Standing Committee of AG 31 October 2007, Cape Town Budget 2008/09 Executive summary Acting CFO: S Boyd

Content Purpose Income statements and balance sheets 2007 to 2011 Audit income Overheads Capital expenditure Funding Way forward

1. Purpose This is an executive summary presentation of the budget component of the AG strategic plan and budget for 2008/09. To obtain SCoAG support for the AG budget for 2008/09. As highlighted in the AG Strategic Plan and Budget 2009-11 the on-going funding challenge requires completion of research and analysis into an appropriate way forward for the AG and the government. To obtain SCoAG support through appropriate resolutions for specific issues and risks including arrear debtors, tariff increases and on-going funding. To understand any SCoAG concerns or requirements and action appropriately within the AG. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

2. Income statements and balance sheets 2007 to 2011 (1 of 2) INCOME STATEMENTS FC 07/08: Skills shortage continues to hamper financial results for 2007/08. Write-offs provision of R2m & doubtful debts provision increased by R8 m. Cost reduction actions of R15m in place. B 08/09:Major focus on recruitment and setup of new audit business units to achieve 2008/09. B 08/09: Overheads normalising below 30% in 2009 . Pre-liminary results from benchmarking shows within middle of the range. B 08/09: 1% surplus (vs 3%) due to mainly BE, SM and general 4% per annum cap. B 10-11: On-going focus to reduce contract work towards 20% in 2010 and 2011 Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

2. Income statements and balance sheets 2007 to 2011 (2 of 2) BALANCE SHEETS Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial. Balance sheet growth driven by audit income and staff growth as well as inherent business model. Special Audit Services Fund increase request assessed however overall funding requires resolution first.

3. Audit income (1 of 3) OWN INCOME 2008/09 VS 2007/08 Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial. Audit income grows 28% versus PY. In terms of Own Hours Income 55% of this increase is due to increased hours and the 45% is due to salary increases of 7% and a general tariff increase of 4%. The increased hours is covered in more detail on the next slide. In terms of Contract Work the increase is due to increased AG vacancy rate assumption, increase in hours as a result of similair drivers to own hours, increased pre-issuance activities and use of more senior staff than in prior years. CW tariff negotiations in progress.

3. Audit income (2 of 3) AUDIT HOURS Overall main drivers for increased audit hours is driven by expanded existing audit coverage (risks and scope), new audits and performance auditing. The additional 2 working days, reduced span of control, additional audit business units and recruitment focus will provide the capacity. Stabilisation of increases due to expanded existing audit coverage not expected until both parties management at CMM level 4. Efficiency capability being established. Will include focus on efficiency improvements for 2010 and 2011. * Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

3. Audit income (3 of 3) AUDIT RATES Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial. Movement in tariff intervals due to 7% salary increases, planned recruitment at market levels (i.e. high end of tables) and promotions. Overhead factor in the tariff formula at 207% materially consistent with prior year at 206%.

4. Overhead Increased overheads largely driven by increased audit activity (28% increase Y on Y) and strategic imperatives (e.g. stakeholder reporting, leadership development, audit technical support, improved financial controls and systems, performance incentives, improved technology maintenance and tools and improved capability maturity). SAICA research and analysis initiative pre-liminary results show international SAI overhead % of audit income between 25% and 35%. AG 28% slightly below median. SAI’s in benchmark are predominantly developed economies, with mature democracies and minimal investments in transformation. New costs in 2008/09 include the performance incentive provision of R9m and once-off costs of R5.3m, mostly for ICT initiatives, and R3.6m for Afrosai conference. Excluding these costs the year on year increase reduces to 16%. Increased focus on service quality and efficiencies planned for 2009. Benefits expected to materialise in 2010 and 2011. Efficiency objective will be to maintain capacity and produce more as the audit business grows. Detailed analysis provided in notes in Annexure 1 of budget and strategic plan. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

5. Capital expenditure R50.1 million planned for 2008/09 versus R39 million for 2007/08. Represents a 29% increase. Main drivers include: New Gauteng and Brooklyn II premises furniture requirements. General under investment in technology during past 3 years. R5m under spend in 2007/08. Technology refresh of out-dated country-wide regional servers. Refer to Annexure 1 and note 19 for further details. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

6. Funding (1 of 3) FUNDING STATEMENTS 2007 - 2011 Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial. Business going concern funding statement format purpose to motivate retention of actual surplus. Actual deficit 2006/07 and forecast deficit for 2007/08. The AG requires approximately R63 million cash (including capital and interest) in 2007/08 to meet operating expenditure, capital expenditure and reserve requirements. Statement does highlight funding deficit issue. Funding model requires re-examination.

6. Funding (2 of 3) ‘STAND-ALONE’ FUNDING MODEL FOR 2008/09 Significant mismatch between timing of inflows and outflows create cash flow problem. Current model does not adequately cater for: working capital requirements managing contract work capital expenditure and reserves for known future liabilities. If the current model remains, the 8.3% vacancy rate is achieved and debtor patterns remain the same the AG will experience cash shortfall of some R89 million. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

6. Funding (3 of 3) INITIAL PROPOSALS FOR CONSIDERATION There appear to be a number of options available for consideration. Results, when finalised by the end of the year, of the SAICA/AG tariff and funding initiatives need to be taken into account. Possible options are: Allocate audit budget to relevant treasury. AG recovers audit fees from relevant treasury. AG paid proportionately in advance at start of ‘planning’ and ‘fieldwork’ stages. ‘Reporting’ (20 - 30%) paid within 30 days of final invoice. AG tariffs increased to fund Capex and Reserves, after interest received. Allocate Corporate Services, Reserves and Capex budget to AG. AG tariffs reduced to exclude Corporate Services. Increase tariffs for working capital funding costs, after interest received. NT quarterly cash advance for operating expenditure. Increase tariffs to fund Capex and Reserves, after interest received. Increase AG tariffs for working capital, capex and reserve funding. Allocate audit budget to AG. Auditees’ note value of ‘service without charge’ in financial statements. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

7. Way forward Action Who Date SCoAG supports AG budget 2008/09 SCoAG feedback on funding options SCoAG supports AG request for special 2007/08 cash funding. SCoAG 31.10.2007 Prepare request for 2007/08 cash advance submission to NT. DAG 15.11.2007 - Complete tariff and funding research project. 15.12.2007 Prepare request for funding model change. Obtain stakeholders (incl. Min Fin) input and support. Obtain SCoAG final support/approval. AG Jan 2008 Feb 2008 Mar 2008 - Manage 2007/08 financial risks including cash flow optimisation including CS recruitment, project and capex post-ponement. Nov – Mar 2008 - Manage 2008/09 financial risks including critical success factors of recruitment and new audit business start-up. Nov 07 – Mar 09 Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

Appendices Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

Gross profit contribution by band of staff BE’s create a deficit. 39% of AG gross profit contributed by AMs. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

Budget 2008/09 sensitivity analysis Gross profit contribution by head and level of vacancies per band of staff BE and SM contribution per head diminishing every year as a result of the tariff cap. Current vacancy rate for AM is 20%. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.

Budget 2008/09 sensitivity analysis Sensitivity analysis of impact of vacancy rate assumption changes Failure to achieve the 8.3% budget vacancy rate assumption will significantly impact the bottom line. If the current vacancy rate of 14.6% remains in 2008/09 the surplus of R8.4 million will change to a deficit of R13.4m. Audit Flavours have been requested for the purposes of 2002-03 planning by the 14 May. To date only Guateng, Northern Cape and North West provinces have responded. Note to the AG Urging them to respond for the purposes of their inputs into the areas we focus on would be extremely valuable and beneficial.