CIGFARO – WESTERN CAPE
June 2017
The Need for a Long Term Financial Plan for
Municipalities
Prepared by
INCA Portfolio Managers
June 2017
Failing to plan is planning to fail
Alan Lakein
“…………. you assume that the outcome
will follow your plan, even when you
should know better.”
Daniel Kahneman
OUTLINE OF PRESENTATION
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 3
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 4
WHAT IS A LONG TERM FINANCIAL PLAN?
A long term financial plan entails proposals on investments,
strategies and policies that will maximise the probability of
the municipality’s financial sustainability into the future and
for it to remain resilient to the demands of its integrated
development plan and ever changing environment.
This is achieved by predicting future revenues, affordable
expenditure and cash flows based on the municipality’s
historic performance and an assessment of the expected
future environment in which it operates.
Prepared by Inca Portfolio Managers | Page 5
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 6
ATTRIBUTES OF A PLAN
Strategies and policies
A financing strategy sets
out how the municipality
plans to finance its overall
operations to meet its
objectives now and in the
future. It summarises
targets, and the actions to
be taken over the planning
period, including
investments required to
achieve its objectives.
Probability
Financial sustainability
Keep in existence,
maintain, affordability
……
ATTRIBUTES OF A PLAN CONT.
Resilient
Responsive,
rebounding, spring
back ……
Predicting
Historic performance
Future environment
ATTRIBUTES
OF A PLAN
CONT.
The tap that produces the water is the economy and
the people in the area that generate the Municipal
Revenue
The water flowing into the Can are the Municipal
Revenues
The can represents the municipality that collects the
revenues and distributes the cash to various
functions and purposes
The first bucket represents
the Operational Expenses
The second bucket represents the cash
needed to service existing debt
The third bucket represents the cash that funds various
reserves
The fourth bucket represents the cash available for new debt service
The last bucket represents the cash left for direct investment in Capex
ATTRIBUTES OF A PLAN CONT.
Providing lighthouses and
beacons for the Council to steer
the municipal ship through the
choppy seas of the future
Long term focus
Planning is a
Process
Cash is King
Scenarios
LTFP Needs
to be
managed
Not a budget
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 11
WHAT DOES THE LAW SAY?
Municipal
Systems Act
Municipal
Finance
Management
Act
Constitution
of South
Africa
Municipal
Structures Act
Regulations
Prepared by Inca Portfolio Managers | Page 12
THE CONSTITUTION 1996
Article 152
A municipality must strive, within
its financial and administrative
capacity, to achieve the objects
set out in subsection (1).
Article 229
Fiscal powers and functions
include imposing of rates on
property and surcharges on fees
for services provided by or on
behalf of the municipality.
Article 230A
Raise loans for capital or current
expenditure for the municipality,
but loans for current expenditure
may be raised only when
necessary for bridging purposes
during a fiscal year
Schedule 4
Schedule 4: Functional area
includes:
Municipal Planning
SYSTEMS ACT, 32 OF 2000
Article 25
Adoption of integrated
development plans ………..adopt a
single, inclusive and strategic plan
for the development of the
municipality
Article 26
Contents of IDP ……….
(h) a financial plan, which must
include a budget projection for at
least the next three years
which (a) links, integrates and co-ordinates
plans and takes into account proposals for the
development of the municipality; (b) aligns the
resources and capacity of the municipality with
the implementation of the plan;…………
Article 73
Municipal services must be …….
(c) financially sustainable
Article 74
Article 74 cont.
(d) tariffs must reflect the costs
reasonably associated with
rendering the service, including
capital, operating, maintenance,
administration and replacement
costs, and interest charges;
(e) tariffs must be set at levels
that facilitate the financial
sustainability of the service,
taking into account subsidisation
from sources other than the
service concerned;
Article 96
Credit control and debt
collection policy ……
(d) realistic targets
consistent with- (i) general
recognised accounting
practices and collection
ratios; and (ii) the
estimates of income set in
the budget less an
acceptable provision for
bad debts; (e) interest on
arrears, where appropriate;
REGULATIONS TO THE SYSTEMS ACT
Chapter 2 Clause 3
IDP
Budget projection
Contents of a financial
plan in an IDP
Financial resources
available for capital
project developments and
operational expenditure
Financial strategy
Revenue raising
Asset management
Chapter 3 Clause 10
PM
The following general key
Performance indicators
…………..
(g) financial viability as
expressed by the
following ratios:
Financial management
•
•
•
Debt coverage
Outstanding service
debtors
Cost coverage
Capital financing
Operational financing
Enhance cost-effectiveness
MUNICIPAL FINANCE MANAGEMENT ACT NO 56, 2003
Article 17
Annual budget must be accompanied
by ………………….
(b) measurable performance
objectives for revenue from each
source and for each
vote in the budget, taking into
account the municipality’s integrated
development plan
Article 21
(2) When preparing the annual
budget, the mayor of a
municipality must—
(a) take into account the
municipality’s integrated
development plan
Article 21
(1) The mayor of a municipality
must—
(a) co-ordinate the processes for
preparing the annual budget
and for reviewing the
municipality’s integrated
development plan and budgetrelated policies to ensure that
the tabled budget and any
revisions of the integrated
development plan and budgetrelated policies are mutually
consistent and credible;
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 17
IPM’S APPROACH
Annual
Financial
Statements
GRAP 17
compliant
Asset
Register
IDP, Sector
Master Plans
&
Workshop
Based on Municipality’s historic financial
records, IPM will:
• Assess Financial Performance
• Determine Income and Expenditure
Patterns
• Analyse Trends
Based on information in the Asset
Register, IPM will quantify future:
Asset Replacement Requirements
Repairs & Maintenance Cost
Based on IDP of Muni and Sector Master
Plans and in consultation with the
Departments IPM will quantify:
New Capital Formation Demand
IPM’S APPROACH CONT.
Economic &
Demographic
Perspective
Based on a perspective of the regional
economy and demography, IPM will
predict future:
Municipal Revenues
Affordable Capital Expenditure
HESSEQUA LM
Model for the Projection of Future Municipal Capital Investment
Hessequa Cap Inv V6.xlsx
2 October 2013
Disclaimer:
This financial model was prepared for planning purposes only and must not be relied on without an independent own assessment. INCA Portfolio Managers (Pty) Ltd
disclaims all warranties as to the accuracy, completeness or adequacy of the information and shall have no liability for any errors, ommissions or inadequacies of the
information that the model generates.
Portfolio Managers
Integrate Financial Assessment and
Forecasts Into a Long Term Financial Plan
with proposed policy and strategy
interventions.
Guidance on Capital
Expenditure Affordability
High level
recommendations on
policies & strategies to
be adopted
Guidance on Funding Mix
for Capital Expenditure
Guidance on liquidity and
reserve targets
IPM’S APPROACH
Historic Financial
Assessment
Economic,
Demographic &
Household
Infrastructure
Perspective
Body of
Model
Asset Register
Knowledge
Conversation
with
Directorates
IDP &
Infrastructure
Master Plans
Long Term
Financial Plan
Prepared by Inca Portfolio Managers | Page 20
IPM APPROACH THEORY
Revenue = f (GVA, Population)
GVA
Population
Real Revenue
Operational
Grants
1
Nominal Revenue
Existing Loans
Less: Operational Expenditure
Net Cash for
Year
Debt Service
Cash Backed
4
New Debt
Service
Free Cash Flow
Residual Cash
2
Liquidity Reserve
CRR
3
New Loans
Capital Grants
CAPEX
Investment
6
5
Capital
Contributions
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 22
CASE STUDY: CITY OF JOHANNESBURG EXPERIENCE
Summary of a Presentation
given by the Group CFO of City
of Johannesburg, Reggie Boqo,
at the INCA Capacity Building
Fund Summer School, 2017.
Prepared by Inca Portfolio Managers | Page 23
COJ EXPERIENCE: PROBLEM STATEMENT
City of Johannesburg faces liquidity crisis
May soon be unable to fund its short-term liabilities.
Malcolm Rees / 7 November 2011 11:49
JOHANNESBURG – The financial position of the City of Johannesburg seems to have deteriorated to a
point at which it is now suffering from an acute lack of liquidity.
This means that the metro may soon no longer be able to fund its expenditure and meet its short-term
liabilities through its income and cash reserves.
Unless a rapid turn-around takes place, the country’s most cash generative city may risk default and face a
financial crisis, say analysts.
Independent ratings agency, Ratings Afrika, has made the claim that Johannesburg is facing a severe
liquidity crisis. This data was provided exclusively to Moneyweb.
COJ EXPERIENCE: NEED FOR A LONG TERM FINANCIAL PLAN
Aims of the LTFP or Financial Development Plan (“FDP”):
• Strengthen ability to generate cash backed internal surpluses
• Afford the R100 billion capital investment program
• Ensuring the right systems, procedures, processes, and controls are in place to
respond to matters of:
• Resource allocation
• Cash management
• Revenue optimization
• Expenditure management
• Debt management
• Asset management
• Accounting and Financial reporting
• Meet all the requirements of the ratings agencies so that funding of capital
expenditure is not compromised
Prepared by Inca Portfolio Managers | Page 25
COJ EXPERIENCE: TARGETED FINANCIAL RATIOS
CoJ embedded a set of ratios to determine continued financial sustainability
into its Service Delivery Budget Implementation Plans (“SDBIP”) targets and
budget allocations. These key budget drivers were the following:
Current ratio
Solvency ratio
Debt to revenue ratio
Remuneration to expenditure ratio
Maintenance to PPE ratio
Interest to expenditure ratio
Net operating margin
Cash cover
-
Above 1:1
Above 2:1
Below 45%
Below 30%
8%
Below 7%
Above 15%
45 days
Prepared by Inca Portfolio Managers | Page 26
COJ EXPERIENCE: SUSTAINABILITY INTERVENTIONS
Cost containment
•
Expenditure Review
/ eliminate waste
•
Zero based
budgeting
•
Institutional review
Service delivery
Revenue maximisation
•
Improving the level
of confidence in
credit control
processes
•
Quality of service
delivery
•
Customer
awareness
•
Minimise
unaccounted for
losses
•
•
Pre-paid and smart
metering
Integrated
management of
customers and
query resolution
•
Improved meter
reading and billing
•
Data clean-up
•
Convenient
payment channels
COJ EXPERIENCE: SUSTAINABILITY INTERVENTIONS CONT.
Rates & taxes
Tariffs
•
Cost recovery
•
Affordability
•
Competitive
•
Indigent policy
•
Competitive pricing
•
Alignment to the
cost drivers funded
from the rates
account
Capital budget
•
Review sources of
funding
•
Balance investment
in economic, basic
needs and social
infrastructure
Repairs and maintenance
expenditure
•
Intentional
increase in R&M
•
Aim to achieving
benchmark of 8%
of PPE
•
5-year R&M
programme
•
Comprehensive
infrastructure
plans
COJ EXPERIENCE: RESULTS
• Liquidity position went from R306m in June 2010 to R5 401m in
June 2013 and was R4 370m in June 2016 (See graph on next page)
• Capex increased over time and since 2013 has almost doubled
from R4.3bn to R8.4bn
• All the ratios are kept in the green
• The shift was made from a consumption to an investment budget
• Funding mix has changed over time with borrowing picking up and
grants reducing considerably since 2013
• Stabilised the City’s finances in the short term
• Increased capacity to spend for improved service delivery in the
long term
Prepared by Inca Portfolio Managers | Page 29
COJ EXPERIENCE: LIQUIDITY POSITION
5,401
5,314
4,880
R’000,000
4,370
2,220
306
June
2010
AMOUNT 306
690
June
2011
690
June
2012
2,220
June
2013
5,401
June
2014
5,314
June
2015
4,880
June
2016
4,370
Prepared by Inca Portfolio Managers | Page 30
1
Outline of presentation
2
What is a Long Term Financial Plan
3
Attributes of a Plan
4
What does the Law say?
5
IPM’s approach
6
Case Study: City of Johannesburg experience
7
Concluding remarks
Prepared by Inca Portfolio Managers | Page 31
CONCLUDING REMARKS
Extract from a Report on the INCA Capacity Building Summer School
2017
“A Long-Term Financial Plan (LTFP) is the essential tool that a
municipality needs to facilitate financial sustainability and resilience,
providing the capacity to deliver on its developmental and service
delivery mandate on a sustainable basis.
It is then essential to obtain the buy-in of all role-players, i.e. the
politicians, executive team and other stakeholders to the strategies and
goals therein so that it becomes institutionalised and obtain collective
accountability.
Furthermore, to review it on a continuous basis to re-confirm or adjust
longer term assumptions in order for the plan to maintain its predictive
ability and credibility and for it to remain the municipality’s ultimate
financial guide.”
Prepared by Inca Portfolio Managers | Page 32
Thank You!
Thank you
Tel: +27 [0]11 202 2210
Fax: +27 [0]11 202 2231
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Pinewood Office Park
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Woodmead