Expenditure FrameworkCurrent Year 2018/19
2.5 OVERVIEW OF BUDGET ASSUMPTIONS OVERVIEW OF BUDGET ASSUMPTIONS
2.5.3 BORROWING AND INVESTMENT OF FUNDS 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.
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 2019/20 Capital Budget of R 7.7 billion is being financed by R 3.5 billion from government grants, R 2.7 billion of internally generated funds and R 1,5 billion in external loans.
The graph below shows the Total Capital Budget since 2013 and indicates its funding sources. The figures in the 10 bars are in billions.
Funding of Capex 2013 – 2022
Loans comprise, on average, only 15 % of the funding mix, 2013 – 2018 being actuals and 2019 to 2022 forecasts.
3,507
5,432 5,613 4,903
5,466
4,766
7,029
7,749 7,933 7,591
0 1 2 3 4 5 6 7 8 9
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Years
Grants
Internal Funds Loans
R'bn
104 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
2016 2017 2018
Human Settlements & Infrastructure R’000 % R’000 % R’000 %
Housing & Hostels 312 438 413,101 986,981
Roads & Storm water (Engineering) 645 714 872,445 695,362
Transport (ETA) 1 437 839 1,008,715 608,081
Sanitation 503 344 718,169 387,041
Solid Waste 75 203 53,803 107,205
Water 561 852 670,678 534,791
Electricity Services 565 781 744,713 950,679
4 102 171 100 4,481,624 100 4,270,140 81
Total Capital Expenditure 4 102 171 4,491,242 5,294,876
The table below indicates the actual borrowings and the future loans to be taken to continue the service delivery programme.
Actual Forecast
2018 2019 2020 2021
R’m R’m R’m R’m
Long Term Debt * 8,161.1 9,419.2 9,868.5 10,034.5
Loans Raised 0.0 2,000.0 1,500.0 1,000.0
Over the MTREF period gearing reduces to 23% at 2020/21 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 Development Financial Institutions (DFI’s) as well as 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.
105
The Municipality had budgeted to borrow R 1.0 billion in 2017/18. However, due to unstable economic conditions during the financial year, it was most favourable for the municipality to delay the draw down to July 2018.
In 2018, eThekwini Municipality started the process of entering a wider capital market by way of issuing bonds through the Domestic Medium Term Note (DMTN) Programme. For this purpose, a Lead Arranger who will assist the Municipality in establishment of the Programme was appointed through SCM procedures in December 2018.
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.
The tables below indicate the status of the indicators mentioned above:
Gearing Ratio 2012 – 2021
Gearing Ratio = Total Debt as a % of Total Operating Income Norm = 45%
2012 - 2018 = Actual 2019 - 2021 = Forecast
This graph indicates the Municipality’s ability to afford Debt. The gearing ratio would have reduced to a healthy 24.3% by 2021
0.0 10.0 20.0 30.0 40.0 50.0 60.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Actual 48.0
40.5 39.1
34.8
28.7
26.7
23.0 26.7 25.9 24.3
%
Forecast
106 Debt Coverage Ratio 2012 – 2021
Debt Coverage Ratio = Debt Services Cost as a % of Total Operating Income Norm = 6% - 8%
2012 – 2018 = Actual 2019 - 2021 = Forecast
This graph indicates affordability of interest on loans plus capital redemption. The ratio is well within the norm of 6% to 8%
Interest Paid as a % of Total Operating Income
Interest Paid Ratio = Finance Charges as a % of Total Operating Income 2012 – 2018 = Actual
2019 – 2021 = Forecast
This graph represents the affordability of finance charges. By 2021 the finance costs will be at 2.2%, 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.
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
6
7
8
7
6 6
4.2 4.5 5.1
%
4.2Actual Forecast
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
4.3 4.0
3.4 3.2
3.0 2.7
2.0 2.3 2.6
% 2.2
Forecast Actual
107 FUTURE TREND
Government grants are budgeted to fund the bulk of capex spend annually (2019: 45%; 2020: 41%; 2021: 44%), underpinned by the Urban Settlement Development Grant. The City is expected to source around R 3.0 billion in new loans annually from 2019 to 2021. TABLE SA17 provides a detailed analysis of the City’s borrowing liability.
The gearing is forecast to remain at 26% in 2019, and drop to 24% in 2020 and further to 23% in 2021.
Furthermore, liquidity metrics are expected to remain sound, with day’s cash on hand forecast to be maintained about 50 days over the next 3 years.
Forecast Balance Actual Forecast
Sheet (Rm) 2018 2019 2020 2021
Short term debt 874.4 770.1 949.3 828.8
Long term debt 7,286.7 8,849.1 8,425.0 8,705.6
Total debt 8,161.1 9,419.2 9,368.3 9,534.4
Cash & cash investments* 6,067 5,250 5,950 6,550
Key ratios
Total debt: income (%) 23.0 27.0 26.0 24.0
Cash cover S/T debt (x) 6.9 6.8 6.3 7.9
Cash on hand (days)* 70 57 53 59
* Includes GIF and unspent conditional grants
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 2018 30 June 2019
% %
Average rate of return on investments 8.45 8.54
Cash which is surplus to immediate requirements is invested in short term money market instruments in terms of a stringent investment policy.
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 1.5 billion and Unspent Conditional Grants of R 1.3 billion.
A cash holding of R 6.1 billion at 30 June 2018 represents 70 Days Cash on Hand which is in line with the National Treasury norm of 1 – 3 months.
108 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.