents

1. Executive summary ... 4

2. List of abbreviations used ... 6

3. Section 1: Introduction ... 6

3.1 Objectives and purpose of the LTFP ... 7

3.2 Strategic alignment ... 8

3.3 Annual budget principles report ... 8

4. Section 2: Assessment of the current challenges facing the municipality ... 8

5. Section 3: Financial overview ... 14

5.1 Forecast of revenue and expenditure ... 14

5.2 Forecast of capital budget ... 16

6. Section 4: Funding resources ... 17

6.1 Capital replacement reserve ... 17

6.2 External loans ... 21

6.3 Grant funding ... 23

7. Section 5: Cash management ... 23

8. Section 6: Ratio and sustainability analysis ... 26

9. Section 7: Other matters ... 31

9.1 Industrial Development Zone ... 31

10. Section 8: Resolutions ... 32

(3)

List of tables

Table 1 - Current challenges facing the municipality ... 10

Table 2 - Summary of operating Revenue and Expenditure ... 15

Table 3 - Summary of capital budget funding sources ... 16

Table 4 - Scenario 2: CRR as funding source is limited to 11% of own Revenue ... 20

Table 5 - Increase in redemption payments of additional external loans ... 22

Table 6 - Best scenario: Redemption payments of external loans ... 23

Table 7 - Best scenario: Additional loans without increased tariffs ... 23

Table 8 - Summary of cash-backed reserves ... 25

Table 9 – Ratios ... 27

Table 10 - Description of ratios and benchmarks ... 30

Table 11 - Sustainability score of the municipality ... 31

Table 12 - Annexure 1: Assumptions used ... 33

List of figures

Figure 1 - Sustainability of the CRR as funding source over the 2014/15 MTREF ... 16

Figure 2 - Scenario 1: CRR as funding source is limited to 9% of own Revenue ... 18

Figure 3 - Scenario 2: CRR as funding source is limited to 11% of own Revenue ... 19

Figure 4 - Scenario 3 - CRR as funding source is limited to 13% of own Revenue ... 20

Figure 5 - Total R-value of external loans ... 21

Figure 6 - External loans as a percentage of own Revenue ... 22

(4)

1.

Executive summary

When developing a long term financial plan it is important to have structure in the plan to ensure successful implementation over the medium to long term. It is required that all councillors and officials understand and implement the resolutions and action plans of the long term financial plan.

The long term financial plan was divided into 8 sections: Section 1: Introduction and objectives;

Section 2: Assessment of the current challenges facing the municipality; Section 3: Financial overview;

Section 4: Funding resources; Section 5: Cash management

Section 6: Ratio and sustainability analysis; Section 7: Other matters; and

Section 8: Resolutions.

In section 2 an assessment was made of the most 12 important challenges that the municipality current faces. The general idea here was that, if these challenges are successfully addressed, it will make the municipality operate more effectively and efficiently and as a result improve our service delivery offering to the public. This list should be updated annually in February and the Municipal Manager and Directors should then report to Council on the implementation thereof.

In section 3 and section 4 an overview was provided of the financial position of the municipality and the capital expenditure funding resources available. The Capital Replacement Reserve was for many years the main contributor as funding source for the capital budget. If the 2014/15 MTREF is used as barometer of the capital expenditure to follow for the next 3 years, it is estimated that over the LTFP period an aggregate amount of R895 million will be spend on capital projects. By the end of 2016/17 the CRR will only have an estimated available balance of R35 million left. Three different scenarios were investigated to determine the optimal level of capital expenditure from the Capital Replacement Reserve. It was also investigated how much additional external loans could be taken up without a corresponding increase in tariffs. The interest revenue that the municipality receives on invested funds is currently being used to subsidise rates and tariffs. As the funds are depleted over the 5 year long term financial plan period, and interest revenue decreases, so does this annual “subsidiary amount”. It goes further in the sense that when external loans are taken up, it carries a component of redemption payments which is to be fund from

(5)

tariffs. There is therefore a double impact which must be considered if Council decides to continue with its high capital expenditure programme.

The best scenario should be to limit the capital expenditure to moderate levels which will ensure that tariffs are not increased, that the capital budget expenditure ratio is above 90%, that the Capital Replacement Reserve are sustainable over the long term and that service delivery to the community is of a high standard.

In section 5 the cash management position of the municipality is discussed. The municipality has 4 internal reserves and provisions on top of the Capital Replacement Reserve that must be ring-fenced. It is also required in terms of the Cash management and investment policy that the municipality has at least R60 million available in the bank account to cover its immediate operating expenditure. If the capital expenditure is not curtailed the municipality will not have sufficient cash resources available to preserve the required cash-backed reserves over the 5 year long term financial plan period.

In section 6 an analysis of 10 key ratios is performed. Based on these ratios a score out of 100 points is calculated to determine the sustainability level of the municipality. This index can be used to benchmark the municipality against other municipalities. The municipality has a score of 86 points out of 100 points by the end of June 2013 which is very good. It is estimated that the score will drop significantly and will 57 out of 100 by the end of June 2019 if the high level of capital expenditure as currently contained in the 2014/15 MTREF is not curtailed.

Section 7 contains the resolutions of the long term financial plan. The resolutions were kept at a minimum to allow the Council to add to the resolutions when the plan is discussed at a workshop which will be held in April 2014. The plan is also open for public scrutiny and any inputs during the budget participation process in April 2014 will be welcomed.

(6)

2.

List of abbreviations used

CFO Chief Financial Officer

CRR Capital Replacement Reserve

HDF Housing Development Fund

IDP Integrated Development Plan

IDZ Industrial Development Zone

LTFP Long Term Financial Plan

LTFP period 1 July 2014 – 30 June 2019

MBRR Municipal Budget and Reporting Regulations

MSA Local Government: Municipal Systems Act No 32 of 2000

MTREF Medium Term Revenue and Expenditure Framework

2014/15 MTREF 1 July 2014 – 30 June 2017

PPE Property Plant and Equipment

SCOA Standard Chart of Accounts

VAT Value Added Tax

3.

Section 1: Introduction

In terms of section 26(h) of the MSA a municipality’s IDP must reflect a financial plan, which should include a budget projection for at least the next three years. Section 7 of the MBRR requires the Accounting Officer to prepare a policy related to the LTFP. The LTFP must therefore be read in conjunction with the IDP and the 3 year MTREF budget projection. Although the MTREF budget only provides for a 3 years projection, the LTFP plan will considered a 5 year planning period from 1 July 2014 to 30 June 2019 which will be reviewed and updated on an annual basis.

The financial position of the municipality is sound, but it is foreseen that there will be a decline in the cash position over the 5 year LTFP period. The aim is to provide a position paper to ensure that the financial position of the municipality remains sustainable and sound, whilst providing a quality service delivery to the community.

The LTFP will be updated annually with at least the following:

- Any changes in the financial status and forecasts of the municipality as recorded in its annual MTREF budget;

- Any changes in the priorities of National Government, Provincial Government or the municipality;

(7)

- Any changes in the local economy, global economy or socio-economic environment;

- Any change in the financial position and financial performance of the municipality; and

- Any changes in the ability of the municipality to spent its capital budget.

It must be mentioned that there is a high level of judgement when preparing a 5 year LTFP, especially the two years falling outside of the MTREF period. It will therefore be necessary to update the plan annually and adjust it with the most recent budgeted MTREF information and figures. The MTREF and the LTFP must mirror each other at all times with regard to the first 3 years of the LTFP. A time period of more than 5 years is needed to plan for long term capital infrastructural needs and other priorities, but it is not realistic and possible to do so accurately. The assumptions used in the preparation of the LTFP are included in annexure 1.

3.1 Objectives and purpose of the LTFP

The general objective of the LTFP is aimed to ensure that the municipality has sufficient funds available to meet the service delivery needs of its community, without any sporadic increases in rates and tariffs.

The main purpose of the LTFP is therefore to:

- Ensure that long term financial planning is done in a structured manner; - Provide a framework for the capital expenditure for the next 5 years;

- Consider various scenarios and involve all stakeholders that includes municipal officials and the public to help identify relevant aspects to be included in the LTFP; - Identify revenue enhancement strategies to broaden the income base of the

municipality;

- Identify cost saving strategies to make rates and services more affordable;

- Assist Council to make informed decisions about the future path for the municipality; and

- Ensure credibility of the IDP.

The LTFP is a public document which will be submitted annually as part of Council’s budget documents, and the public is encouraged to provide appropriate comments annually in April during the public participation process of the budget.

(8)

3.2 Strategic alignment

The vision, mission and values of the municipality as well as the strategic objectives of National Government, Provincial Government and other strategic matters such as the alignment of the National Development Plan are detailed in the IDP document and it is therefore not necessary to disclose it again in the LTFP.

The IDP of the municipality can be found at:

http://www.saldanhabay.co.za/pages/IDP/idp.html

3.3 Annual budget principles report

Annually in September a document that entails the budget principles to be followed for the new budget process is prepared and presented to the budget steering committee for approval by the Council. This document serves as an initial budget planning document that will guide the budget preparation process. In essence it represents a “mini budget” for the next budget year. This budget principles document must be aligned to the LTFP and must at least included information about the following:

- Inflationary forecasts over the MTREF period; - Current economic environment;

- Capital budget and funding sources; - Personnel budget;

- Principles that will be used to determine the tariff increases for the next budget period;

- An abridged summary of the estimated operating budget for the next budget period;

- Sensitivity analysis on the tariff for the next budget period to aid the budget decision making process; and

- Appropriate recommendations to Council

4.

Section 2: Assessment of the current challenges facing the

municipality

The municipality faces many challenges. It is necessary to understand these challenges by developing appropriate action plans to address all of these challenges in a structured manner. It is also important that the list be updated annually and that feedback be given to Council on the successful implementation of the action plans. The 12 most important challenges that the municipality currently faces are listed below.

(9)

1. The 2014/15 MTREF capital budget of the municipality is too high;

2. The 2012/13 audit outcome was an unqualified audit opinion but the Auditor-General highlighted various areas that require attention;

3. The revenue base of the municipality must be enhanced; 4. The municipality does not collect all its revenue;

5. The additional long term borrowings and decrease in investment revenue as the cash resources are diminishing will increase rates and tariffs;

6. The housing policy and procedures of the municipality must be revisited; 7. Proper contract management is lacking;

8. The SAMRAS financial system is not fully utilised and there are concerns regarding the customer support that the service provider gives;

9. The current personnel structure has many unfunded vacancies; 10. The expenditure on non-income and support services is high;

11. The municipality does not provide for any incentives for new business investments; and

12. Technical losses on water and electricity are high.

(10)

Table 1 - Current challenges facing the municipality

Current challenges Status quo Action required Completion

date Responsible person/s 1. The 2014/15 MTREF capital budget of the municipality is too high.

- The municipality utilised too much of the CRR to fund the capital budget.

- A ranking system does exist for capital projects but with limitations and it is not possible to scientifically determine the prioritisation of capital projects.

The level of capital expenditure that is funded from the CRR must be limited to 9% of own revenue.

Annually Municipal Manager and Directors 2. The 2012/13 audit outcome was an unqualified audit opinion but the Auditor-General highlighted various areas that require attention.

During the 2012/13 regulatory audit 11 out of the 31 municipalities in the Western Cape have achieved the status of a “clean audit”. Saldanha bay municipality has committed itself to achieve this status by no later than the 2014/15 financial year.

The audit outcomes in recent years were: - 2008/09 - Disclaimer

- 2009/10 - Qualification

- 2010/11 - Unqualified with findings - 2011/12 - Unqualified with findings - 2012/13 - Unqualified with findings

The 4 most pressing issues raised by the Auditor-General during the 2012/13 regulatory audit were: 1. Predetermined objectives. The municipality received an qualified opinion in the management report;

1. 2. Housing project management and accounting thereof are lacking;

2. 3. The correct implementation of the Supply Chain Management Regulations; and

3. 4. The existence of sub-stores and the absence of controls over the stock in these stores.

4.

The most recent audit findings must be addressed by all relevant municipal officials and the directors must review the corrective actions made.

A status report must be submitted annually to the audit committee on the progress of the implementation of the corrective actions.

Annually Municipal Manager and Directors

(11)

Current challenges Status quo Action required Completion date

Responsible person/s 3. The revenue base of

the municipality must be enhanced.

- Some businesses in the municipal area still pay property taxes based on a residential tariff.

- There might be property owners that are billed on the original municipal valuation amount even after developments were done one the property.

- There might be ratepayers that are not billed for all services consumed.

- For many housing projects approved the required Surveyor-General diagrams were not completed.

- An audit must be done by the Town planning division on businesses that operates illegally and a report of the findings must be prepared once the audit has been completed;

- An audit must be done on all the customers that receive monthly accounts to ensure that they are billed for all services and taxes; - A revenue enhancement exercise

must be done to ensure that all consumers are billed;

- The government grants available must be maximised by appointing a dedicated official tasked with the responsibility; and

- The Surveyor-General diagrams must be obtained. June 2015 - CFO - Director: Engineering and Planning Services 4. The municipality does not collect all its revenue.

- The credit control function is limited as a result of staff shortages.

- The gross debtors are high with a corresponding high irrecoverable debt provision.

- The staff structure in the collection division must be reviewed;

- If cost beneficial, the services of a service provider must be obtained to assist with the debt and collection process, similar than what Mossel bay municipality currently has in place; and

- A debtors cleansing exercise must be performed.

(12)

Current challenges Status quo Action required Completion date

Responsible person/s 5. The additional long

term borrowings and

decrease in

investment revenue

as the cash

resources are diminishing will increase rates and tariffs.

The 3 year MTREF capital budget is R591 220 426. If the final 2013/14 capital adjustment budget is added to this it amounts to R799 881 956. The MTREF capital budget will deplete our cash resource entirely, and additional external loans are required to fund the high capital budget. An additional R113 000 000 will be borrowed over the 2014/15 MTREF

- The capital budget portion funded from the CRR must be limited to 9% of own Revenue annually; and

- Loans should only be taken up after the impact on tariffs has been considered and other options have been exhausted.

Annually Council, Municipal Manager and Directors

6. The housing policy and procedures of the municipality must be revisited.

- Informal and traditional dwellings exist. - The IDZ will result in an influx of jobseekers.

- The municipality does not have a policy to deal with squatters.

- The infrastructure for low cost housing is funded from the CRR.

- There is no clear structure of accountability within housing project management.

- Re-draft the housing policy; - A strategy to deal with squatters

is needed;

- Accountability structures must be determined;

- The financing of low cost housing infrastructure must be financed from grants; and

- The Director: Engineering and Planning Services must be tasked to source funding thereof.

February 2015 Director: Community Services and Director: Engineering and Planning Services 7. Proper contract management is lacking.

- The municipality operates without a proper contract management system.

- A detailed needs analysis on a contract management system (Collaborator or another) must be done; and

- The appropriate system must be implemented. February 2015 Director: Corporate and Protection Services 8. The SAMRAS financial system is not fully utilised and there are concerns regarding the quality of customer support being received.

- The system is outdated and inefficient.

- The services provider (Bytes Technology) does not provide the required level of customer support.

- The Standard Chart of Accounts (SCOA) must be implemented by 1 July 2016.

- The municipality does not utilise all the modules of SAMRAS.

- Investigate the readiness of SAMRAS to implement SCOA; - Investigate the feasibility to

migrate to another system; and - If the decision is to continue with

SAMRAS all modules must be implemented by the municipality.

December 2014

(13)

Current challenges Status quo Action required Completion date Responsible person/s 9. The current personnel structure has many unfunded vacancies.

The Council approved a new personnel structure during 2013 and it was implemented on 1 October 2013. The structure provides for 1 395 positions of which 1 030 will be budgeted for during the 2014/15 financial year. The total amount budgeted for salaries for 2014/15 is R235m. Budgetary provision of R306 is needed for this period if the entire structure is to be funded. This means that 26% of the structure is unfunded.

It is not realistic possible to fund these vacancies and it is recommended that the structure is scaled down to only allow for a between maximum 10% unfunded vacancy percentage. February 2015 Municipal Manager and Directors 10. The expenditure on non-income and support services is too high and there are concerns of the low productivity levels of some officials.

Deliveries of basic services are under treat due to overspending on other services and the low level of staff productivity.

- A critical analysis of the level of service in each service department must be made;

- A productivity assessment of each employee must be made to determine production levels and suitability within the staff structure; and - Re-deployment must be considered. February 2015 Municipal Manager and Directors 11. The municipality does not provide for any incentives for

new business

investments.

- A large part of the community lives in poverty;

- A large part of the community receives indigent support and social grants;

- The municipality cannot create jobs but can develop incentives to attract business which will create job opportunities.

- Develop an incentive policy to attract businesses;

- Re-look at the capital contribution model; and

- Improve plan approval procedures turnaround time.

February 2015 - CFO - Director: Engineering and Planning Services 12. Technical losses on

water and electricity are high.

There is still room for improvements on the reduction of technical losses on water and electricity.

- Investigate reasons for technical losses.

- Develop strategies that can be implemented to better monitor and reduce the technical losses.

February 2015 Director: Engineering and Planning Services

(14)

5.

Section 3: Financial overview

5.1 Forecast of revenue and expenditure

When preparing an annual budget for the municipality it is required to determine the realistically anticipated revenue and appropriating expenditure for the next 3 years. The LTFP has been aligned with the 3 year 2014/15 MTREF operating budget and an additional forecast were made for years 4 and year 5.

Operating Revenue

The estimated operating revenue at the end of 2018/19 will be R1 055 million which is 32% higher than the estimated operating revenue budget of R800 million at the end of 2014/15.

Operating Expenditure

The estimated operating expenditure at the end of 2018/19 will be R1 108 million which is 33% higher than the estimated operating expenditure budget of R831 million at the end of 2014/15.

A summary of the expected revenue and expenditure over the LTFP period has been provided in the table below.

(15)

Table 2 - Summary of operating Revenue and Expenditure 2012/13 (audited) 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Revenue Property rates 129 273 604 146 247 316 159 880 485 172 535 555 186 220 910 201 118 583 217 208 069 Service charges 376 075 341 407 651 975 450 392 608 491 820 880 537 149 830 574 750 318 614 982 840 Investment revenue 34 611 084 22 768 840 22 962 575 18 874 920 15 607 330 14 578 516 15 366 502 Other revenue 34 172 138 31 871 657 32 065 807 33 385 750 34 793 530 37 086 970 39 533 846 Own Revenue 574 132 167 608 539 788 665 301 475 716 617 105 773 771 600 827 534 387 887 091 258 Plus grants: Operational grants 75 607 084 68 991 842 84 147 450 95 116 850 112 398 245 120 266 122 128 684 751 Capital grants 47 230 388 50 598 380 50 129 550 41 547 050 34 899 250 37 342 198 39 956 151 Total revenue 696 969 639 728 130 010 799 578 475 853 281 005 921 069 095 985 142 706 1 055 732 160 Less: expenditure Employee cost 198 346 378 220 427 688 234 761 429 250 124 900 267 313 310 286 025 242 306 047 009 Remuneration of councillors 7 866 699 8 338 880 8 985 910 9 615 060 10 288 240 11 008 417 11 779 006 Depreciation and asset impairment 90 623 138 112 622 077 121 649 834 131 406 560 141 945 700 149 042 985 156 495 134 Finance charges 11 239 369 8 872 701 10 283 698 15 044 783 19 966 789 21 415 107 22 966 894 Bulk purchases 202 083 083 218 320 000 247 302 000 270 951 860 297 754 690 320 754 799 345 537 497 Transfer and grants 1 896 897 2 001 550 2 109 640 2 215 130 2 325 890 2 488 702 2 662 911 Other expenditure 153 543 275 181 565 617 205 571 572 210 092 640 231 084 535 246 341 486 262 638 854

Total expenditure 665 598 839 752 148 513 830 664 083 889 450 933 970 679 154 1 037 076 737 1 108 127 306 Surplus/ (deficit)/ for the year 31 370 800 -24 018 503 -31 085 608 -36 169 928 -49 610 059 -51 934 031 -52 395 146

(16)

Page 16 of 33

5.2 Forecast of capital budget

The CRR was for many years the main contributor as funding source for the capital budget. At the end of 2016/17 the CRR will have an estimated balance of R35 195 481. This is in accordance with the 3 year 2014/15 MTREF budget where an aggregate total of R591 220 426 will be spend on capital projects. The CRR will not be a major contribution to the capital budget from the 2018/19 financial year onwards, as can be seen in the table below, as it will be depleted by then. Only the annual contribution to the CRR will then be available to fund future capital projects.

For purposes of the compilation of table 3 below the 2014/15 – 2016/17 CRR capital expenditure were taken from the 2014/15 MTREF. For the 2017/18 financial year an amount of 9% of own revenue was assumed to be the CRR capital expenditure. For the 2018/19 financial year the available CRR balance is taken to fund the capital expenditure for that year.

Table 3 - Summary of capital budget funding sources

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 CRR 140 512 285 139 166 268 94 807 272 117 671 036 113 910 384 72 440 928 External loans 1 638 240 13 140 000 49 380 000 50 480 000 20 000 000 20 000 000 Capital grants 50 598 380 50 129 550 41 547 050 34 899 250 37 342 198 39 956 151 HDF 15 912 625 - - - - - Total 208 661 530 202 435 818 185 734 322 203 050 286 171 252 581 132 397 080

The graph below has been prepared to indicate the sustainability levels of the CRR over the LTFP period.

Figure 1 - Sustainability of the CRR as funding source over the 2014/15 MTREF

R(50 000 000) R50 000 000 R100 000 000 R150 000 000 R200 000 000 R250 000 000 R300 000 000 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Sustainability of the CCR

(17)

Page 17 of 33

6.

Section 4: Funding resources

Council has three capital funding sources, being the CRR, external loans and government grants. A detailed explanation of these funding sources is provided below.

6.1 Capital replacement reserve

The CRR is Council’s only internal source of funding to finance capital expenditure for infrastructure and other fixed assets in order to provide services of an acceptable standard to the community. It is required to manage this reserve carefully to ensure that, when the reserve becomes depleted, it is not necessary to impose unplanned or sporadic increases in rates and tariffs.

Council should make a decision on the sustainability period of the CRR. For how long does the Council want the CRR to be sustainable? The level of the capital budget is currently too high and it should be curtailed to a level that –

- will ensure that the capital budget spending percentage is above 90%; - will ensure that the CRR is sustainable for a longer period;

- will ensure that it is not necessary to take up any excessive loans that will have a negative impact on tariffs; and

- will ensure that service delivery remains at an acceptable high standard.

There are two major components to the CRR, being the annual contribution from rates and tariffs to grow the reserve (inflow) and the capital expenditure funded from the CRR (outflow).

Annual contribution from rates and tariffs to the CRR (inflow)

In terms of our “Budget implementation and management, funds and reserves and virement policy”, at least 6% of the previous financial year’s own Revenue must be provided annually from rates and tariffs to grow the CRR.

Capital expenditure funded from CRR (outflow)

For the 2014/15 MTREF the average percentage capital expenditure funded from the CRR is 16%. This is not ideal as the CRR will be depleted after 3 years.

(18)

Page 18 of 33

Three different scenarios are presented below as guidance to Council to aid with their decision making in determining for how long the CRR will have a positive balance if these three capital spending alternatives are considered. For purposes of this exercise the follows assumptions are made:

- The capital budget of 2014/15 will be spent in its entirety and that Council will apply the limitations for the financial years commencing on 1 July 2015; and - Loans to the value of R153 000 000 will be taken up over the LTFP period in

trances of R13.14 million, R49.38 million, R50.48million, R20 million and R20 million in 2014/15 respectively.

The 3 scenarios that are considered to determine the most optimal use of the CRR as funding source of the capital budget are:

1. Capital expenditure from the CRR is limited to 9% of budgeted own revenue; 2. Scenario 2: Capital expenditure from the CRR is limited to 11% of budgeted own

revenue; and

3. Capital expenditure from the CRR is limited to 13% of budgeted own revenue.

Figure 2 - Scenario 1: CRR as funding source is limited to 9% of own Revenue

R50 000 000 R100 000 000 R150 000 000 R200 000 000 R250 000 000 R300 000 000

Sustainability of the CCR

(19)

Page 19 of 33

If the capital expenditure funding from the CRR is limited to 9% of own Revenue the CRR will be depleted after 10 years in 2023/24. If no external loans are taken up over the LTFP to partially fund the capital expenditure, and the high level of the 2014/15 MTREF capital budget remains, the CRR will be depleted after 3 years in 2016/17.

Figure 3 - Scenario 2: CRR as funding source is limited to 11% of own Revenue

If the capital expenditure funding from the CRR is limited to 11% of own Revenue the CRR will only be depleted after 8 years in 2023/24. If no external loans are taken up over the LTFP to partially fund the capital expenditure, and the high level of the 2014/15 MTREF capital budget remains, the CRR will be depleted after 2.75 years in 2016/17. R(50 000 000) R50 000 000 R100 000 000 R150 000 000 R200 000 000 R250 000 000 R300 000 000

Sustainability of the CCR

(20)

Page 20 of 33

Figure 4 - Scenario 3 - CRR as funding source is limited to 13% of own Revenue

If the capital expenditure funding from the CRR is limited to 13% of own Revenue the CRR will be depleted after 5 years in 2023/24. If no external loans are taken up over the LTFP to partially fund the capital expenditure, and the high level of the 2014/15 MTREF capital budget remains, the CRR will be depleted after 2.5 years in 2016/17.

Conclusion

Scenario 1 is the best option. However, the capital budget over the 2014/15 MTREF is high and 9% is conservative if Council decides to continue to invest aggressively in capital projects in the immediate future. If scenario 2 is applied the capital budget for 2015/16 – 2018/19 will be as follows, keeping in mind that the 2014/15 capital budget is at a level of 16% of own revenue and amounts to R202 million:

Table 4 - Scenario 2: CRR as funding source is limited to 11% of own Revenue

R(50 000 000) R50 000 000 R100 000 000 R150 000 000 R200 000 000 R250 000 000 R300 000 000 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Sustainability of the CCR

2015/16 2016/17 2017/18 2018/19 Funded from the CRR within 11%

limitation

78 827 882 85 114 876 91 028 783 97 580 038

External loans 49 380 000 50 480 000 20 000 000 20 000 000 Capital grants 41 547 050 34 899 250 37 342 198 39 956 151

(21)

Page 21 of 33

6.2 External loans

At the end of June 2013 the balance of the outstanding external loans were R65 463 190. The municipality has not taken up any loans since the 2011/12 financial year. Over the 2014/15 MTREF new loans to the value of R113 000 000 has been budgeted for. For purposes of the LTFP additional loans to the value of R20 000 000 will be taken up in 2017/18 and R20 000 000 in 2018/19. The total value of new loans taken up over the LTFP period will then be R160 000 000. The effect of what this will have on future tariffs are provided in table 5 below.

There are a number of existing loans that will be redeemed over the LTFP period which will soften the impact of tariffs increases.

At the end of June 2019 the balance of the outstanding external loans will be R155 325 376.

A graph has been provided below to show the R-value movement of external loans over the LTFP period.

Figure 5 - Total R-value of external loans

As part of the 2013/14 budget principles report (R54/10-13), the Council has adopted the principle that external loans must not exceed 25% of its own revenue. A graph

R20 000 000 R40 000 000 R60 000 000 R80 000 000 R100 000 000 R120 000 000 R140 000 000 R160 000 000 R180 000 000 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Total R-value of external loans

(22)

Page 22 of 33

has been provided below to show the movement of external loans as a percentage of own revenue over the LTFP period. At the end of June 2019 the total external loans as a percentage of own revenue will be 19%.

Figure 6 - External loans as a percentage of own Revenue

As already mentioned, the increased borrowings will have an impact on the future tariffs of the municipality. The interest and capital redemptions on the loans are recovered annually from the ratepayers. The total impact of the increased level of interest and capital redemption payments over the LTFP period is provided in table 5 below.

Table 5 - Increase in redemption payments of additional external loans

2014/15 2015/16 2016/17 2017/18 2018/19 Interest and capital

redemption:

On existing loans 16 324 158 11 744 304 11 605 191 8 018 970 6 923 750 On new loans 1 883 747 8 962 853 16 199 653 19 066 849 21 934 044 Total 18 207 906 20 707 157 27 804 845 27 085 819 28 857 794

There is a big increase in 2016/17 which will have to be recovered through a higher than normal increase in tariffs for that specific year if no alternative cost saving measures can be identified. It will probably result in an additional increase in tariffs of approximately 3%.

If no additional tariffs increases is to be imposed, the loan amount of R50 480 000 which has been included in the 2014/15 MTREF budget for the 2016/17 financial year, must

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Total external loans as a percentage of own

(23)

Page 23 of 33

not be taken up. The intended new loans to the value of R153 000 000 to be taken up will then be reduced to R102 520 000. The capital and interest redemption payments will then be stable without any increased repayments as can be seen in the table below.

Table 6 - Best scenario: Redemption payments of external loans

2014/15 2015/16 2016/17 2017/18 2018/19 Interest and capital

redemption:

On existing loans 16 324 158 11 744 304 11 605 191 8 018 970 6 923 750 On new loans 1 883 747 8 962 853 8 962 853 11 830 048 14 697 243 Total 18 207 906 20 707 157 20 568 044 19 849 018 21 620 993

Conclusion

The best scenario will be to take up external loans as follows:

Table 7 - Best scenario: Additional loans without increased tariffs

6.3 Grant funding

It is not possible to obtain detailed information of the grant funding available for the municipality over the entire LTFP period. A high level estimation has been made for the capital grants which are included under section 3.

7.

Section 5: Cash management

The municipality is currently in a favourable position with a cash balance of R426 million at the end of June 2013. It is estimated that the cash position will reduce gradually as the CRR is depleted and by the end of June 2019 should be approximately R227 million. During the LTFP period, loan proceeds as discussed in section 4 will also be received into the bank account of the municipality to be used for specific capital projects.

2014/15 13 140 000

2015/16 49 380 000

2016/17 -

2017/18 20 000 000

2018/19 20 000 000

(24)

Page 24 of 33

Specific provision must be made for certain liabilities and reserves to be ringed-fenced and backed up by sufficient cash resources as per the “Budget implementation and management, funds and reserves and virement policy”.

The municipality has 4 internal reserves and provisions that must be cash-backed at all times, being

- The retirement benefit obligation;

- The environmental rehabilitation provision; - The Housing Development Fund; and - The self-insurance reserve.

On top of these reserves the Council’s Funds and Reserves policy also requires that an amount of R60 000 000 be reserved as working capital in the operating bank account of the municipality to cover at least 1 month operating expenditure.

A reconciliation of the estimated required cash-backed reserves versus the estimated available cash resources over the 5 year LTFP period has been provided in table 8 and figure 7 below.

The top line in the graph represents the total available cash resources of the municipality, whilst the bottom line represents the required cash-back reserves. The top line should never cross the bottom line in the graph. When this happens it indicates that the required cash-backed reserves are no longer cash-backed.

It can be seen from this summary and the graph below that, as the CRR becomes depleted, the gap closes completely between the total cash resources of the municipality and the required cash-backed reserves, and that the municipality will then be in an unfavourable situation where a shortfall on its cash-backed reserves exists.

(25)

Page 25 of 33

Table 8 - Summary of cash-backed reserves

2012/13 (audited)

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Retirement benefit obligation 66 086 738 70 389 000 80 889 000 92 019 000 103 816 800 113 224 422 123 290 577 Provision for environmental

rehabilitation

55 212 107 56 061 000 59 561 000 63 061 000 66 561 000 70 306 000 74 313 150 Housing Development Fund 18 175 697 - - - - - - Self-insurance reserve 1 786 940 1 689 584 1 768 000 2 268 000 2 798 000 3 359 890 3 359 890 Working capital margin 60 000 000 60 000 000 60 000 000 60 000 000 60 000 000 60 000 000 60 000 000 Minimum cash resources required 201 261 482 188 139 584 202 218 000 217 348 000 233 175 800 246 890 312 260 963 617 Plus: CRR 222 496 371 175 260 000 106 641 320 91 105 497 35 195 481 - -

Total cash-backed reserves 423 757 853 363 399 584 308 859 320 308 453 497 268 371 281 246 890 312 260 963 617

Less: Cash resources available 425 633 092 350 000 000 264 191 593 241 741 199 200 139 153 246 203 391 226 756 748 Cash surplus/ (shortfall) 1 875 239 -13 399 584 -44 667 727 -66 712 298 -68 232 128 -686 921 -34 206 869

(26)

Page 26 of 33

Figure 7 - Cash-backed reserves versus available cash resources

8.

Section 6: Ratio and sustainability analysis

The Western Cape Government has embarked on a process to develop a uniform set of ratios for municipalities in the Western Cape. This was done in conjunction with Mubesko Africa. The aim of this project was to enable municipalities to measure their own performance against the benchmarks in each ratio. The number of ratios available for measurement is vast, but the project also provides for a sustainability measurement index that only measures 10 specific ratios. These 10 specific ratios each contain different weights and provide for a score out of 100 points. Each municipality can then measure its own performance against the benchmark and also compare it against the performance of other municipalities.

The LTFP will only focus on these 10 ratios and will calculate the sustainability score to enable the readers of this document to understand the sustainability level of the municipality. The ratios achieved by Saldanha bay municipality over the LTFP period are provided in table 9 below. The description of these 10 ratios is listed and explained in table 10. The results of the sustainability score for each ratio is contained in table 11. R50 000 000 R100 000 000 R150 000 000 R200 000 000 R250 000 000 R300 000 000 R350 000 000 R400 000 000 R450 000 000 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Must be avoided

(27)

Page 27 of 33

Table 9 – Ratios

Ratio 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

1. Acid test ratio 4.2 3.8 3.1 2.9 2.6 2.1 2.0

2. Debtors payment level 99% 98% 99% 99% 99% 99% 99%

3. Cash generated from operations at % of Revenue

13% 14% 13% 14% 13% 18% 13%

4. PPE acquisitions as % of cash generated from operations

179% 173% 191% 159% 175% 106% 104%

5. Cost coverage 9.1 6.6 4.4 3.8 2.8 2.7 2.6

6. Debtors turnover days 108 115 100 93 86 83 79

7. Long term debt as % of Revenue

9% 7% 7% 11% 15% 15% 15%

8. Debt servicing cost to Revenue

3% 3% 3% 3% 3% 3% 3%

9. Short term debt as % of cash 30% 35% 46% 52% 62% 75% 80%

10. Cash funded budget over LTFP period

Yes Yes Yes Yes No No No

1. Acid test ratio

The municipality scored maximum points over the LTFP period for this ratio. It is estimated that this ratio should not decrease to below 2 to 1 from 2018/19 onwards as the required cash-backed reserves will ensure stability at that point in time when the CRR has by then been depleted.

2. Debtors payment level

The municipality scored maximum points over the LTFP period for this ratio and no further discussion is required.

3. Cash generated from operations as a percentage of Revenue

This ratio indicates the level of net cash generated by the municipality in relation to the Revenue of the municipality. The required benchmark is to generate cash of at least 20% of Revenue per annum. The municipality only managed to achieve 13% in the 2012/13 financial year. It is estimated that over the 5 years LTFP period this ratio will be between 13% - 18% which is below the benchmark.

The reason for this below par performance is as a result of the municipality’s high capital budget and the resultant cash outflow required. If the municipality was not in such good financial health this would have required immediate attention.

(28)

Page 28 of 33

4. PPE acquisitions as a percentage of cash generated from operations

This ratio measures the extent to which the net annual cash generated by the municipality are used to finance capital expenditure. If this ratio is above 100% it means that the municipality is dependent on other sources of funding than the annual cash it generates from its own operations.

This ratio was 179% in the 2012/13 financial year which is well above 100%. Over the entire LTFP period this ratio will be 100% which is indicative of the high capital expenditure. The high capital budget is not sustainable and the municipality must reduce it.

5. Cost coverage ratio

This ratio measures the number of month cash available to cover the monthly fixed operating expenditure. Any unspent conditional grants are taken out of the cash balance. The general industry norm is 4 months and higher. This ratio is a good indication of the level of sustainability of a municipality.

This ratio was 9 months in the 2012/13 financial year which is indicative of the good current financial position of the municipality. However this ratio is diminishing over the 5 year LTFP period and from 2015/16 onward it will be below the benchmark of 4 months.

6. Debtors turnover (days)

This ratio indicates to what extent the credit control and debt collections measures are implemented and it is a good indicator of how successful the municipality implement its write-off policy. This ratio does not consider the provision of debtor impairment.

This ratio was 108 days in the 2012/13 financial year and it is estimated that this will reduce to 79 days by June 2019. If the debtor impairment provision was considered the debtors days outstanding would be on average approximately 50 days over the LTFP period.

The municipality will only improve this ratio once a debtors cleaning exercise is done and the irrecoverable debt is written off.

(29)

Page 29 of 33

7. Long term debt as a percentage of Revenue

The municipality scored maximum points over the LTFP period for this ratio and no further discussion is required.

8. Debt servicing cost to Revenue

The municipality scored maximum points over the LTFP period for this ratio and no further discussion is required.

9. Short term debt as a percentage of cash

This ratio indicates the level of current liabilities relative to its cash position. The current industry norm for this ratio is 50% or less. This ratio was 30% for the 2012/13 financial year and it is estimated that this will move above the 50% range from 2016/17 onwards as the cash position of the municipality weakens.

10. Cash funded budget over LTFP period

It is estimated that the municipality will score maximum points until 30 June 2016. From thereon as the cash resources decrease, whilst the capital expenditure is still moderately high, the municipality will not have a cash funded budget. The shortfall will then be financed from the 4 cash-backed reserves that the municipality must preserve. However, this must position be avoided at all cost. Also refer to figure 7 where it can be seen that the available cash resources drops below the required cash-backed reserves from 2016/17 onwards.

(30)

Page 30 of 33

Table 10 - Description of ratios and benchmarks

Ratio Maximum

points

Benchmark Purpose of ratio

1. Acid test ratio 10 Greater/ equal than 2 Indicates the ability to meet short term obligations with short term liquid assets

2. Debtors payment level 15 Greater/ equal than 95%

Indicates the ability of the Municipality to collect its outstanding debtors 3. Cash generated from

operations at % of Revenue

8 Greater/ equal than 20%

Indicates the amount of cash generated which can be utilised towards service delivery and the purchase of capital assets

4. PPE acquisitions as % of cash generated from operations

8 Greater/ equal than 100%

Indicates the extent of cash generated from operations to finance capital expenditure.

5. Cost coverage 15 Greater/ equal than 4 Indicates how many months operating expenditure can be covered by the current cash balance.

6. Debtors turnover days 2 Smaller/ equal than 75 Indicates to what extent credit control and debt collection measures are being implemented.

7. Long term debt as % of Revenue

5 Smaller/ equal than 40%

Indicates the level of long term debt taken up 8. Debt servicing cost to

Revenue

8 Smaller/ equal than 5% This ratio determines how much of revenue is being spent on the repayment of long term loans.

9. Short term debt as % of cash 4 Smaller/ equal than 50%

Indicates the level of short term debt relative to its cash balances 10. Cash funded budget over

LTFP period

25 It must be 100% funded Over the three years budget cycle the cash balance must be positive

(31)

Page 31 of 33

Table 11 - Sustainability score of the municipality

Ratio 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 1. Acid test ratio 10 10 10 10 10 10 10 2. Debtors payment level 15 15 15 15 15 15 15 3. Cash generated from

operations at % of Revenue

4 4 4 4 4 6 4

4. PPE acquisitions as % of cash generated from operations

0 0 0 0 0 8 8

5. Cost coverage 15 15 15 10 5 5 5 6. Debtors turnover days 0 0 0 0 1 1 1 7. Long term debt as % of

Revenue

5 5 5 5 5 5 5

8. Debt servicing cost to Revenue

8 8 8 8 8 8 8

9. Short term debt as % of cash

4 4 4 3 3 2 1

10. Cash funded budget over LTFP period

25 25 25 25 0 0 0

Total score 86 86 86 80 51 60 57

The municipality has achieved the maximum points for 4 out of the 10 ratios over the entire LTFP period. At the end of 2014/15 the sustainability score for the municipality is calculated at 86 points. It is estimated that by the end of 2018/19 this will decrease to 57 points.

9.

Section 7: Other matters

9.1 Industrial Development Zone

The Saldanha bay Industrial Development Zone (IDZ) has officially been launched by President Zuma on 31 October 2013. The President also made specific reference in his State of the Nation Address on 13 February 2014. This will have an impact on our local economy and will result in the establishment of new industries. This initiative is being driven by WESGRO in partnership with the Saldanha bay Licensing Company (LICO). The IDZ will add pressure on our capital infrastructure as the population increases. It is required to be proactive in the planning processes to ensure that the municipality manages all of its risks sufficiently as there will be an inevitable social, economic and environmental impact that will flow from the IDZ.

(32)

Page 32 of 33

10.

Section 8: Resolutions

The LTFP will be updated annually and the resolutions only apply to the period 1 July 2014 to 30 June 2015. It is resolved:

1. The municipality currently has a good and sound financial position;

2. The 2014/15 MTREF capital budget is too high and the CRR will be depleted within 3 years if it is not curtailed during the next budget process;

3. The capital expenditure financed from the CRR during the 2015/16 budget preparation process must be limited to 9% of the previous year’s own revenue; 4. The external loans taken up over the LTFP period should be limited to

R102 520 000 as discussed in section 4 of the LTFP; and

5. The action plan in table 1 must be adopted and the Municipal Manager and Directors must report back in February 2015 on the implementation status thereof to Council;

(33)

Page 33 of 33

11.

Annexures

The MTREF budget period covers 3 years, whilst the LTFP has a planning period of 5 years. The LTFP was prepared in accordance with the 2014/15 MTREF tabled budget. Considerable judgement and the use of assumptions were used for year 4 and year 5. The general assumptions that were used for those two years are listed below.

Table 12 - Annexure 1: Assumptions used

No Descriptions 2017/18 2018/19

1. Property rates 8% 8%

2. Services 7% 7%

3. Interest received 6% 6%

4. Capital grants and operating grants 7% 7%

5. Vat revenue from DORA grants 5% 5%

6. Other revenue 7% 7%

7. CPIX 5.70% 5.80%

8. Bulk purchases - Water 7% 7%

9. Bulk purchases - Electricity 8% 8%

10. Staff cost 7% 7%

11. Interest rate of new loans 10% 10%

12. Term of new loans 15 years 15 years

13. Repairs and maintenance 7% 7%

14. Depreciation 5% 5%

15. Other expenditure 7% 7%

16 Percentage spent of capital budget 85% 90%

17. Increase in gross debtors 3% 3%

18. Increase in debt impairment 3% 3%

19. Increase in grants 7% 7%

20.

Annual budgetary contribution to the CRR as a percentage of Revenue

http://www.saldanhabay.co.za/pages/IDP/idp.html

References

Related documents

Mean variance analysis documented the highest average return on Monday for the period from 1995 to 2007 (Table 7), the result is statistically significant at 5% confidence level,

Percentages of Total Annual Repayment (Capital and Interest) to Operating Expenditure to be less than 10%. Allocations to capital projects from cash backed internal

In the case of heating needs, if assuming that heating could be done directly with electricity, half of the rooftop area of rural residential buildings could

Terraform acquires a resource is the requested not available for searching for plugin using encryption for students.. Click open at the top cause the

The implementation of the CoffeeBreak garbage collector that can allocate objects on its own, Restricted Domain Scope (RDS)-managed, heap shows a solution to the two basic problems

The estimated costs for nuclear power from the study will be based on the findings of the United Nations Scientific Committee on the Effects of Atomic Radiation (UNSCEAR), with the

The relative discrepancy on the major target sequences in different hosts infected by ToCMoV-[BA-Se1] might reflect different compositions of the silencing machinery in the two

Complacency about database backups can kill your store dead in the water should there be some sort of problem with the hosting server – never assume that your hosting company runs