The establishment of a funding strategy for your Municipality

Outline of presentation Municipal borrowing requirements Municipal debt absorption capacity Guiding principles Investors market Interest rate environment

Municipal borrowing requirements Convert to cash based approached 03/04 Current 04/05 05/06 06/07 07/08 Total Operating Income (Total Operating Expenditure) Change in Working Capital Non cash adjustment Cash Operating Surplus/(Deficit) Net Interest Cash retained after Interest Capital redemption Cash retained before capital movements Net Capital Movement Balance before financing Financing Net change in cash and investments Cash and investment balance Determine multi-year requirements from capital budget Billed income Expenditure incl non cash items Change in debtors, creditors & stock Non cash items in income & expenditure Determine cash flow surplus (funding from own revenue) Real cash available Interest earned Min Interest paid Determine capital grants Determine the required cash & investment balance Own cash available for capex Capital grants Min Capex Borrowing requirement to be funded through external loans

Municipal debt absorption capacity Unfortunately; limit to borrowings Debt absorption capacity: Indicators Debt to income < 50% External interest/ Total operating expenditure < 7,5% Net cash flow/external interest > 1X Debt requirements should be limited to absorption capacity

Interest rate environment Short-term outlook: SARB Monitory Committee Meeting Strong Rand Drought Credit demand Long-term outlook International Economy Where in the cycle are we?

R157 yield curve

R157 yield curve

Interest rate environment - continued Fixed or floating rate Holding/carry cost of funds Municipality’s average cost of funding

Investors Market Traditional investors: New investors: DBSA (50 – 55% market share) ABSA (total banking sector 20 – 10% market share) INCA (30 – 35% market share) New investors: Investec FirstRand SCMB Nedbank Barclays Future investors : institutional investors : (the Joburg Bond)

Guiding principles Utilise a multi-year approach Target banks and investors Enhance profile through pro-active interaction Make use of funding with a term longer than 10 years Obtain facilities without incurring commitment fees Meet the requirements of the Municipal Finance Management Act

Recommendation for a funding strategy Take a multi-year funding strategy to Council for approval Combine the strategy with a view on the interest rate environment Consider carefully which investors to approach

CONCLUSION Do not time the market, your task is to provide funding on a sustainable basis and to lower the average cost of funding. You are welcome to contact INCA for assistance and guidance.