Select Committee on Appropriations

Parliament Presentation

City of Tshwane 16 October 2012

Presented byAndile DyakalaGroup Chief Financial

Officer1

• Development and implementation of Municipality’s budgets

• Compliance with the Municipal Finance Management Act and other legislation

• Sources of revenue, collection and its expenditure management

• Spending patterns and performance of the municipality with regards to conditional grants

• Municipal cash flow financial status• Current assets and liabilities• Key Financial Ratios • Plans to address audit findings

TABLE OF CONTENTS

2

Development & Implementation of Municipality’s Budget

3

• The political leadership of this city played a significant role in strengthening the link between Government’s priorities and spending plans, with the goal to enhanced service delivery aimed at improving the quality of life for all people within the city.

• Budgeting is primarily about the choices that the municipality has to make between competing priorities and fiscal realities.

Development and implementation of Municipality’s budgets (1)

• The incorporation of the former Metsweding District Municipality, Nokeng-tsa-Taemane and Kungwini Local Municipalities into the City of Tshwane culminated in the greater City of Tshwane being the largest Metropolitan Municipality in South Africa Area of 6 368 km², 7 regions and 105 wards Third largest city in the world in terms of area. Population of approximately 2,5 million. R 20 million Financial Assistance was received from Gauteng

Provincial Government towards the merger. No other restructuring grant was received from National Government.

Request for financial assistance was submitted to NT.

Development and implementation of Municipality’s budgets (2)

Various factors and variables influenced the compilation of the 2011/12 MTREF to ensure a financially affordable and sustainable MTREF:

• Cash Flow Management Intervention Initiatives and Strategy

• Implementation of cash-backing of reserves strategy

• Funding choices must ensure sustainability as determined in the funding compliance assessment and regulated by NT

• Special attention needs to be given to efficiency gains and the principle of value for money

• Centralisation of ie I.T. Equipment and purchasing of vehicles.

• Scaling down on non-essential expenditure Concentrate on core functions

• During the MTREF process departments are requested to do periodic planning which directly informs the SDBIP.

Development and implementation of Municipality’s budgets (3)

Compliance with the MFMA and other legislation

7

Most significant compliance factors:

• The budget must be funded in accordance with the funding compliance procedure set out in MFMA Circular 42, read together with supporting table SA10 and the Funding Compliance Guideline.

• The following legislated compliance has also been met: Approval of Budget Time Schedule Tabled MTREF consulted with community Draft MTREF approved on 28 April 2011 Monthly reporting ie In-year report submitted timeously.

Compliance with the Municipal Finance Management Act and

other legislation

Compliance with Section 45 & 46 of MFMA – (Short Term & Long Term Funding)

• Section 45 of the MFMA state that a municipality may incur short-term debt in accordance and subject to the provision of this Act and only when necessary to bridge –(a) short falls within a financial year during which the debt incurred, in expectation of specific and realistic anticipation of income to be received within

the financial year; or

(b) capital needs within a financial year to be repaid from specific fund to be

received from enforceable allocations or long term debt commitments.• There has been allegations from the councillors of the Democratic Alliance that

the municipality did not comply with section 45 & 46 of the MFMA and this was followed by Media publicity.

• The City has complied with the prescriptions of the Act

9

Compliance with Section 45 & 46 of MFMA – (Short Term & Long Term Funding)

• On the 12 July 2012 National Treasury issued a Media Statement in On the 12 July 2012 National Treasury issued a Media Statement in response to the allegations which read as follows:response to the allegations which read as follows:

“National Treasury has noted media reports alleging that the City of Tshwane Metropolitan Municipality breached sections of the Municipal Finance Management Act (MFMA) when it sought to issue a

bond in June 2012. Treasury’s monitoring of, and oversight over, the financial affairs of municipalities, especially those relating to long-term borrowing, are governed by the MFMA. The City of Tshwane did consult on its plans to raise long-term debt, including inviting comments from

National Treasury and the Gauteng provincial treasury. However the decision making and accountability for the bond issue is the responsibility of the municipal council. National Treasury can confirm though that with respect to the proposed bond issue the City of Tshwane

Metropolitan Municipality acted within the legislative framework and did not breach Sections 45 and 46 of the MFMA.”

10

State of the City’s finances

11

Sources of revenue, collection and its expenditure management

Details

Current year 2012 Budget

Current year 2012 Actual

Variance Variances

R R R %

REVENUE Property rates 3 446 037 600 3 396 321 346 49 716 254 1.44%Service charges 10 443 773 900 10 564 477 607 ( 120 703 707) -1.16%Rental of facilities and equipment 114 310 200 97 923 329 16 386 871 14.34%Interest received - external investments

49 901 534 52 185 099 ( 2 283 565) -4.58%

Interest received - outstanding debtors

293 108 056 244 643 012 48 465 044 16.53%

Fines 3 170 642 4 540 725 ( 1 370 083) -43.21%Licences and permits 42 253 600 52 425 804 ( 10 172 204) -24.07%Government grants and subsidies : Operating

2 260 306 296 2 335 544 049 ( 75 237 753) -3.33%

Government grants and subsidies : Capital

1 412 529 443 1 225 795 800 186 733 643 13.22%

Other income 868 165 493 957 147 139 ( 88 981 646) -10.25%Public contributions and donations 131 225 400 142 084 742 ( 10 859 342) -8.28%Gain/ (Loss):Transfer of Functions - 947 108 331 ( 947 108 331) #DIV/0!TOTAL REVENUE 19 064 782 164 20 020 196 984 ( 955 414 820) -5.01%12

Sources of revenue, collection and its expenditure management (2)

Details

Current year 2012 Budget

Current year 2012 Actual

Variance Variances

R R R %

EXPENDITURE        Employee Related Costs ( 4 758 655 561) ( 4 739 894 487) ( 18 761 074) 0.39%Remuneration of Councillors ( 90 293 361) ( 91 436 294) 1 142 933 -1.27%Depreciation and Amortisation Expense ( 1 039 496 246) ( 1 050 746 143) 11 249 897 -1.08%

Asset Impairment 0 ( 6 348 493) 6 348 493 #DIV/0!Finance Cost ( 690 308 757) ( 633 408 583) ( 56 900 174) 8.24%Bad Debt ( 851 547 311) ( 1 078 516 396) 226 969 085 -26.65%Collection Costs ( 113 460 600) ( 94 983 032) ( 18 477 568) 16.29%Repairs & Maintenance ( 1 163 766 719) ( 1 197 743 525) 33 976 806 -2.92%Bulk Purchases ( 5 775 049 900) ( 6 256 547 053) 481 497 153 -8.34%Grants and Subsidies Paid ( 14 281 600) ( 21 495 798) 7 214 198 -50.51%General Expenditure (SFP) ( 3 301 459 955) ( 2 906 635 105) ( 394 824 850) 11.96%Gain/Loss on disposal of assets and liabilities

( 170 032) ( 60 748 037) 60 578 005 -35627.41%

Loss on Disestablishment Mun. Entities 0 ( 226 160) 226 160 #DIV/0!

Gain/Loss on exchange rate differences ( 1 000 000) ( 2 630 305) 1 630 305 -163.03%

Fair value adjustments 0 ( 264 454) 264 454 #DIV/0!

  ( 17 799 490 042) ( 18 141 623 864) 342 133 822 -1.92%  1 265 292 122 1 878 573 119 ( 613 280 997) -48.47%

13

Spending patterns and performance of the municipality with regards to conditional grants (2)

Capital Grants and Subsidies

Original Budget MTREF2011/12

Adjusted Budget2011/12

Accumulative Receipts2011/12

AccumulativeActuals2011/12

Variances (Actual

Receipts vs Actual

Expenditure)

Available Balance

National Government: 1 159 581 000 1 349 932 045 1 214 581 000 1 168 415 545 86.55% 181 036 500

Urban Settlement Dev Grant 887 581 000 887 581 000 887 581 000 877 902 840 98.91% 9 678 160

Intergrated Electrification Programme (INEP) 21 000 000 21 000 000 21 000 000 21 000 000 100.00% -

Energy & Electricity Demand Side Management 25 000 000 46 531 158 44 000 000 46 501 635 99.94% 29 523

Water Affairs 15 597 000 - 15 597 000 100.00% -

Public Transport Infrastructure & Systems Grant 180 000 000 295 057 000 180 000 000 158 745 283 53.80% 136 311 717 Neighbourhood Development Partnership Grant 45 000 000 82 861 813 82 000 000 48 364 714 58.37% 34 017 099

Finance Management Grant 304 074 - 304 074 100.00% -

Gautrans Job Creation 1 000 000 1 000 000 - - 0.00% 1 000 000

Provincial Government: - 38 468 160 38 468 160 38 468 160 100.00% -

Housing: Acquisition of Land 38 468 160 38 468 160 38 468 160 100.00% -

Total Capital Transfers and Grants 1 159 581 000 1 388 400 205 1 253 049 160 1 206 883 705 86.93% 183 329 977

Spending patterns and performance of the municipality with regards to conditional grants

Operating Grants and Subsidies

Original Budget MTREF2011/12

Adjusted Budget2011/12

Accumulative Receipts2011/12

AccumulativeActuals2011/12

Variances (Actual

Receipts vs Actual

Expenditure)

Available Balance

R thousands    

Operating Transfers and Grants    

National Government: 51 351 000 20 661 502 51 369 000 18 827 816 91.13% 1 833 686

Finance Management Grant 5 250 000 5 196 502 5 250 000 5 196 502 100.00% -

Water Services Operating Subsidy Grant (Refer to Capex) 22 601 000 7 022 000 22 619 000 6 926 472 98.64% 95 528

Public Transport Infrastructure & Systems Grant (Refer to Capex) 20 000 000 4 943 000 20 000 000 3 644 603 73.73% 1 298 397

Urban Settlement /MIG Cities (Refer to Capex) 3 500 000 3 500 000 3 500 000 3 060 239 87.44% 439 761

Provincial Government: 103 349 187 250 598 114 236 820 400 182 372 234 72.77% 68 225 880

Primary Health Care 31 150 000 31 150 000 31 150 000 31 150 000 100.00% -

Emergency Medical Services 47 310 000 47 310 000 47 310 000 47 310 000 100.00% -

HIV and Aids Grant 4 674 000 5 097 000 5 097 000 5 007 350 98.24% 89 650

Housing Accreditation   962 527     0.00% 962 527

Housing Topstructure 12 815 187 159 058 587 146 243 400 93 056 868 58.50% 66 001 719

Sports and Recreation: Libraries 7 400 000 7 020 000 7 020 000 5 848 016 83.31% 1 171 984

Total Opex Transfers and Grants 154 700 187 271 259 616 288 189 400 201 200 050 74.17% 70 059 566

Plans To Accelerate Capital Plans To Accelerate Capital Expenditure Expenditure

• Mayoral Committee has established a Capex Committee Capex Committee chaired by Leader of Executive Business and MMC Finance.

• One of Resolution of the Committee was the compilation of procurement plans in line with capital budget. All the procurement plans were officially submitted.

• To date through we have approved specification to the value of R 1.5 billion.

• The City will convert all department panel of professional services and turnkey contractors in Corporate Panels which will ensure cross utilization and efficiency.

• CFO issues a Weekly Report on Capital Expenditure.16

Municipal cash flow financial status

Cash Flow Position: 2011/12 versus previous years (bank statement balance)

A cash backing of reserve funds initiative was introduced from July 2012 to earmark R21 million per month for this purpose.

Date City of Tshwane

(parent)

R

Fresh Produce Market

R

City of Tshwane

Group

R

Status

30 June 2012 574 772 570 25 052 451 599 825 021 Positive

30 June 2011 388 240 910 21 853 817 410 094 727 Positive

30 June 2010 60 570 554 19 593 055 80 163 609 Positive

30 June 2009 43 358 725 18 813 633 62 172 358 Positive

17

• Total revenue increased by 28,6 % since 2010/11 Assessment rates increased by 16% Service charges increased by 25,9%

• Total expenditure increased by 22,68 % since 2010/11• Surplus for the year R1 877m vs R778m of prior year- a major

increase is as a result of gain attributable to transfer of functions of R947,1m

• Depreciation – increased by 25,85% due to reviewing of useful lives of certain asset classes and increase in capex

• Asset impairment (R29,8 m) due to purifying of net book value of certain asset classes

2011/12 Performance against Previous FY (3)

18

• Net increase in cash and cash equivalents is R28,2 m

Net cash from operating activities increased from R2,008 billion to R4,009 billion

Net cash from investing activities increased from R2,756 m to R4,698 m

external loans decreased by net of R716,3 billion from R881,7 million (R1,5 billion long term loan was not taken in full – this on the other hand improved our gearing ratio from 39% to 33%)

2011/12 Performance against Previous FY (4)

19

Key Financial Ratios

Key financial ratios

Measurements/ratios Actual Actual Budget

  2010/11 2011/12 2012/13Cash to interest coverage 3,32:1 6,33:1 3,53:1Debt to cash 3,73;1 1,68:1 3,05:1

Ave cash collection % 106% 105% 103%

Current Asset ratio 0,90:1 0,80:1 1,1:1Solvability ratio 1,80:1 1,82:1 1,87:1Gearing Ratio 38.6% 33.6% 41,2% Net debtors to total operating revenue 20,34% 16.63%

Cash at bank and call deposits R855 571 442 R883 852 130R 1 532 736 845

*Collection rate of consumers debtors = 95% and 8% is provided for previous debt payable

20

CASH FLOW and LIQUIDITY

Cash flow strategy– Cash backing strategy – R21 million per month as per 2012/13 MREF, CPI

linked. Towards cash backing of reserves and capital redemption estimated R252 million investment for 12 months

– Cash Flow Management Model • Monitor daily cash flow and cash forecast up to 12 months • Red flag alert in the forecasts• Revenue collection is given non negotiable monthly targets based on budget

and annual forecasts • Have to improve debtors days to 56 days by 2014/15 – obviously this can

even be better to 30-45 days if we roll out 100% prepaid meters by 2015. This will then match creditors days of 30 days as required by MFMA

• Repayments/redemption of capital and interest are included in MTREF and Cash forecasted upfront without compromise – No default allowed per Treasury policy of CoT

• Improve our net working capital /cost coverage from 1.3 months to 2.3 months – Ideal situation is 3 months

• Surprise creditor/expenditure not forecasted is discouraged at all possible costs 21

CASH FLOW and LIQUIDITY (cont)

• Overdraft facility – are utilised as bridging finance for capital expenditure while waiting for

finalisation of borrowings

• Excess cash– is invested as possible to earn interest and to set off debt cost of

overdraft

22

REVENUE AND DEBTORS(Liquidity)

• Current strategies to reduce Debtors book and improve liquidity

– Security of Revenue programmes• Currently imposing By-law that all CoT residents must be on pre-paid• Exploring a right to collect on debtors book (R2 million set aside to facilitate

this process)

• Purification of data is currently taking place to ensure correct and accurate billing through:-

– Smart meter reading– Computer assisted audit techniques (accuracy and completeness of revenue)

i.e. Correct and accurate billing encourage residents to pay for services rendered

• Engagement with National and Provincial Government regarding outstanding debt:-

– How they could offer assistance on collecting the outstanding debt– To lead by example by keeping own account up to date

23

REVENUE AND DEBTORS - LIQUIDITY (cont)

• Exhaust all legal processes against defaulters:-– Hand-over all debtors over 90 days to a panel of 10 collection agencies

– Collection policy is currently being reviewed as follows:

(i) no accounts are opened for tenants anymore

(ii) Arrangement for partial payment is reviewed – which is now limited to worst and non-affordability cases with proof

– Arranged debtors accounts must stick to arrangement otherwise cut-off services is the only option for any defaults

– Very strict on commercial and industrial consumers – cut-off is an option for them for any default payments

– Encourage households who cannot afford to register as Indigent debtors so that strict collection policy will eventually apply to those who are indeed not indigent debtors

• Providing free or subsidised municipal services to the poor

– Efficient customer care to address queries urgently to avoid de-activation of accounts 24

Current assets and liabilities

Current Assets 2011/12 2010/11 Audited

Inventory 404 714 978 324 768 450

Consumer debtors 2 673 020 434 2 556 294 849

Other debtors 602 388 517 582 895 696

Non-current assets held for sale 1 306 886 2 227 087

Current portion of long-term debtors 108 802 610 102 835 274

Call investment deposits 323 851 507 496 337 962

Bank balance and cash 560 000 624 359 233 479

Total Current Assets 4 674 085 557 4 424 592 797

Total Assets 25 418 153 044 21 059 288 504

Current assets and liabilities (2)

Current Liabilities 2011/12 2010/11 Audited

Consumer deposits 403 868 672 356 856 244

Creditors 4 423 149 772 3 405 039 917

Unspent Conditional Grants and Receipts 317 636 465 390 219 159

VAT 255 243 501 144 462 998

Bank overdraft - -

Provisions - -

Current portion of long-term liabilities 349 312 286 494 634 121

Current portion of finance lease liabilities 126 026 714 106 980 596

Total Current Liabilities 5 875 237 410 4 898 193 035

Total Liabilities 13 948 777 311 12 015 502 370

Plans To Address Audit Findings

27

Plans to address audit findings

• CoT received an Unqualified audit opinion 2 years in a row (2009/10 and 2010/11) since 2005/06 financial year

• To maintain Unqualified audit opinion and towards a clean audit report the following mechanisms are in place:

– Management letter action plan to address all important, significant and administrative matters raised by Auditor-General

– 28 Operation Clean Audit Officials appointed within CoT to monitor, address and follow up on progress on issues raised with in service departments and the City as a whole

– The progress on the management letter action plan is a standing agenda item on Top Management meetings fortnightly, chaired by City Manager. Any delays, regression or failures on the progress are addressed immediately by City Manager

– Operation Clean Audit Committee is also established and the committee meetings are chaired by the Executive Mayor as to how audit issues raised are addressed to ensure a Clean Audit Report by 2013/14.

– Support from the Provincial Department of Finance where they deployed resources at their cost to assist with Creditors reconciliation and assests.

28

Addressing the Management Letter Issues(Audit Outcomes)

• We had to Merge the three municipalities(Metsweding Erstwhile):• Metsweding District Municipality – unqualified• Nokeng Tsa Taemane Local Municipality - qualified• Kungwini Local Municipality – qualified

• Management’s responsibility to devise action plans to address issues highlighted in the management letters

• It was necessary to ensure that data and information taken from merging municipalities is cleansed and corrected accordingly first, so that such issues raised do not recur and affect the City’s audit opinion going forward:

• The main issues arising from the MLAP can be categorised into five sections:

• Revenue • Supply Chain Management• Assets • Information and Communications Technology (ICT) • Predetermined objectives (Performance Information• Other important and administrative findings

29

Management Letter Action Plan -Revenue

• Amalgamation of take-on balances in terms of merger with Metsweding Region (in particular local municipalities)

• Kungwini Local Municipality - qualified for consumer debtors

Addressed in the following:• Purification and cleansing of data

• Accuracy, Occurrence, Compliance, Completeness - audit objectives

• Implementing Computer Assisted Auditing Techniques (CAATS) – ACL

• Institutionalised by Revenue Enhancement Unit (Office of the CFO)• Exception reports addressed in bi-monthly Revenue meetings

30

Management Letter Action PlanSupply Chain Management

• Issues predominately relate to compliance with laws and regulations and completeness of disclosure in terms of MFMA

• MFMA SCM Regulations Section 44 and 45 – prohibiting awards to employees of the city and state National and Provincial Government)

• Complete disclosure of non-compliance with MFMA SCM Regulations Section 36 (deviations that did not comply with regulation 36 resulting in irregular expenditure)

Measures taken to address critical issues as follows:• Controls to minimise/prevent deviations that do not comply with section 36 regulations – by

issuing compliance certificates prior to accounting officer’s approval• All deviations approved by Executive Adjudication Committee• CAATS exception reporting:• to identify employees of council and where possible of other spheres of government that may

have conducted business with the municipality to address not compliance with MFMA SCM Regulations 44 and 45.

• Punitive measures taken against offenders – MPAC to determine same• Cleansing of vendor database – eliminate duplication of vendors, VAT no’s etc.• Annual procurement plan – avoid unnecessary deviations• Track expiring contracts – avoid unnecessary deviations• Revised SCM policy to address deviations and other non compliance - EAC

31

Management Letter Action PlanAssets (GRAP 17)

• PWC/Sekela Consortium was appointed for a period of 24 months to assist the Asset Management Unit (AMU) in establishing a sustainable unit with established policies and procedures and ensure GRAP 17 compliance

• Key deliverables included:• Ensuring that CoT and merging municipalities have one GRAP17

compliant asset register• Train and provide skills transfer to internal staff in AMU

• In order to overcome staff shortages within the AMU, all departments had to identify departmental specific asset controllers:

• Verification and identification of assets, regularly• Periodic asset counts• Impairment of assets• Review of useful life of assets• Management of Low value assets (on SAP system)

32

Management Letter Action PlanInformation and Communications Technology (ICT)

• Security and access control deficiencies• Segregation of duties - Internal human capital constraints • ICT continuity strategy and plans• Governance – Policies and FrameworkBulk of the issues addressed as follows:

• Where impractical contingency matters are being put in place until permanent solutions can be implemented, e.g. new systems being developed and implemented

• Interface exception reports• SAP GRC implementation project

33

Management Letter Action PlanPredetermined objectives (Performance Information)

• Cuts across the entire organisation and entities• Issues raised around the alignment of the IDP, budget, SDBIP and

performance scorecards of departments• Lack of supporting documentation• Inconsistencies between quarterly and annual reports• Inconsistencies in measurement tools – percentage/ numbers etc• Reported targets are not consistent, part of approved IDP targets• Targets not achievedIssues resolved in the following manner:

• Greater alignment and co-ordination for the 2012/13 financial year between all role-players

• The Organisation Performance Management unit has also given refresher training on the QPR (Performance) system to all departments

• Quarterly updates of QPR with actuals and supporting documentation

• Problems addressed by section 72 report – adjustment budget, SDBIP

34

Role of Internal Audit

• Auditing the progress on the completed management letter action plan• Assisting the departments to sustain the internal controls in place• Compiling progress reports to the audit committee and accounting officer

35

Thank You

36