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 ITEM NUMBER:
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 11. Annexures... 33
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 Figure 7 - Cash-backed reserves versus available cash resources... 26
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
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.
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;
- 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.
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.
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. The action plan for the challenges is included in the table 1 below.
Table 1 - Current challenges facing the municipality Current challenges Status quo Action required Completion date 1. The 2014/15 - The municipality utilised too much of the CRR to fund The level of capital expenditure Annually MTREF capital the capital budget. that is funded from the CRR must budget of the - A ranking system does exist for capital projects but be limited to 9% of own revenue. municipality is too with limitations and it is not possible to scientifically high. determine the prioritisation of capital projects. 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 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 Responsible person/s Municipal Manager and Directors Municipal Manager and Directors 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.
Current challenges Status quo Action required Completion date 3. The revenue base of - Some businesses in the municipal area still pay - An audit must be done by the June 2015 the municipality property taxes based on a residential tariff. Town planning division on must be enhanced. - There might be property owners that are billed on the businesses that operates illegally original municipal valuation amount even after and a report of the findings must developments were done one the property. be prepared once the audit has - There might be ratepayers that are not billed for all been completed; services consumed. - An audit must be done on all the - For many housing projects approved the required customers that receive monthly Surveyor-General diagrams were not completed. 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 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. must be obtained. - 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. June 2015 Responsible person/s - CFO - Director: Engineering and Planning Services - Finance
Current challenges Status quo Action required Completion date 5. The additional long The 3 year MTREF capital budget is R591 220 426. If - The capital budget portion funded Annually term borrowings and the final 2013/14 capital adjustment budget is added to from the CRR must be limited to decrease in this it amounts to R799 881 956. The MTREF capital 9% of own Revenue annually; investment revenue budget will deplete our cash resource entirely, and and as the cash additional external loans are required to fund the high - Loans should only be taken up resources are capital budget. An additional R113 000 000 will be after the impact on tariffs has diminishing will borrowed over the 2014/15 MTREF been considered and other increase rates and options have been exhausted. tariffs. 6. The housing policy - Informal and traditional dwellings exist. - Re-draft the housing policy; February and procedures of - The IDZ will result in an influx of jobseekers. - A strategy to deal with squatters 2015 the municipality - The municipality does not have a policy to deal with is needed; must be revisited. squatters. - Accountability structures must be - The infrastructure for low cost housing is funded from determined; the CRR. - The financing of low cost housing - There is no clear structure of accountability within infrastructure must be financed housing project management. from grants; and - The Director: Engineering and Planning Services must be 7. Proper contract management is lacking. 8. The SAMRAS financial system is not fully utilised and there are concerns regarding the quality of customer support being received. - The municipality operates without a proper contract management system. - 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. tasked to source funding thereof. - A detailed needs analysis on a contract management system (Collaborator or another) must be done; and - The appropriate system must be implemented. - 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. February 2015 December 2014 Responsible person/s Council, Municipal Manager and Directors Director: Community Services and Director: Engineering and Planning Services Director: Corporate and Protection Services CFO
Current challenges Status quo Action required Completion date 9. The current February personnel structure 2015 has many unfunded vacancies. 10. The expenditure on non-income and support services is too high and there are concerns of the low productivity levels of some officials. 11. The municipality does not provide for any incentives for new business investments. 12. Technical losses on water and electricity are high. 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. Deliveries of basic services are under treat due to overspending on other services and the low level of staff productivity. - 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. There is still room for improvements on the reduction of technical losses on water and electricity. 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. - 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. - Develop an incentive policy to attract businesses; - Re-look at the capital contribution model; and - Improve plan approval procedures turnaround time. - Investigate reasons for technical losses. - Develop strategies that can be implemented to better monitor and reduce the technical losses. February 2015 February 2015 February 2015 Responsible person/s Municipal Manager and Directors Municipal Manager Directors and - CFO - Director: Engineering and Planning Services Director: Engineering and Planning Services
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.
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
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 R300 000 000 R250 000 000 R200 000 000 R150 000 000 R100 000 000 R50 000 000 Sustainability of the CCR R- R(50 000 000) 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Page 16 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. Page 17 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 R300 000 000 Sustainability of the CCR R250 000 000 R200 000 000 R150 000 000 R100 000 000 R50 000 000 R- Page 18 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 R300 000 000 Sustainability of the CCR R250 000 000 R200 000 000 R150 000 000 R100 000 000 R50 000 000 R- R(50 000 000) 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. Page 19 of 33
Figure 4 - Scenario 3 - CRR as funding source is limited to 13% of own Revenue R300 000 000 Sustainability of the CCR R250 000 000 R200 000 000 R150 000 000 R100 000 000 R50 000 000 R- R(50 000 000) 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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 Funded from the CRR within 11% limitation 2015/16 2016/17 2017/18 2018/19 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 Total capital budget 169 754 932 170 494 126 148 370 980 157 536 190 Page 20 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 R180 000 000 R160 000 000 R140 000 000 R120 000 000 R100 000 000 R80 000 000 R60 000 000 R40 000 000 R20 000 000 Total R-value of external loans R- 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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 Page 21 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 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Total external loans as a percentage of own revenue 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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 Page 22 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 2014/15 13 140 000 2015/16 49 380 000 2016/17-2017/18 20 000 000 2018/19 20 000 000 Total external loans 102 520 000 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. Page 23 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. Page 24 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 55 212 107 56 061 000 59 561 000 63 061 000 66 561 000 70 306 000 74 313 150 rehabilitation 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 Page 25 of 33
Figure 7 - Cash-backed reserves versus available cash resources R450 000 000 R400 000 000 R350 000 000 R300 000 000 R250 000 000 R200 000 000 R150 000 000 R100 000 000 R50 000 000 R- Must be avoided 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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. Page 26 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 13% 14% 13% 14% 13% 18% 13% operations at % of Revenue 4. PPE acquisitions as % of cash 179% 173% 191% 159% 175% 106% 104% generated from operations 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 9% 7% 7% 11% 15% 15% 15% Revenue 8. Debt servicing cost to 3% 3% 3% 3% 3% 3% 3% Revenue 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. Page 27 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. Page 28 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. Page 29 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 Indicates the ability of the Municipality to collect its outstanding debtors 95% 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 8 Greater/ equal than 100% Indicates the extent of cash generated from operations to finance capital expenditure. operations 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 5 Smaller/ equal than Indicates the level of long term debt taken up Revenue 40% 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 Indicates the level of short term debt relative to its cash balances 50% 10. Cash funded budget over 25 It must be 100% funded Over the three years budget cycle the cash balance must be positive LTFP period Total points 100 Page 30 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 4 4 4 4 4 6 4 operations at % of Revenue 4. PPE acquisitions as % 0 0 0 0 0 8 8 of cash generated from operations 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 5 5 5 5 5 5 5 Revenue 8. Debt servicing cost to 8 8 8 8 8 8 8 Revenue 9. Short term debt as % of 4 4 4 3 3 2 1 cash 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. Page 31 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; Page 32 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% Annual budgetary contribution to the 6% 6% 20. CRR as a percentage of Revenue Page 33 of 33