EKURHULENI METROPOLITAN MUNICIPALITY
FINANCIAL PLAN, POLICIES AND STRATEGIES


1. INTRODUCTION

EKURHULENI METROPOLITAN MUNICIPALITY’s financial sustainability and fiscal stability is dependent upon Council and Management’s acceptance of the key issues identified and on achieving a unity of purpose on the strategies and action plans required to effectively address these issues.

The following strategies have been identified:

n Revenue Enhancement Strategies

n Improving Debt Collection

n Addressing the issue of Unfunded or Under-funded Mandates

n Reviewing the user-charges for less essential services (e.g. Sport and Recreation)

n Cost Reduction Strategies

n A Staff Vacancy and Attrition (staff turn-over) Management Plan

n This will include a freezing of further appointments until EKURHULENI METROPOLITAN MUNICIPALITY has a better understanding of the current staff complement.

n Reducing Service Losses on Water Supply and Electricity distribution.

n Reducing the cost and intensity of less essential (revenue absorbing) services.

2. Detailed Analysis of Sustainability Issues related to the Operating Statement

2.1 Payment levels and Provision of Bad Debt

2.1.1 Initial Estimates of Payment Levels and Provisions

The Budget is based on achieving an average payment level of 88.7% this current financial year.

The Bad Debt provision = R551.9m on rateable services in the past two years, the the payment levels were 85% and 87%.





Payment Levels per Ward by Business and Residents

The actual payment level is the average of the following:

A core of 43.5% of reliable debtors:

Representing 78.6% of the total value
Averaging a payment level of 101.7%

A balance of 56.5% of unreliable debtors:

Representing 21.4% of the Value
Averaging a payment level of only 13.7%

Business represents only 5.2% of the core of reliable debtors, but contribute 35.9% of the Value with an average payment level of 105.2%.

Some 38.3% of Residents fall within the core of reliable debtors and contribute 42.7% of the value with an average payment level of 98.7%.

Unreliable debtors are responsible for 71% of the arrears that are building up month to month. This segment contains 93.6% of all indigents so that probability of improvement of payment levels of recovery of arrears will be zero.

This correlates with the following analysis of the Monthly Metro Payment Level Report:

The progressive annualized arrears point to a provision requirement of R817m for the year.

2.2 Service Loss Provisions; Water Supply and Electricity Distribution and Recovery Targets

2.2.1 Budget

The Loss % and amounts allowed for in the budgeted Baseline (2002.03) for BULK PURCHASES are –
Electricity: 4.5%
Water: 23.2%


A cost reduction strategy is required to reduce these losses over time by ring-fencing supply areas to identify the combinations of causes and developing corrective action. These causes would include the following:
Physical Breakage and leaks especially of municipal water reticulation pipes and consumer connections and plumbing
Metering covering unmetered connections and faulty meters
Illegal connections and tampering
Incorrect meter reading
Incorrect billing
2.3 Provision for Depreciation in lieu of Capital Charges, Interest and Redemption
In terms of GAMAP, municipalities have to provide for depreciation of fixed assets. Traditionally the operating budget would have included a provision for Capital Charges comprising external Interest Payments and Capital Redemption. This will be replaced by DEPRECIATION under the protocols of GAMAP. Depreciation was not budgeted for in the 2002/2003 operating statement due to the fact that GAMAP has not yet been implemented.
2.3.1 Estimating the Provision for Depreciation
The basis for the calculation of depreciation is:
The value of Fixed assets as at 30 June 2001
A preliminary breakdown of Fixed assets into the GAMAP categories
Weighting this breakdown values by the prescribed depreciation rates
Using the WEIGTHED AVERAGE % as indicative of DEPRECIATION ALLOWANCE required in EKURHULENI METROPOLITAN MUNICIPALITY.
Wastage and use in excess of subsidized quantities.

2.3.2 Providing for Depreciation in the Current Budget used as BASE YEAR for forecasting financial Results
Depreciation Provision is a NON-CASH item but has to be provided for adequately in the BASE YEAR to form the basis for forward projections. There is not an adequate provision on the current BASELINE. The provision is R29.2m from 2002/04 to 2007/08.




The applicable sustainability parameter used is a provision of R550m in the BASELINE and over the next 5 years. The effect this has on the BASELINE 2002/03 and further is shown below.
3. Conclusions and Indicated Strategies for Sustainability
The scope for addressing the financial circumstances in EKURHULENI METROPOLITAN MUNICIPALITY derives from the two generic strategies in terms of which financial and economic sustainability of the EKURHULENI METROPOLITAN MUNICIPALITY can be achieved.

The two generic strategies that will be developed are:
n A revenue enhancement strategy aimed at improving the revenue base to sustainable levels,
n A cost reduction strategy (reducing costs to affordable levels) aimed at reducing disproportionately high costs and expenditure on the service-mix and items of expenditure.
The following strategies are indicated:
Revenue Enhancement Strategies
n Improving Debt Collection
n Addressing the issue of Unfunded or Under-funded Mandates
n Reviewing the user-charges for less essential services (e.g. Sport and Recreation)
Cost reduction Strategies:
n A Staff Vacancy and Attrition (staff turn-over) Management plan. This will include a freezing of further appointments till EKURHULENI METROPOLITAN MUNICIPALITY has a better understanding of the current staff complement
n Reducing Service Losses on Water Supply and Electricity distribution
n Reducing the cost and intensity of less essential (revenue-absorbing) services
4. Evaluation of Strategies and Scope for Addressing the Situation on Sustainability
Council is striving to focus its attention of these areas where income and revenue can be enhanced in the immediate term and where cost reduction management can effect savings.

The scope for action to address the situation is addressed below.

Revenue Enhancement Strategies
Improving Debt Collection and Payment Levels
Status on Debt Collection and Improvement Prospects
Council has announced and is imposing strict Credit Control measures. Monthly reports show the number of cut-offs and legal actions taken. However, the monthly reports show a large contingent of unreliable payers mainly in the INDIGENT category.

Analysis of the monthly Debtors Report indicate a build-up of arrears of debtors of 60 days and more as the following table shows.


This shows consistent increases in debtors of 60 days and over with some reductions in 90 days and more.
The strategic issue is acceptance that there is an inability to pay for the level of services offered. The imposition of stricter credit control measures may therefore not be effective.
The indicated strategy that needs to be explored further is to install service restriction devices on consumption of water and electricity and so reduce the scope of lost and possibly irrecoverable income.

Addressing the Issue of Under-funded Mandates
4.1.2.1 The Scope of Under-funded Mandates
As per the operating statement, the EKURHULENI METROPOLITAN MUNICIPALITY expects Provincial and Other government grants amounting to R221 million in the current year.


The scope of Under-funding is shown in the table below.


4.1.2.2 Appropriate Strategies for Sustainability

These services are under-funded by an average of 85%. This implies that EKURHULENI METROPOLITAN MUNICIPALITY has accepted these mandates as relevant but have not scaled them in terms of their income streams (affordability) or have not established forums to negotiate on provincial and national level for funding to sustain the mandates assumed.

This is clearly not affordable or sustainable and needs to be urgently addressed at a political level.

Cost Reduction Strategies

4.2.1 The Scope of a Staff Vacancy and Attrition Management Plan in addressing the Sustainability GAP
4.2.1.1 Basis of the Plan
Analysis of the budgeted employment cost in relation to statements and statistics on the staff complement shows that there could be scope for savings both due to vacancies and unfilled posts on the one hand and in the possibilities of a staff attrition (staff turnover) management plan.

The scope for savings will emanate from a Staff Vacancy and Attrition Management Plan that will allow a freezing of all vacancies and will provide for the filling of ONLY KEY POSTS to a level of say 50% of the staff turnover rate.





4.2.1.2 Projected Future Impact of A Staff Vacancy and Attrition Management Plan for the next Five years
The projected forward impact of this over the next five years is as follows:


This indicates a targeted potential saving and cost reduction of Employment Cost by R100m per year increasing to R140m over five years.

4.2.2 The scope of Reduction in Service Losses in addressing the Sustainability GAP
4.2.2.1 Current and Future Impact of Loss Reduction Strategies
Every 1% reduction of the combined service loss on Water and Electricity is equal to approximately R22m per year or R1.8m per month.

We have applied parameters for a LOSS REDUCTION STRATEGY in the Financial Model applying to the current year and the next five years with the following targets:
Electricity: Loss reduction by 0.25% per year
Water: Loss reduction by 1.25% per year
The effect that the achievement of these loss reduction targets will have on the bottom line both on the Operating Results, the Unappropriated Surplus (Deficit) and the Appropriated Surplus (Deficit), is shown below.


As indicated, the combined loss reduction strategy on the basis of the parameters presented here would increasingly reduce costs by an average of R20 to R90 million per year.
4.2.2.2 Managerial "Stretch" in Loss Reduction Targets
To reduce these service losses to the budget losses provided requires a major effort due to the STRETCH between the current level of losses and the Budgeted Loss levels. This is highlighted in the following graphs.

Illustrative Stretch in Water Loss Reduction Targets
The improvement Stretch on reduction of Water losses over the current full year from current losses (Low 25% and High 30%) % to the targeted 23% is illustrated in the following graph:


The graph shows that achievement of year-end loss of 16% is required to get to an average 23% for the year from the current 27% to 30%.

Illustrative Stretch in Electricity Loss Reduction Targets
The improvement Stretch on reduction of Electricity losses over the current full year from current losses (Low 6% and High 7%) to the targeted 4.5% is illustrated in the following graph:

The graph shows that achievement of year-end loss of 2% is required to get to an average 4.5% for the year from the current 7.5%
5. Financial Performance, Trends and Prospects for Ekurhuleni Metropolitan Municipality
The financial analyses in this report are based on combinations of the aggregated financial statements of the constituent municipalities (now Service Delivery Centres –SDC’s) and their accompanying municipal statistics.

5.1 EKURHULENI METROPOLITAN MUNICIPALITY Consolidated Operating Performance over the past Two Years
5.1.1 Actual Operating Performance for 2002
The actual operating performance of EKURHULENI METROPOLITAN MUNICIPALITY is summarised in the table below:

Table 2002.A: Actual Operating Performance Against Budget 2002

Pertinent Issues
n The net result shows a swing in the Unappropriated Operating Income of R535m over budget. This is the result of an increase in income of R86m and lower than expected Net Expenditure of R449m
n Total Income is R86m more than budgeted owing to increases in Sundry municipal income (R124m) and higher than expected Grants and Subsidies (R12, 7m). This is off-set by a net decrease in Rateable Income of R50m
The main savings in Expenditure are on –
n Salaries and Allowances (R118m)
n Other General Expenses (R142m)
n Lower Bulk Purchases on Water off-set by R53m more on Electricity
n Lower Contributions to Fixed Assets (R190m)
n Lower Development Aid of R297m
n Lower than budgeted Amounts Charged Out of R175m
5.1.2 Comparative Consolidated Financial Performance: Operating Statements 2002 over 2001
The results of 2002 are substantially better than those of 2001 as highlighted in the following table.

Table 2002.B: Comparative Operating Performance: 2001 to 2002 and Trend Indicators


Pertinent Issues
n The net result for 2002 shows a positive swing in the Unappropriated Operating Result of R130m over 2001. This is the result of an increase in income of R895m off-set by a smaller increase of R764m in Net Expenditure
n The increased Income is the result of RSC income of R542m and increased Operating income of R377m despite reductions in Grants and Subsidies of R23m year-on-year
Main increases in Expenditure in 2002 are due to –
n Higher expenditure on Salaries and Allowances (R182m) equal to 14.3% much higher than inflation indicating additional staff contrary to the expectation of economy of scale on merging
n Higher General expenditure (R344m) equal to 12.4%
n Higher Capital Charges (R106m) equal to 25%
n Higher Contributions (R31m) equal to 12.7%
n New expenditures for regional service functions (R86m)
The comparative changes in income ratios and sources of income for 2002 over 2001 appear below.

Table2002.C: Comparative Change in Income: 2001 to 2002


Pertinent Issues in Table 2002.C: Income Trends
Sundry income from levies now contribute 9.6% of Income
Grants and Subsidies are now 2.4% of total income compared to 3.4% in 2001
Operating income has therefore decreased as % of total income from 97% in 2001 to 88% in 2002
Due to the impact of Sundry Levy Income, the proportionate contributions of the main rateable service have reduced as follows:
Assessment Rates from 21% (2001) to 19.6% (2002)
Sale of Electricity from 42% (2001) to 37% (2002)
Sale of Water from 14% (2001) to 12.7% (2002)
Other service charges down from 20% (2001) to 18% (2002)

The comparative changes in Expenditure are highlighted in the table below.

Table 2002.D: Comparative Change in Expenditure as % of Total Income: 2001 to 2002


Pertinent Issues in Table 2002.D: Expenditure Trends
Salaries and Allowances have decreased from 26.8% of total income (2001) to 25% (2002
Expenditure on Repairs and Maintenance have been kept a the same level of 6.7% (2001) and 6.1.1% (2002) but still below the 10% level considered to be appropriate for a metropolitan council given the asset base to be kept functional
Regional functions and Development aid have increased in expenditure from a combined 1.6% (2001) to 7.1% (2002)
Capital Charges show an absolute and marginally proportionate increase in % of total income
Gross Expenditure has decreased in absorption from 106.5% of total income to 104%
This gain is offset by a proportionate decrease in Amounts Charged Out from 10.4% to 9.6% of total income to bring the net expenditure down from 96.1% to 94.4% of total income.
5.1.3 High-level Trend Indicators on Core Municipal Service Performance in 2001 and to 2002
Table 2002.G: High-level Summary of Trend Indicators for Core Municipal Service Performance: 2001 to 2002


Pertinent Issues in Table 2002.G: Core Municipal Service Trend Indicators
Net revenue-generation by Rateable Services shows a decrease in Surpluses generated of R77.3 m – the net of an increase in the surplus on the administration of Assessment Rates offset by a reduction of the surplus on Directly Rateable Services by R163.8m
An increase in the cost of administration on other Municipal services of R45.1m results in an increase in the deficit of R27.4m.
This is exacerbated by the cost of R322.2m associated with regional services
The net deficit on Municipal performance has therefore increased by R426.8m
The increase in cost of administration on combined external Grants and Subsidies of R45.6m against an increase in income mainly from RSC levies contributes a surplus of R556.8m to increase the Surplus on Municipal Performance by R129.9M year-on-year.
Appropriations have decreased with a positive impact of R50.8m on the bottom line
The Accumulated Surplus at the beginning of year 2002 has decreased from R216.8m to R83.6m but the Net Surplus of R253.5m increases the carry forward for 2003 to R337.1m
5.2 Analysis of the Consolidated Balance Sheets and Cash Flows 2001 and 2002
The solvability ratio (2.20:1) for 2001/2002 as reflected in the financial statements for the period was based on the calculation of total assets which included gross fixed assets, amounting to R 8,222m.

Compliance to GAMAP necessitates the adjustment of gross fixed assets with accumulated depreciation. With net fixed assets being estimated at approximately R 1,198m the solvability ratio is closer to 1:1.

6. Development of a Macro Parameter Framework: Five-year Financial Plan and Macro Parameters Applied to Measure Sustainability
In view of the Sustainability Issues identified, the directional strategies proposed and the economic and growth prospects identified a five-year plan based on the macro parameters that affect fiscal stability and financial sustainability is being developed and applied.

A financial model has been developed for this purpose and has forecast expected future financial performance with the current year (2002/03) as BASELINE.

The following pertinent issues impact on the financial plan:
n Disposable income across residential socio-economic sub-segments
n Economic trends affecting service expansion and contraction and therefore municipal services consumption in non-residential segments (Commercial and Industrial)
n Reliable economic forecasting models that could serve as input into strategic service revenue planning
n Economic trends affecting service expansion and contraction in the Industrial Segment and its sub-segments.
6.1 Parameters applied to the Financial Plan (Operating Model)
The BASELINE of the Forecasts is the Approved Budget for 2002/03 (June 2002)
The basis of the model is the Baseline + 5 years
The following parameters apply to the 5-year Forecasts:
General parameters used;
l Growth @ 1.5% per year
Income and Expenditure escalation @ 6% per year

Growth in Rates Base:
n 2003/04: 1.5%
n 2000/05: 4.0%
n 2005/06: 1,5%
n 2006/07: 4.5%
n 2008/08: 1.5%
Exceptions on General Parameters:
n Regional Service Levies: Growth @ 7% p.a.
n Licenses and Permits: Growth @ 3% p.a.
n Remuneration of Councillors: Growth @ 9.5% p.a.
n Contracted Services: Growth @ 10% p.a.

The following Income Items are forecast with no Growth:

n Operating Grants and Subsidies: R 221.1m p.a.
n Rent of facilities and equipment: R43m p.a.
n Fines: R 93m p.a.
n Other sundry income: R 15.8m p.a.

The following Expenditure Items are forecast with no Growth:
n Depreciation: R 29.2m p.a.
n Internal transfers: R 1,306.4m p.a.
Grants and Subsidies Paid: R 4.6m p.a.

6.2 The Five-year Financial Forecast Operating results as per the EKURHULENI METROPOLITAN MUNICIPALITY Model
The five-year forecasts are based on the above parameters and are linked to a Capital Investment, Funding Plan and Cash Flow Plan. These show CAPEX only for 2002/03 and the appropriate amounts to incorporate in the Operating Accounts. The Five-year Operating Statement with only main items and the projected net un-appropriated results is shown in the table below.


The projected trends in the forecast INCOME streams are as follows:

The total rateable income is increasing its contribution relative to the other income streams indicating that EKURHULENI METROPOLITAN MUNICIPALITY will be less dependent on external income – notably from RSC income and Operating Grants and Subsidies. This is a conservative and appropriate view.

The projected trends in the forecast EXPENDITURE streams are as follows:

The provision for Interest Expense and Internal Borrowings are declining because no CAPEX is provided after the base year 2002/03.
A positive trend is the increased allowance for Repairs and Maintenance capturing the intent of EKURHULENI METROPOLITAN MUNICIPALITY management to assure effective service infrastructure and service delivery.
General Expenses and Bulk Purchases are escalated at 6% in line with official inflation allowance to date.





























7. CAPITAL INVESTMENT PROGRAMME

8. DEBT MANAGEMENT FRAMEWORK

9. FINANCIAL MANAGEMENT POLICIES


9.1 THE FINANCIAL FRAMEWORK

9.1.1 Revenue Adequacy and Certainty

It is essential that the Ekurhuleni Metropolitan Municipality has access to adequate sources of revenue, from both its own operations and intergovernmental transfers to enable it to carry out its functions. It is furthermore necessary that there is a reasonable degree of certainty with regard to source, amount and timing of revenue. The Division of Revenue Act has laid out the level of funding from National Government that will be received in the future financial years.

It is important to trace the respective sources of revenue received by the Ekurhuleni Metropolitan Municipality as they can be quite different and can vary substantially depending upon the phase that the municipality is in. Knowledge of the sources of funds will illustrate the Ekurhuleni Metropolitan Municipality’s position more accurately, its ability to secure loans relative to its income streams and its borrowing capacity.

9.1.2 Cash / Liquidity Position

Cash and cash management is vital for the short and long term survival and good management of any organisation.

9.1.3 Sustainability
The Ekurhuleni Metropolitan Municipality needs to ensure that its budget is balanced (income covers expenditure). As there are limits on revenue, it is necessary to ensure that services are provided at levels that are affordable and that the full costs of service delivery are recovered. However, to ensure that households which are too poor to pay for even a proportion of service costs, at least have access to basic services, there is a need for subsidisation of these households.
9.1.4 Accountability, Transparency and Good Governance

The Council is accountable to the people who provide the resources, for what they do with the resources. The budgeting process and other financial decisions should be open to public scrutiny and participation. In addition, the accounting and financial reporting procedures must minimise opportunities for corruption. It is also essential that accurate financial information is produced within acceptable time-frames.
9.1.5 Borrowing
The strong capital market In South Africa (banks and other tending institutions like DBSA, INCA etc.) provides an additional instrument to access financial resources. However, it is clear that the Council cannot borrow to balance its budget and pay for overspending. Safeguards need to be put in place to ensure that the Council borrows in a responsible way. In order to have access to this market, the Council will need to have accurate and appropriate financial accounting and reporting systems. The manner in which the Council manages debt or takes on new debt to finance activities will have a significant impact on the solvency and long-term viability of the council.

9.2 INFRASTRUCTURE INVESTMENT POLICIES
The Council will establish and implement a comprehensive five-year Capital Investment Programme. This programme will be updated annually.

An annual Capital Investment Budget will be developed and adopted by Council as part of the annual budget. Council will make all capital improvements in accordance with the Capital Investment Budget.
Unexpended capital project budgets shall not be carried forward to future fiscal years.
The Council will maintain all assets at a level adequate to protect the Council's capital investment and to minimize future maintenance and replacement costs.
9.3 REVENUE POLICIES
The Council will estimate annual revenues by a conservative, objective and analytical process based on a realistically expected income.
The Council will consider market rates and charges levied by other public and private organizations for similar services in establishing rates, fees and charges.
The Council will periodically review the cost of activities supported by user fees to determine the impact of inflation and other cost increases. Fees will be adjusted where appropriate to reflect these increases.

The Council will set fees and user charges at a level that fully supports the total direct and indirect costs of operations. Tariffs will be set to reflect the Development and Social Policies of the Council.

The Council will continue to identify and pursue grants and appropriations from Province, Central Government and other agencies that are consistent with Council’s goals and strategic plan.
The Council will follow an aggressive policy of collecting revenues.



9.4 INVESTMENT POLICY

As trustees of public funds, the Council has an obligation to see to it that cash resources are managed as effectively and efficiently as possible.

Council has a responsibility to invest public funds with great care and are liable to the community in this regard.

The investment policy should be aimed at gaining the highest possible return without undue risk during those periods when funds are not needed. To bring this about, it is essential to have an effective investment policy and cash flow management program.

Legal Requirements

The Investment of funds by Local Authorities is regulated by Section 10G(9)(a) and (b) of the Local Government Transition Act as amended, (Act. No. 97 of 1996) which reads as follows:

"(9)(a) A municipality may, subject to such investment policy (if any) as the Minister may determine by notice in the Gazette, with the concurrence of the Minister of Finance and subject to paragraph (b), invest in the following instruments or investments:

Deposits with banks registered in terms of the Banks Act, 1990 (Act No. 94 of 1990).
Securities issued by the National Government.
Investments with the Public Investment Commissioners as contemplated by the Public Investment Commissioners Act, 1984 (Act No. 45 of 1984).
Deposits with the Corporation for Public Deposits as contemplated by the corporation for Public Deposits Act, 1984 (Act No. 46 of 1984).
A municipality’s own stock or similar type of debt.
Internal funds of a municipality which have been established in terms of a law to pool money available to the municipality and to employ such money for the granting of loans or advances to departments within a municipality, to finance capital expenditure.
Bankers, acceptance certificates or negotiable certificates of deposit of banks.
Long-term securities offered by insurance companies in order to meet the redemption fund requirements of municipalities, and
Any other instruments or investments in which a municipality was under a law permitted to invest before the commencement of the Local Government Transition Act Second Amendment Act, 1996 : Provided that such instruments shall not extend beyond the date of maturity or redemption thereof.
The Minister may, with the concurrence of the Minister of Finance by notice in the Gazette determine instruments or investments other than those in paragraph (a) in which a municipality may invest."

Cash Flow Estimates

Before money is invested, the Chief Financial Officer, and or his/her nominee has to determine whether surplus funds are available, and for which period such funds can be invested, taking cognizance of Council’s anticipated cash flow position over the anticipated investment period.

Investment Ethics

The Chief Financial Officer is responsible in the final instance for the investment of funds, and has to steer clear of outside interferences irrespective of the source and nature thereof, and should under no circumstances be susceptible to coercive measures at all.

Investment Principles

Risk and Exposure to financial institutions

The volatility of the South African Financial and Economic conditions as a result of global influences have an impact on the South African Stock Exchange and also on banks in this country, who are to a more or lesser degree sensitive to sudden changes in interest rates and economic conditions that impact on borrowers ability to service their debt.

In recent years three South African based banks (Prima Bank, New Republic Bank and FBC Fidelity) went under curatorship, leaving some of their investors in a serious predicament due to their inability to repay the capital and interest amounts to their investors on maturity dates.

There are usually not timeous warning signs to potential investors who for instance want to invest for a period of between 6 to 12 months, that a specific bank may be experiencing difficulties that may end up in curatorship.

The following table reflects the rapid change in status of the last two banks that went into curatorship, namely New Republic bank and FBC Fidelity Bank:

The rates offered on investments by some of these institutions are not very competitive which in the end compel one to invest large amounts with some of the institutions above, in order to maximize the potential interest to be earned. This practice also has the inherent danger of overexposure to some extent, which can result in relatively larger losses should one of those highly rated institutions develop difficulties.

It would be suggested that when long term investments need to be made, it be made with institutions with minimum long term ratings of A+.

With regard to short term investments which are regularly redeemed and re-invested to ensure sufficient cash flow, it would be suggested that these investments be done by the HOD: Finance or his nominee as is presently the case and that Council’s exposure to institutions which falls within the criteria above, be limited as follows:

A1+ short term ratings: 3% of the institutions total equity as published from time to time in the Fitch Banking Sector Report.
A1 short term ratings: 2% of the institutions total equity as published from time to time in the Fitch Banking Sector Report.

Since there are some of the institutions above, who do not deal directly with non-taxable organisations such as the Council, in certain investments such as Zero Bonds and promissory notes, which are usually required as security when an institution such as the Council negotiate a long term loan on the Capital market, it would be suggested that investments of such a nature (instrument in future be done by the HOD : Finance or his nominee in consultation with the Finance/Portfolio Councillor and Council Manager and that they obtain professional advice/assistance from an acknowledged/authorised financial advisor as approved by Council, if necessary.

It would also be suggested that Council retain its subscription with one of the reputable rating agencies in South Africa, in order to monitor the official ratings and to manage Council’s investments accordingly.

Borrowing Money for Re-investment

Money should not be borrowed for investment purposes.

Growth related investments

When making investments of this nature, the Chief Financial Officer should ensure that only instruments that guarantee at least the capital amount be considered.
General Investment Practice

General

After determining whether there is cash available for investment and fixing the maximum term of investment, the Chief Financial Officer and or his nominee has to consider the way in which the investment is to be made. Because rates can vary according to money market perceptions with regard to the term of investment, quotations should be requested telephonically from all the institutions which meet the rating criteria, for periods within the limitations of the maximum term. The person responsible for obtaining these quotations from financial institutions should record the name of the person who gave the telephonic quotation, the relevant terms and rates, and other relevant facts on an investment quotation schedule.

Once the required number of quotations have been obtained, a decision has to be taken regarding the best terms offered and the institution with which the funds are going to be invested. The best offer is normally accepted, with thorough consideration of investment principles and limits.

The above-mentioned procedure should be followed regardless of whether the money is to be invested in a fixed deposit or on a call basis.

It is essential to ensure that the investment document received, is a genuine document, issued by the approved institution. Investment capital should be paid over, only to the institution with which it is to be invested, and not to an agent.

Payment of commission

The Auditor-General requires the financial institutions to issue certificates with regard to each investment, in which it states the following:

Investments by the Council have not been subjected to any form of surety and are registered in the name of the Council.
No commission or other compensation was paid to any councillor or employee of the Council during the period for obtaining the investment.

Reports

Investments made should be reported to Council on a quarterly basis.

Cash in bank

Arrangements should be made with Council’s bankers to link the interest rate on monies in Council’s current accounts to that of the daily call money rate.

It would further be suggested that an amount not less than R20 million be kept on a call account, to be available within 24 hours in the event that short term liabilities temporarily exceed available funds in the current account.
Control over Investments

Proper records should be kept of all investments made. At the very least the following facts should be indicated; the institution, the capital amount, the interest rate and the maturity date.

Interest, correctly calculated, should be received timeously, together with any distributable capital.

Investment documents and certificates should be kept in a fire-resistant safe.

9.5 DEBT MANAGEMENT POLICY

The Council shall incur debt only when necessary to meet a public need and when, funding for such projects is not available from current revenues, reserves or other sources.
Long-term borrowing will be used to finance capital improvements as approved in the Capital Investment Plan.
Capital projects financed through the external debt shall be financed for a period not to exceed the expected useful life of the project.
The Council will not incur debt to finance current operations,
Lease-purchase obligations, capital outlay notes or other debt instruments may be used as a medium-term method of borrowing for the financing of vehicles, computers, other specialized types of equipment, or other capital improvements.

9.6 RESERVE FUND POLCIES


Adequate reserve levels are a necessary component of the overall financial management strategy and a key factor in external agencies' measurement of the Council's financial strength.

One of the main problems of the financial statements of the Metro is that reserve funds have been utilised to fund operations as a result of the high levels of non-payment. Although the balance sheet of Council reflects large balances for funds and reserves, a significant percentage of the cash/investments has been used to finance debtors. There is little or no chance of the investments being reinstated, even in the longer term.

In view of the above, a process has been embarked upon to write off funds and reserves that are not backed by cash. Separate bank accounts have been opened for capital funds and reserves to ensure that these funds are not used in operations and can be accounted for separately.