Select Committee on Appropriations Parliament Presentation City of Tshwane 16 October 2012

1. Select Committee on Appropriations Parliament Presentation City of Tshwane 16 October 2012 Presented by Andile Dyakala Group Chief Financial Officer

2. TABLE OF CONTENTS • 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

3. Development & Implementation of Municipality’s Budget

4. Development and implementation of Municipality’s budgets (1) • 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.

5. Development and implementation of Municipality’s budgets (2) • 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.

6. Development and implementation of Municipality’s budgets (3) • 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.

7. Compliance with the MFMA and other legislation

8. Compliance with the Municipal Finance Management Act and other legislation • 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.

9. 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

10. Compliance with Section 45 & 46 of MFMA – (Short Term & Long Term Funding) • On the 12 July 2012 National Treasury issued a Media Statement in 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.”

11. State of the City’s finances

12. Sources of revenue, collection and its expenditure management

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

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

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

16. Plans To Accelerate Capital Expenditure • Mayoral Committee has established a 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.

17. 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.

18. 2011/12 Performance against Previous FY (3) • 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

19. 2011/12 Performance against Previous FY (4) • 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%)

20. Key Financial Ratios *Collection rate of consumers debtors = 95% and 8% is provided for previous debt payable

21. 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

22. 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

23. 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

24. 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

25. Current assets and liabilities

26. Current assets and liabilities (2)

27. Plans To Address Audit Findings

28. 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.

29. 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

30. 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

31. Management Letter Action Plan Supply 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

32. Management Letter Action Plan Assets (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)

33. Management Letter Action Plan Information and Communications Technology (ICT) • Security and access control deficiencies • Segregation of duties - Internal human capital constraints • ICT continuity strategy and plans • Governance – Policies and Framework • Bulk 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

34. Management Letter Action Plan Predetermined 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 achieved • Issues 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

35. 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

36. Thank You