BORROWINGS
The Municipal Finance Management Act No. 56 of 2003 permits long term borrowing by municipalities only to finance capital expenditure, property, plant and equipment.
The eThekwini Municipality’s Infrastructure Financing Strategy is to:
· Maximise internally generated funds and national transfers from other spheres of government.
· Minimize borrowings.
· Pursue alternate funding sources e.g. Development charges, and public private partnerships.
Description 2017/18 2018/19 2019/20
% % %
CPI-Inflation 6.1 5.9 5.8
Remuneration Increase 7.8 7.2 7.2
Telephones 5 5 5
Fuel and Oil 5 5 5
Postage & Revenue Stamps 5 5 5
Printing & Stationery 6 6 6
88 CAPITAL EXPENDITURE
The capital expenditure of the parent municipality has been funded from a mix of government transfers, internally generated funds and external loans. The 2017/18 Capital Budget of R 7.2 billion is being financed by R 3.8 billion from government grants, R 2.4 billion of internally generated funds and R 1,0 billion in external loans.The graph below shows the Total Capital Budget since 2011 and indicates its funding sources. The figures in the 10 bars are in billions.
Funding of Capex 2011 – 2020
Loans comprise, on average, only 15 % of the funding mix, 2011 – 2016 being actuals and 2017 to 2020 forecasts.
BASIC SERVICE DELIVERY
The table below indicates the Capital spend on ‘Basic Service Delivery’ items over the past three years. The bulk of the Capital is spent on ‘Basic Service Delivery’ infrastructure. This pattern of expenditure is expected to be maintained for the foreseeable future.
Capital utilised for Infrastructure
2014 2015 2016
Human Settlements & Infrastructure R’000 % R’000 % R’000 %
Housing & Hostels 64,029 361,592 312 438
Roads & Storm water (Engineering) 972,098 862,771 645 714
Transport (ETA) 296,182 875,203 1 437 839
Sanitation 822,062 583,041 503 344
Solid Waste 140,061 66,146 75 203
Water 838,044 815,638 561 852
Electricity Services 526,070 541,797 565 781
3,658,546 87 4,106,188 87 4 102 171 84
Total Capital Expenditure 4,201,622 4,686,556 4 102 171
3,790
3,516 3,507
5,432 5,613 4,903
6,626
7,247 7,169 7,698
0 1 2 3 4 5 6 7 8 9
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Years
Grants
Internal Funds Loans
R'bn
The table below indicates the actual borrowings and the future loans to be taken to continue the service delivery programme.
Actual Forecast
2016 2017 2018 2019
R’m R’m R’m R’m
Long Term Debt * 9,236.4 8,836.0 9,132.4 9,302.7
Loans Raised 0 1,000.0 1,000.0 1,000.0
Over the MTREF period gearing reduces to 26% at 2018/19 Financial Year.
* - Total debt is reflected after loans raised and repayment of loans maturing.
LONG TERM BORROWING
APPROACH
Long term borrowings in eThekwini have been mainly in the form of annuity loans, with a significant proportion borrowed from the Development Bank of South Africa and other financial institutions. The dominance of annuity loans within eThekwini’s borrowing portfolio is largely due to the ability of the City to source competitive interest rates from financial institutions. While a bond issuance is a viable option for eThekwini, in part due to an excellent credit rating of AA annuity loans are preferred.
The City has in the past preferred fixed interest rate annuity loans as they eliminate interest risk associated with variable rate loans and paid over the duration of the loan instead of a bullet payment at the end of the term.
Whilst the Municipality’s budgeted loan requirement for 2016/17 is R 1.0 billion, R 700.0 million has already been secured through IIPSA funding inOctober 2016. The funding included a grant funding of R 93 million and a loan of R 700m provided by the two IIPSA participating Development Finance Institutions (DFI’s) being Agence Francaise de Development (AFD) and the Development Bank of South Africa (DBSA). Each of the two DFI’s provided debt of R 350 million, resulting in a total new loan of R 700.0 million
DEBT CAPACITY INDICATORS
The City tracks a number of key debt capacity indicators, with the prudential limits for each of these ratios being summarised below:
· Gearing should preferably be maintained at 45 per cent of total revenues.
· Debt service costs should not exceed 8 per cent of total operating revenues.
90
The tables below indicate the status of the indicators mentioned above:
Gearing Ratio 2010 – 2019
Gearing Ratio = Total Debt as a % of Total Operating Income Norm = 45%
2010 - 2016 = Actual 2017 - 2019 = Forecast
This graph indicates the Municipality’s ability to afford Debt. The gearing ratio would have reduced to a healthy 26% by 2019
Debt Coverage Ratio 2010 – 2019
Debt Coverage Ratio = Debt Services Cost as a % of Total Operating Income Norm = 6% - 8%
2010 – 2016 = Actual 2017 – 2019 = Forecast
This graph indicates affordability of interest on loans plus capital redemption. The ratio is well within the norm of 6% to 8%
0.0 10.0 20.0 30.0 40.0 50.0 60.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Years 46 51
48
41 39
35
29 28 27 26
%
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Years 5
7
6
7
8
7
6 6
5 5
%
Interest Paid as a % of Total Operating Income
Interest Paid Ratio = Finance Charges as a % of Total Operating Income 2010 – 2016 = Actual
2017 – 2019 = Forecast
This graph represents the affordability of finance charges. By 2019 the finance costs will be at 2.7%, which is indeed sustainable and a fairly healthy situation. The graphs indicate that the City will not breach any of the prudential ratios over the MTREF period. The borrowings are therefore sustainable and affordable.
FUTURE TREND
Government grants are budgeted to fund the bulk of capex spend annually (2017: 55%; 2018: 57%; 2019: 58%), underpinned by the Urban Settlement Development Grant. The City is expected to source around R 3.0 billion in new loans annually from 2017 to 2019. TABLE SA17 provides a detailed analysis of the City’s borrowing liability.
The gearing is forecast to fall to 28% in 2017 (2016: 29%), and further to 27% in 2018 and 26% in 2019.
Furthermore, liquidity metrics are expected to remain sound, with day’s cash on hand forecast to be maintained about 100 days over the next 3 years.
Forecast Balance Actual Forecast
Sheet (Rm) 2016 2017 2018 2019
Short term debt 1,057.4 900.4 757.9 750.2
Long term debt 8,179.0 7,935.6 8,374.5 8,552.5
Total debt 9,236.4 8,836.0 9,132.4 9,302.7
Cash & cash investments* 6,904.5 7,100 8,000 9,050 Key ratios
Total debt: income (%) 29.0 28.0 27.0 26.0
Cash cover S/T debt (x) 6.5 7.9 10.6 12.0
Cash on hand (days)* 91 90 95 101
* Includes GIF and unspent conditional grants 0.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Years 3.7
4.5 4.3
4.0
3.4 3.2
3.0 2.9
2.5 2.7
%
92 INVESTMENTS
Investments made with the various financial institutions are strictly in compliance with Municipal Finance Management Act and the Investment Regulations.
The investment returns achieved and projections are as follows: -
30 June 2016 30 June 2017
% %
Average rate of return on investments 7.41 7.90
Cash which is surplus to immediate requirements is invested in short term money market instruments in terms of a stringent investment policy. Cash and investments are expected to be around R 7.1 billion at the end of the current financial year.
TABLES SA15 & SA16 provide details of investments and investments particular by maturity.
However, it must be remembered that this entire amount does not represents ‘unrestricted’ cash. The following amounts are ring fenced, viz. Self-Insurance Fund of R 1.3 billion and Unspent Conditional Grants of R 750.0 million. A cash holding of R 6.9 billion at 30 June 2016 represents 91 Days Cash on Hand which is in line with the National Treasury norm of 1 – 3 months.
RISKS ASSOCIATED WITH AGGRESSIVE CAPITAL BUDGET
The following risks need to be acknowledged before any consideration can be given to increasing the utilisation of internally generated funds for the financing of the Capital Budget, viz:
· Whilst the City presently enjoys a healthy debtor’s collection rate, sustained high tariff increases being passed onto consumers may present a challenge in terms of sustaining these levels in the future.
· Depreciation provisions every year have to be ‘cash backed’, after providing for the National Treasury norm for Days Cash on Hand of 90 days. This places a significant higher demand on maintaining cash resources.