Cost Drivers
1.5 Operating Expenditure Framework
The metro’s expenditure framework for the 2015/16 budget and MTREF is informed by the following:
The asset renewal and the repairs and maintenance requirements as identified in the backlog study.
Balanced budget constraint (operating expenditure should not exceed operating revenue) unless there are existing, uncommitted, cash-backed reserves to fund any deficit.
Funding of the budget over the medium-term, as informed by Section 18 and 19 of the MFMA.
The capital programme is aligned to the asset renewal needs and backlog eradication goals.
The prioritisation of capital needs was based on the Capital Investment Framework.
Operational gains and efficiencies will be directed to funding the Capital Budget and other core services.
Strict adherence to the principle of no project plans no budget. If there is no business plan no funding allocation can be made.
Applying the guidance from NT of “doing more for less” and the broad principle raised by the Minister of Finance in his Mid Term Budget Speech of “Building the capacity of local government through the “back to basics” approach”
The following table is a high level summary of the 2015/16 budget and MTREF (classified per main type of operating expenditure):
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Table 16 Summary of operating expenditure by standard classification item (Table A4)
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The budgeted allocation for employee related costs and remuneration of Councillors for the 2015/16 financial year totals R6.1 billion, which represents 20.33% of the total operating expenditure. The 2015/16 salary budget increased by 11.16%, which is made up as follows:
R
Salary Budget for 2014/15 5,548,706,224
Minor adjustments (24,681,839)
General Salary Increase of 6.8% 377,312,023
Provision for new positions and Institutional Review 155,000,000
Salary Budget for 2015/16 6,056,336,408
An amount of R155m has been provided for new positions in the 2015/16 financial year.
The purpose of the funds provided is to accommodate additional personnel for the extension of services (like new clinics or fire stations) for an amount of R55 m. Another R100m is provided for the roll-out of the Institutional Review.
A detailed analysis is supplied with the discussion regarding employee related costs as set out in MBRR Tables SA22 - 24 in this document.
The cost associated with the remuneration of councillors is determined by the Minister of Co-operative Governance and Traditional Affairs in accordance with the Remuneration of Public Office Bearers Act, 1998 (Act 20 of 1998). The most recent proclamation in this regard has been taken into account in compiling the metro’s budget. An increase of 6.8%
has been provided in the 2015/16 financial year.
The provision of debt impairment was determined based on an annual collection rate of 93% and the principles as set out in the Provision for Doubtful Debt and Debt Write-off Policy. For the 2015/16 financial year this amount equates to R1.44 billion and escalates to R1.68 billion by 2017/18.
Provision for depreciation and asset impairment has been informed by the municipality’s Asset Management Policy. Depreciation is widely considered a proxy for the measurement of the rate asset consumption. Budget appropriations in this regard total R2.093 billion for the 2015/16 financial and represents 7.07% of the total operating expenditure.
Interest on External Loans and Borrowings make up 2.56% (R763 m) of operating expenditure excluding annual redemption for 2015/16 and increases to almost R1 billion by 2017/18.
Bulk purchases are directly informed by the purchase of electricity from Eskom and water from Rand Water. The annual price increases have been factored into the budget appropriations and directly inform the revenue provisions. The expenditures include distribution losses.
The bulk purchases from water is reflecting an increase of 13.78% from the current Adjustment Budget to the 2015/16 financial year. The amount was calculated as follows:
R
Bulk Water Purchases Budget for 2014/15 2,153,380,465
Increase of Bulk Purchases for current 2014/15 Year as presented in the Adjustment Budget
86,135,220 Subtotal – Revised Budget for 2014/15 2,239,515,685 Plus Estimated Increase in Bulk for 2015/16 of 14.5% 324,729,774
Plus Growth Rate increase of 1.6% 41,027,927
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R Total Amount Required for 2015/16 before improvement of
efficiency 2,605,273,386
Less Reduction of bulk as a result of improvement of efficiency in the maintenance of the water network (approximately 2%
improvement) (57,131,388)
Budget for 2015/16 2,548,141,998
Repairs and Maintenance comprise of, amongst others, the purchase of materials for maintenance, staff cost of dedicated maintenance personnel and the appointment of external contractors to perform maintenance works. In line with the metro’s repairs and maintenance plan this group of expenditure has been prioritised to ensure sustainability of the metro’s infrastructure. For 2015/16 the appropriation against this group of expenditure is R2.72 billion which represents 9.13% of the total operating expenditure. The budget was therefore increased with 15.47% from the Original Budget of 2014/15.
As part of the compilation of the 2015/16 MTREF contracted services expenditure totalled R909m, which is 3.05% of the total operating expenditure. This represents an increase of 3.33% from the 2014/15 Adjustment Budget.
The following table gives a breakdown of the main expenditure categories for the 2015/16 financial year.
Figure 1 Main operational expenditure categories for the 2015/16 financial year
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1.5.1 Repairs and maintenance
Aligned to the priority given to preserving and maintaining the metro’s current infrastructure, the 2015/16 budget and MTREF provide for growth in the area of asset maintenance, as informed by the asset renewal and repairs and maintenance requirements of the metro. In terms of the Municipal Budget and Reporting Regulations, operational repairs and maintenance is not considered a direct expenditure driver but an outcome of certain other expenditures, such as remuneration, purchases of materials and contracted services. The following table is extracted from MBRR Table SA1 to reflect the amount provided for repairs and maintenance in context with the amounts provided for PPE, depreciation and the renewal of assets:
Table 17 Operational repairs and maintenance
The table below provides a breakdown of repairs and maintenance in relation to asset class as summarised from MBRR SA34c:
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Table 18 Consolidated repairs and maintenance by asset class
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The amount budgeted for repairs and maintenance in the 2014/15 financial year represents 4.7% of the value of Property, Plant and Equipment (see table above). Due to the significant increase in the R&M budget, this percentage will increase to 5.9% in 2015/16. This is a significant improvement in order to reach the NT target of 8%.
For the 2015/16 financial year 75 % or R2.046 billion of repairs and maintenance will be spent on infrastructure assets.
Electricity infrastructure has received a significant proportion of the infrastructure
allocation, totalling R883m, followed by road infrastructure at R541m, water at R374m and sanitation for R188 m.
Community assets have been allocated R109m of total repairs and maintenance equating 4% of total repairs and maintenance.
Social Rental Housing was allocated R22m and this forms part of Community assets.
The amount of R295m (11 % of total repairs and maintenance) for other assets, relates mainly to the repairs and maintenance of vehicles, IT equipment and Council buildings.
1.5.2 Free Basic Services: Basic Social Services Package
Council renders free basic services (FBS) to residents, and services grants based on certain conditions. FBS imply the service is rendered for free to all residents. It means a resident does not need to apply for the free service.
The cost of FBS is regarded as “Income Forgone” and the cost is deducted from the income of the relevant service. In other words, it would have been income but Council opted not to charge residents for the service rendered.
Various grants or rebates are allocated to residents based on their specific socio-economic circumstances. Such grants and rebates are only supplied if the terms and conditions are adhered to. As these grants or rebates are not applicable to all residents, it is not treated like FBS (and subsequently deducted from the income budget), but is recorded in the budget as a grant expenditure item in the expenditure of the budget.
The following table reflects the costs of the FBS and grants and rebates:
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Table 19 Cost of Free Basic Services and Indigents
The total cost of FBS and grants and subsidies as budgeted in 2015/16 amounts to R2.5 billion.
Cognisance must be taken that in addition to the above recognised costs, there are some other grants not recorded as expenditure line items, such as:
Water rendered to informal settlements is not metered and therefore not included. Costs to this effect form part of cost for unaccounted water, which the department is addressing.
Electricity supply to all Tariff A users is heavily subsided and sold below cost to residents. The cost to subsidise the tariff is not included in the above table.
The provision of chemical toilets to informal settlements is not included because the cost thereof is funded by USDG.
The Council’s Indigent Policy prescribes various concessions to registered indigents on sundry services, such as cemetery fees, use of halls and community centres, ambulance and emergency fees, etc.
Further detail relating to FBS, the cost of FBS, revenue lost owing to FBS and basic service delivery measurement is contained in Table 31 MBRR A10 (Basic Service Delivery Measurement) on page 82.