Cost Drivers
Part 2 Supporting Documentation
A. REVIEW PROCESS
2.3 Measurable performance objectives and indicators
2.3.1 Performance indicators and benchmarks .1 Borrowing Management
Capital expenditure in local government can be funded by capital grants, own-source revenue and long-term borrowing. The ability of a municipality to raise long-term borrowing is largely dependent on its creditworthiness and financial position. As with all other municipalities, EMM’s borrowing strategy is primarily informed by the affordability of debt repayments. The structure of the metro’s debt portfolio is dominated by municipal bonds. The following financial performance indicators have formed part of the compilation of the 2015/16 MTREF.
Borrowing to asset ratio is a measure of the long-term borrowings (non-current) as a percentage of the total asset base of the municipality. This ratio will increase over the MTREF from 12.4% in 2015/16 to 17.7% in 2017/18, but must not be considered a measure on borrowing capacity in isolation of other ratios and measures.
Capital charges to operating expenditure is a measure of the cost of borrowing in relation to the operating expenditure. It can be seen that the cost of borrowing will move from 3.1% in 2011/12 to 3.6% in 2017/18. The increase can be attributed to the raising of external funding to fund portions of the capital programme. While borrowing is considered a prudent financial instrument in financing capital infrastructure development, this indicator will have to be carefully monitored going forward as the affordability of the interest repayments are becoming problematic in the outer years.
The metro has not yet reached its prudential borrowing limits, but the shrinking revenue raising ability (mainly resulting from decreasing margins in the electricity service) makes loan servicing unaffordable. The Capital Budget is based on the R8 billion Domestic Medium-term Note Programme (or municipal bond) which will last up to the 2017/18 financial year, as well as possible other borrowings during the 2017/18 financial year. These additional loan funding’s will, however, be subject to affordability.
Capital charges to Own Revenue is a measure of the cost of borrowing in relation to the Own Revenue. It can be seen that the cost of borrowing will remain constant at 3.9% from 2011/12 until 2017/18.
Borrowing funding of own capital expenditure measures the degree to which own capital expenditure (excluding grants and contributions) has been funded by way of borrowing. The percentage for the 2014/15 year of 61.5% will decrease slightly to 60.4% in 2017/18.
Long-term debt increased from R5.0 billion as at 30 June 2014 to R9.2 billion at the end of the 2017/18 FY. This is inter alia as a result of:
o The issuing of the first municipal bond for R815m on 28 July 2010 to fund a portion of the capital infrastructure programme for the 2009/10 financial year as well as a portion of the capital programme for the 2010/11 financial year. The bond was issued for a 10-year period at a fixed interest rate of 10.56%.
o The second EMM bond was issued on 11 March 2011 for R800m. This bond was taken up to finance the remainder of the capital programme for the 2010/11 financial year. The book filled at 185 basis points and the final interest rate was fixed at 10.72%, being the R208 at 8.87% (as at the time of finalising the book build) + 185 basis points.
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o The third EMM bond was issued on 4 May 2012 at an amount of R800m. The final interest rate was fixed at 10.05%. A R4 billion Medium-term Domestic Note Programme was registered at the Johannesburg Stock Exchange (of which the R2.415 billion has been issued).
o The fourth EMM bond was issued on 16 May 2013 at an amount of R800m and this is the first amortisation bond issued by the metro. This bond was taken up to finance the remainder of the capital programme for the 2012/13 financial year.
The book filled at 180 basis points and the final interest rate was fixed at 9.16%, being the R213 at 7.36% (as at the time of finalising the book build) + 185 basis points. The tenure is fixed at 15 years. No sinking will be established for this bond issuance, the interest and capital repayment will done be semi-annually.
o The fifth EMM bond was issued on 17 April 2014 at an amount of R785m, the second amortisation bond issued by the metro. This bond was taken up to finance the capital programme for the 2014/15 financial year as approved by Council. The book filled at 180 basis points and the final interest rate was fixed at 10.67 %, being the R213 at 8.87% (as at the time of finalising the book build) + 180 basis points. The tenure is fixed at 15 years.
The long-term loans with bullet redemption profiles will be funded from sinking funds.
The value of sinking funds as at 30 June 2014 was R772.5m.
2.3.1.2 Safety of Capital
The gearing ratio is a measure of the long-term borrowings (non-current) over funds and reserves. During the 2013/14 financial year the ratio was 500% which will increase to 583% in the 2017/18 financial year. This ratio is much lower than the benchmark levels, mainly resulting from the implementation of GRAP 17 where found assets were fair valued as part of the first time recognition of certain assets. This transaction credited the accumulated surplus and the equity of the metro is thus much higher than would have most probably been the case with historical costs. This ratio is therefore not seen as a reliable measure for the affordability of additional loans.
2.3.1.3 Liquidity
Current ratio is a measure of the metro’s ability to pay short-term obligations with its short-term assets. The higher the ratio, the better the metro’s ability to adhere to its short-term obligations. The calculation is the current assets divided by the current liabilities and as a benchmark the metro has set a limit of 1.2, hence at no point in time should this ratio be less than 1.2. For the 2015/16 MTREF the ratio is expected to be 1.7, and improving to 1.9 in the outer years of the MTREF.
The liquidity ratio is a measure of the ability of the metro to utilise cash and cash equivalents to extinguish or retire its current liabilities immediately. Ideally the municipality should have the equivalent cash and cash equivalents on hand to meet at least the current liabilities, which should translate into a liquidity ratio of 1. Anything below 1 indicates a shortage in cash to meet creditor obligations.
For the 2013/14 financial year the ratio is 0.9 and as part of the financial planning strategy it is projected to decrease slightly to 0.8 in the 2015/16 financial year but then improve to 1.0 in 2017/18.
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2.3.1.4 Revenue Management
As part of the financial sustainability strategy, an aggressive revenue management and enhancement project has been embarked upon to increase cash inflow, not only from current billings but also from debtors that are in arrears in excess of 90 days. The Revenue Management and Enhancement Programme is driving projects that cover the following six areas:
o Metering and billing value chain.
o Water and electricity losses.
o Key accounts management unit.
o Indigent management.
o Telephone query management.
o Data quality.
The programme has identified the following key business themes which serve as strategic objectives that should drive and support revenue management and enhancement programme.
o Reduction of consumer debt through appropriate credit control and debt collection to improve revenue.
o Improved, consistent and accurate /integrative property value chain.
o Improved customer services.
o Monitoring and evaluation of consumption processes and efficiencies.
o Revenue collection.
The annual debtors’ collection rate indicates the percentage payment levels of the metro. It indicates at what levels the metro receives payments owed, in terms of receivables, from its customers. It is also used to establish whether credit control has been efficiently managed. The metro’s payment level percentage, according to this calculation, in 2012/13 was 90.8% and is expected to be at 94.2% in 2017/18.
2.3.1.5 Creditors Management
The efficiency ratio at the end of 2013/14 was 75.97%. It is predicted to improve to 90% as a results from the capacity building programme in the Supply Chain Management Division.
2.3.1.6 Other Indicators
The electricity distribution losses, as per the audited financial statements, is 11.12% (of which non-technical losses were only 5.22%) in the 2011/12 financial year. It is forecasted at a rate of 10% for the MTREF period until 2017/18.
The Energy Department uses the following data to determine the loss:
o Meter on Line data.
o Suprima and IMS prepayment sales data.
o Take credit meter read data.
o Take usage for streetlights/traffic lights.
o The usage for own consumption.
It is expected to stabilise over the MTREF. The initiatives to ensure these targets are achieved include managing illegal connections and theft of electricity by rolling out smart metering systems, including prepaid meters. Material losses can
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be divided in technical and non-technical losses. Technical losses are related to copper, iron and heat losses and are generally between 5% and 7% and it is in line with the industry norm. These losses cannot be reduced and are inherent in any electricity network. Non-technical losses can be attributed to illegal connections and electricity theft (also bypassed meters, etc.). The Energy Department is in the process of restitution of large areas to repair the electrical network and install protective structures and split prepayment meters to manage and reduce illegal connections and meter tampering. It has been determined that more than 60% of total unit sales are from the demand meter customer segment, business/industry and large residential/townhouse complexes. All these demand meters are placed on automated meter reading to minimise risk as far as possible. Readings are taken at intervals of 30 minutes and accounts issued monthly. In addition, the Cable and Copper Theft Task Team will continue with its activities to curb cable and copper theft. An energy balance has been created and shows losses are within acceptable norms, although more is being done to reduce these losses. By-law "sting" operations are executed regularly by the EMPD and people tampering with their meters are arrested and taken to court.
The water distribution losses, as per the audited financial statements, is 30.34%
in the 2011/12 financial year. It is forecasted at a rate of 30% for the MTREF period until 2017/18.
This has been achieved with the introduction of a water leakage report and action centre. The intention is to further rollout additional depots within the metro to further leverage from the efficiency that the centre offers. It is planned to further reduce the distribution losses over the MTREF period. It must be recognised that the metro is managing aged and ageing infrastructure and this has a direct bearing on the amount of water lost. The water losses were due to many factors significant of which were the following:
o Unmetered properties that were not billed.
o Metered areas that were billed on estimates.
o Properties with more than one meter.
o Infrastructure-related water losses.
The department is attending to these areas of concern through Programme Boloka Metsi. The interventions in this programme include the following projects:
o Infrastructure replacement and rehabilitation programmes.
o Metering Programme.
o Top Consumer Programme.
o Education and awareness/Consumer Capacitation Programme.
The objective of this intervention is to significantly reduce both non-revenue water and water losses. It must be mentioned though that the extent to which the non- revenue water is reduced depends on the rate at which migration is affecting the metro. The metro has been experiencing growth in the last year mostly from poor people that stay in informal settlements. This increases the amount of free basic water that the metro supplies to these areas and by extension increases the amount of non-revenue water.
Employee costs and remuneration as a percentage of revenue (excluding capital revenue) continues to decrease over the MTREF. This is primarily owing to the high increase in bulk purchases which directly increase revenue levels, as well as increased allocation relating to operating grants and transfers. The averages of the ratios are 21% respectively over the MTREF period.
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Repairs and maintenance as a percentage of revenue (excluding capital revenue) needs to be at an appropriate level to ensure that capital assets remain efficient and perform and an optimal level. Similar to that of employee costs, repairs and maintenance as a percentage of operating revenue is also ultimately decreasing owing directly to cost drivers such as bulk purchases increasing far above inflation.
The average ratio is 9.2% over the MTREF period.
Finance charges and depreciation as a percentage of revenue (excluding capital revenue) is dependent on borrowing, interest rate levels, and the rate of depreciation of capital assets. The average ratio is 8.4% over the MTREF period.
2.3.1.7 IDP regulation financial viability indicators
Debt Coverage is the coverage of revenue (excluding operating grants) over debt- service and is an indication of the metro’s ability to meet annual interest and principle payments on debt. The coverage is expected to be 28.6 in 2015/16 and is expected to move to 32.4 in 2017/18.
Outstanding service debtors to revenue ratio is an indication of what percentage of revenue is in outstanding service debtors. This is also an indicator of the metro’s effectiveness in managing credit control and debt collection. The lower the ratio, the more effective the management of receivables. The ratio is estimated to be 21.1%
in 2015/16 and is expected to move to 17.6% in 2017/18.
Cost coverage is an indication of the metro’s ability to cover fixed operational expenditure with its cash and investment balances. The higher the ratio, the higher the ability. The ratio is estimated at 2.6 in 2015/16 and is expected to remain 2.6 over the MTREF period.
2.3.2 Free Basic Services: basic social services package for indigent households