Annual Budget Tables - Parent Municipality

Cost Drivers

1.7 Annual Budget Tables - Parent Municipality

Figure 2 Capital Infrastructure Programme

1.6.1 Future operational cost of new infrastructure

The future operational costs and revenues associated with the capital programme have been included in Table 96 MBRR SA35 - future financial implications of the Capital Budget on page 358. This table shows that future operational costs associated with the capital programme totals R564m in 2015/16, escalates to R596m in 2016/17 and to R631m in 2017/18. It needs to be noted that as part of the 2014/15 MTREF, this expenditure has been factored into the two outer years of the operational budget through increases in the budgets of the departments and the provision of the R55m global amount for additional vacancies.

The new facilities created through the capital programme of the Social Development Cluster have the greatest impact on future Operating Budgets as a result of the increased human resource costs associated with the facilities. The sustainability of the number of facilities created is being looked at to ensure that future tariffs are not unaffordable to our communities. Part of the long-term strategy is to invest in projects that will stimulate economic growth which will result in increased financial resources so that social facilities can be afforded.

In the short- to medium-term, however, it will require a reduction in the investment in social facilities so that available funds can be geared towards economic growth projects. The section dealing with the proposed new capital prioritisation model will further elaborate on this principle.

It is important to note that these tables represent the budget of the EMM only and not consolidated figures for the group.

Table 21 MBRR Table A1 - Budget Summary

Explanatory notes to MBRR Table A1 - Budget Summary

1. Table A1 is a budget summary and provides a concise overview of the metro’s budget from all of the major financial perspectives (operating, capital expenditure, financial position, cash flow, and MFMA funding compliance).

2. The table provides an overview of the amounts approved by Council from operating performance and resources deployed to capital expenditure, financial position, cash and funding compliance, and the metro’s commitment to eliminating basic service delivery backlogs.

3. Financial management reforms emphasises the importance of funding for the municipal budget. This requires the simultaneous assessment of the financial performance, financial position and cash flow budgets, along with the Capital Budget.

The Budget Summary provides the key information in this regard:

a. The operating surplus/deficit (after total expenditure) is positive over the MTREF.

b. Capital expenditure is balanced by capital funding sources, of which:

i. Transfers recognised are reflected on the Financial Performance Budget.

ii. Borrowing is incorporated in the net cash from financing on the Cash Flow Budget.

iii. Internally generated funds are financed from a combination of the current operating surplus and accumulated cash-backed surpluses from previous years. The amount is incorporated in the net cash from investing on the Cash Flow Budget. The fact that the municipality’s cash flow remains positive and is improving indicates that the necessary cash resources are available to fund the Capital Budget.

4. The cash-backing/surplus reconciliation shows that in previous financial years the liquidity position of the municipality was placed under pressure and consequently many of its obligations were not cash-backed. This placed the municipality in a very vulnerable financial position. Consequently Council has taken a deliberate decision to ensure adequate cash-backing for all material obligations in accordance with the recently adopted Funding and Reserves Policy. This cannot be achieved in one financial year. But over the MTREF there is progressive improvement in the level of cash-backing of obligations. The cash position of the Council improved over the last year and it is anticipated that the goal of having all obligations cash-back will be achieved during the current MTREF year, when surpluses are reflected.

5. Even though the Council is placing great emphasis on securing the financial sustainability of the municipality, this is not being done at the expense of services to the poor. The section of FBS shows that the amount spent on FBS and the revenue cost of free services provided by the municipality continues to increase. In addition, the municipality continues to make progress in addressing service delivery backlogs.

Table 22 MBRR Table A2 - Budgeted Financial Performance (revenue and expenditure by standard classification)

Explanatory notes to MBRR Table A2 - Budgeted Financial Performance (revenue and expenditure by standard classification)

1. Table A2 is a view of the budgeted financial performance in relation to revenue and expenditure per standard classification. The modified GFS standard classification divides municipal services into 15 functional areas. Municipal revenue, operating expenditure and capital expenditure are then classified in terms if each of these functional areas which enables the National Treasury to compile ‘whole of government’ reports.

2. Note that the Total Revenue in this table includes capital revenues (transfers recognised – capital) and so does not balance with the operating revenue shown on Table A4.

3. Note that as a general principle the revenues for Trading Services should exceed expenditures. The table highlights that this is the case for electricity, water and waste water and the solid waste management (refuse removal) functions.

4. Other functions that show a deficit between revenue and expenditure are being financed from rates revenues and other revenue sources reflected under Corporate Services.

Table 23 MBRR Table A3 Consolidated – Budgeted Financial Performance (revenue and expenditure by municipal vote)

Explanatory notes to MBRR Table A3 - Budgeted Financial Performance (revenue and expenditure by municipal vote)

Table A3 is a view of the budgeted financial performance in relation to the revenue and expenditure per municipal vote. This table facilitates the view of the budgeted operating performance in relation to the organisational structure of the metro. This means it is possible to present the vote’s operating surplus or deficit. The following table is an analysis of the surplus or deficit for refuse removal, electricity and water (including sanitation) trading services.

Table 24 Surplus/ (deficit) calculations for trading services as per MBRR Table A3

The electricity trading surplus is decreasing from R1.334 billion in 2014/15 budget to R1.017 billion in 2015/16 MTREF. This is mainly as a result of the NERSA principles that tariff increases is less than the bulk purchases tariff increase.

The fact that the expenditure of the Electricity Service is also increasing with more than the benchmark percentages used in the calculations, resulted in the decrease. Especially in respect with Repair & Maintenance expenditure. According to Circular 74 of NT the R&M may only increase with 6.3%, but EMM budgeted for an increase of 10.93%.

The surplus on the water and sanitation account reflects a very similar pattern as the Electricity service and it is decreasing from R1.21 billion in 2014/15 budget to R1.14 billion in 2015/16 MTREF. This is also as a result of the drastic increase R&M of the service. The R&M reflects an increase of 31.3% if compared with the 2014/15 Original Budget. However, the budget was drastically increased in the Adjustment Budget. The increase from the Adjustment Budget to the new budget is 3.55%

Waste Management reflects a surplus of R237m in 2015/16. In the outer years, the surplus is R294m and R337m respectively.

There is a clear indication of Council’s commitment to improve the level of core municipal services to the community. More funds are allocated for maintenance and repairs to adhere to the Minister of Finance’s speech of building capacity of local government through the

“back to basics” approach. This resulted therein that the Total Surplus from Trading Services is decreasing from R2.8 billion in 2014/15 to R2.4 billion in 2015/16 MTREF. A decrease of R410m.

Note that the surpluses on these trading accounts are utilised to cross-subsidise other services.

Table 25 MBRR Table A4 - Budgeted Financial Performance (revenue and expenditure)

Explanatory notes to MBRR Table A4 - Budgeted Financial Performance (revenue and expenditure)

Revenue generated from rates and service charges forms a significant percentage of the revenue basket for the metro. Rates and service charge revenues comprise 80.3% of the total revenue mix. In the 2015/16 financial year, revenue from rates and service charges totalled R23.5 billion in the income budget. This increases to R26.3 billion and R29.1 billion in the respective financial years.

Details in this regard are contained in Table 99 MBRR Table SA1 - Supporting detail to budgeted financial performance on page 376.

Electricity is the biggest source of income and represents R13.2 billion or 44.7% of the total income budget in 2015/16.

Property rates are the second largest revenue source totalling 14.6% of the total income budget or R4.3 billion.

Operating grants and transfers totals R2.9 billion or 10% of total income budget in the 2015/16 financial year and moves to R3.4 billion by 2017/18.

Bulk purchases significantly increased between 2011/12 and 2017/18, escalating from R7.9 billion to R15 billion. These increases can be attributed to the substantial increase in the cost of bulk electricity from Eskom and water from Rand Water. Bulk purchases also include bulk sewer purification costs.

Employee related costs and bulk purchases are the main cost drivers within the municipality and alternative operational gains and efficiencies will have to be identified to lessen the impact of wage and bulk tariff increases in future years.

The following graph illustrates the major expenditure items per type.

Figure 3 Expenditure by major type

Table 26 MBRR Table A5 - Budgeted Capital Expenditure by vote, standard classification and funding source

Explanatory notes to MBRR Table A5 - Budgeted Capital Expenditure by vote, standard classification and funding source

1. Table A5 is a breakdown of the capital programme in relation to capital expenditure by municipal vote (multi-year and single-year appropriations); capital expenditure by standard classification; and the funding sources necessary to fund the Capital Budget, including information on capital transfers from national and provincial departments.

2. The MFMA provides that a municipality may approve multi-year or single-year Capital Budget appropriations. In relation to multi-year appropriations for 2015/16, R4.065 billion has been allocated of the R4.471 billion Capital Budget, which totals 90.90%.

This allocation escalates to R4.585 billion in 2016/17 and R4.687 billion in 2017/18. 3. Single-year capital expenditure has been appropriated at R406.7m for the 2015/16 financial year and remains relatively constant over the MTREF at levels of R372.6m and R494.7m respectively for the two outer years.

4. Unlike multi-year capital appropriations, single-year appropriations relate to expenditure that will be incurred in the specific budget year such as the procurement of vehicles and specialised tools and equipment. The budget appropriations for the two outer years are indicative allocations based on the departmental business plans as informed by the IDP and will be reviewed on an annual basis to assess the relevance of the expenditure in relation to the strategic objectives and service delivery imperatives of the metro. For the purpose of funding assessment of the MTREF, these appropriations have been included but no commitments will be incurred against single-year appropriations for the two outer-years.

5. In terms of Circular 58, any downward adjustments for 2015/16 (relating to the multi- year appropriation for 2015/16) in the 2014/15 budget must be explained. The following votes had downward adjustments:

 Council General – the ERP System has been moved to ICT department

 Energy - Network enhancement and substation projects delayed

 Health & Social Development - Construction of 3 clinics (Bonaero Park, Chief Albert Luthuli and Kempton Park clinic) delayed with a year. Planning will continue in 2015/16

 Real Estate – Metro Parks division was previously part of the Real Estate department, now moved to Environmental Resources Management

 Transport – Reduction in the Public Transport Network Grant

 Waste Management – The Simmer and Jack Waste site as well as the air space development projects are still under planning and construction will commence in the 2016/17 financial year.

6. The capital programme is funded from capital and provincial grants and transfers, public contributions and donations, borrowing and internally generated funds from current year surpluses. For 2015/16, capital grants and transfers totals R1.976 billion (44.18%) and increases to R2.200 billion by 2016/17 (44.38%). It then escalates to R2.366 billion (45.65%). A substantial portion of the Capital Budget will be funded from borrowing over MTREF, with anticipated borrowings of R1.007 billion in 2015/16). Borrowing is estimated at R1.812 billion in 2016/17 and R1.712 billion in the 2017/18 financial years.

The balance will be funded from internally generated funding totalling R1.489 billion R945 million and R1.105 billion in the respective multi-year budgets. These funding sources are further discussed in detail in 2.6 (overview of budget funding).

Table 27 MBRR Table A6 - Budgeted Financial Position

Explanatory notes to MBRR Table A6 - Budgeted Financial Position

1. Table MBRR A6 is consistent with international standards of good financial management practice, and improves councilors’ and management’s understanding of the impact of the budget on the statement of financial position (balance sheet).

2. This format of presenting the statement of financial position is aligned to GRAP1, which is generally aligned to the international version which presents assets less liabilities as “accounting” community wealth. The order of items within each group illustrates items in order of liquidity; i.e. assets readily converted to cash or liabilities immediately required to be met from cash, appear first.

3. Table 101 MBRR Table SA3 – supporting detail to the statement of financial position is supported by an extensive table of notes (SA3 which can be found on page 379) providing a detailed analysis of the major components of a number of items, including:

 Call investments deposits.

 Consumer debtors.

 Property, plant and equipment.

 Trade and other payables.

 Provisions non-current.

 Changes in net assets.

 Reserves.

4. The municipal equivalent of equity is community wealth/equity. The justification is that ownership and the net assets of the municipality belong to the community.

5. Any movement on the budgeted financial performance or the Capital Budget will inevitably impact on the budgeted financial position. For example, the collection rate assumption will impact on the cash position of the municipality and subsequently inform the level of cash and cash equivalents at year end. Similarly, the collection rate assumption should inform the budget appropriation for debt impairment which in turn would impact on the provision for bad debt. These budget and planning assumptions form a critical link in determining the applicability and relevance of the budget as well as the determination of ratios and financial indicators. In addition, the funding compliance assessment is informed directly by forecasting the statement of financial position.

Table 28 MBRR Table A7 - Budgeted Cash Flow Statement

Table 29 MBRR Table A8 – Cash-backed Reserves/Accumulated Surplus Reconciliation

Explanatory notes to MBRR Table A7- Budgeted Cash Flow Statement

1. The budgeted cash flow statement is the first measurement in determining if the budget is funded.

2. It shows the expected level of cash inflow versus cash outflow that is likely to result from the implementation of the budget.

3. It can be seen that the metro’s cash levels are increasing steadily.

4. The cash and cash equivalents increase because of healthy increases in operational activities due to implementations of various interventions, i.e. extensive debt collection drive.

5. The 2015/16 MTREF has been informed by the planning principle of ensuring adequate cash reserves over the medium-term.

6. Cash and cash equivalents are expected to improve steadily to R6.2 billion in 2017/18. This increase is in line with the metro’s aim to achieve a three-month operating expenses coverage with its available cash and cash equivalents balances in the near future. As can be seen from the table, the metro has a healthy net cash inflow from its operating activities. This result steadily increases over the MTREF period. This indicates that the cash inflows (inflows from ratepayers, etc.) generated from operating activities substantially exceeds the cash outflows (outflows to suppliers, employees etc.) of the operating activities. The significant net cash outflows from investing activities indicates inter alia that the metro is spending vast amounts on capital assets (property, plant and equipment etc.). This is made possible largely due to the healthy net cash inflows from operating activities mentioned above. The net cash inflows from financing activities is largely due to existing bonds and new bonds that will be taken up during the MTREF, as discussed in various sections within this document.

Explanatory notes to MBRR Table A8 – Cash-backed Reserves/Accumulated Surplus Reconciliation

1. The cash-backed reserves/accumulated surplus reconciliation is aligned to the requirements of MFMA Circular 42 – Funding a Municipal Budget. It is also in line with Council’s Funding and Reserves Policy.

2. In essence, the table evaluates the funding levels of the budget by firstly forecasting the cash and investments at year end and secondly reconciling the available funding to the liabilities/commitments that exist.

3. The outcome of this exercise would either be a surplus or deficit. A deficit would indicate that the applications exceed the cash and investments available and would be indicative of non-compliance with the MFMA requirements that the municipality’s budget must be “funded”.

4. Non-compliance with section 18 of the MFMA is assumed because a shortfall would indirectly indicate that the annual budget is not appropriately funded.

5. The end objective of the medium-term framework is to ensure the budget is funded and aligned to Section 18 of the MFMA.

6. From the table it can be seen that the cash surplus is increasing over the years.

7. As part of the budgeting and planning guidelines that informed the compilation of the 2015/16 MTREF and considering the requirements of Section 18 of the MFMA, it can be concluded that the 2015/16 MTREF is funded due to the significant cash surplus.

8. Cash and investments available increase from R6.7 billion in 2013/14, to R7.9 billion in 2017/18, mainly due to the increase in the cash and cash equivalents, as discussed in the cash flow section. The application of cash and commitments similarly increase from R3 billion to R4 billion in 2017/18. This is mainly due to long-term investments (sinking funds) committed to repay borrowings, as well as the increase in cash-backed reserves. Overall the surplus indicates healthy growth to 2017/18. This increase is in line with the metro’s aim to achieve a three-month operating expenses coverage with its available cash and cash equivalents balances in the near future.

Table 30 MBRR Table A9 - Asset Management

Explanatory notes to MBRR Table A9 - Asset Management

1. Table A9 provides an overview of municipal capital allocations to building new assets and the renewal of existing assets, as well as spending on repairs and maintenance by asset class.

2. National Treasury has recommended that municipalities should allocate at least 40%

of their Capital Budget to the renewal of existing assets, and allocations to repairs and maintenance should be 8% of PPE. The metro meets the 40% renewal requirement.

3. The repairs and maintenance is not met due to the EMM having revalued its assets with the first time adoption of GRAP 17 and asset values are currently high in relation to other municipalities. However, the R&M budget is increased significantly increased to meet not only the meet the NT benchmark target of 8%, but to improve the service delivery to the community. The percentage is increased from the current 4.7% to 5.9%

in 2015/16.

4. The following graph provides an analysis between depreciation and operational repairs and maintenance over the MTREF. It highlights the metro’s strategy to address the maintenance backlog.

Figure 4 Depreciation in relation to repairs and maintenance over the MTREF

Dalam dokumen Ekurhuleni Municipality Budget 2015/16-2017/18 (Halaman 54-87)