1. FINANCIAL MANAGEMENT REFORM & ACCOUNTABILITY IMFO CONFERENCE 2011 Presenter: Carl Stroud | Specialist: Local Government Budget Reforms, CD: LGBA, National Treasury | 13 September 2011

2. Consolidated LG financial performance: 2010/2011 2 Operating under expenditure R17.8 billion (9.1 per cent) against adjusted budget Operating Performance Capital under expenditure R12.3 billion (29.3 per cent) against adjusted budget 201 municipalities > 15 per cent under spent R4.2 billion relates to unspent grants Capital Performance Net increase in cash & cash equivalents of R6.5 billion BUT: Outstanding creditors > 30 days: R2.1 billion Under spent conditional grants: R4.2 billion Cash flow Performance

3. Financial performance 3 Significant increases in spending at the end of fourth quarter Evidence of weak multi-year budgeting Possible unofficial stockpiling Risk to cash flow and liquidity

4. Declining own funding 4 Decline in own contribution to capital programme (internal and borrowing) 2009/10 own funding of R12.1 billion 2012/13 own funding of R6.6 billion, significant reduction

5. Challenges Municipalities are finding it increasingly difficult to generate own revenue Insufficient funds for repairs and maintenance Ineffective supply chain management Financial mismanagement and financial misconduct Councils face severe long-term social challenges as the demand for services grows Demographic changes, migration patterns & increasing demand for basic services Threatens the sustainability and viability of municipalities Service delivery protests 5

6. Recent LG benchmarking engagements Key issues: MTREF 2011/2012 Three of the eight metro’s and eight of the nine secondary cities’ budgets are unfunded; Tariff setting and cost recovery is generally weak; Ineffective debt collection processes, incorrect billing and inaccurate data impedes the ability to bill and collect own revenue; Cash flow forecasting, funding compliance and funding measurement efforts are dismal; and Inadequate allocations for asset renewal and maintenance. 6

7. Financial management reform focus areas 7 SCOA & Business Process Improvement Budget Formulation Revenue Management Financial Modeling

8. The need for financial management reforms Funded, sustainable and credible budgets over the MTREF; and improve cash flow management Strengthen revenue management; billing and collection activities Introduce minimum standards informed by business processes for software applications Introduce costing methodologies; informed tariff determination Introduce a standard chart of accounts Promote financial management accountability 8

9. Key elements of service delivery 9 Governance and Strategy: transparency; accountability; oversight; priority determination and IDPProcesses: procedures; tasks; workflows; revenue and expenditure processes Structure: Organograms; job descriptions; competent staff Planning: forecasting; scheduling; coordinating; MTREF; SDBIP Implementation: Project management; monitoring; AFS SERVICE DELIVERY CONSTITUTIONAL OBJECTIVES OF LG AND LEGISLATIVE FRAMEWORKS Democratic and accountable government Provision of sustainable services Social and economic development Safe and healthy environment Communities involvement in LG COMMUNITY OVERSIGHT Economies of ScaleChoice of Technology

10. BUDGET REFORM

11. Need for structured budgeting ‘Balanced budget’ versus ‘funded budgets’ Budgeting for a ‘surplus’ Effective cash flow management Support implementation of Service Delivery and Budget Implementation Plans (SDBIPs) Improve quality of reporting Improve transparency and accountability – MBRR Move beyond compliance 11

12. Dimensions of municipal planning – MBRR 12 ‘Funded’ budget not ‘Balanced’ Consideration for cash flow items and none cash flow items, such as depreciation and debt impairment Generating surpluses Credible and realistic budget appropriations Statement of operating performance Must be funded (expenditure must balance with funding) Consideration for asset renewal versus new asset creation Funding mix – grants, internal funding and borrowing Internal funding should be cash and not limited to AFS Capital programme Consideration for cash flow projections, that is, collection rates versus billing Has the operating statement of financial performance been translated into actual cash movements for the MTREF Is the forecasting indicative of a positive cash position Cash coverage of the municipality Cash flow forecasting How much cash, cash equivalents of investment? Is this sufficient to cover liabilities such as unspent conditional grants & borrowing Working capital requirements Conditional grants should be cash backed Cash backed reserves & accumulated reserves reconciliation Has the impact of the OSFP been factored and forecasted into the balance sheet position Issues include increased borrowing liabilities, increased outstanding debtors, debt impairment provision Has the outcome been considered and measured as part of the planning process Statement of financial position What resources are spent on asset renewal and maintenance Which asset class is receiving appropriations What is the level of depreciation What are the service delivery backlogs and related performance objectives Is the cost of free basic services (social package) adequately provided for? Asset management & basic service delivery measurement

13. Key focus areas of budget reform Alignment of the SDF, IDP and MTREF Promote multi-year budgeting Enhance funding strategy - capital programme –notable decline in own revenue contribution to capital programme Asset renewal and repairs and maintenance Effective cash flow management and funding compliance Transparency Accountability 13

14. FINANCIAL MODELLING

15. Cost recovery of trading services 19 secondary cities – 2010/11 FY 15 (79 per cent) have at least one service trading at a deficit Electricity – 3 are trading at a deficit; R143 million Water – 6 are trading at a deficit; R194 million Sanitation – 7 are trading at a deficit; R74 million Refuse removal – 9 are trading at a deficit; R94 million Such trading deficits: –require cross subsidisation –result from flawed tariff determination –place sustainability of service at risk –mean no surpluses to fund capital programme 15

16. The need for financial modeling Applying basic accounting principles and costing methodologies to determine the ‘real’ cost of providing services Tariff determination informed by accurate costing that incorporates direct, indirect and hidden costs of services To enable municipalities to achieve cost efficiencies Improve project prioritisation in respect of capital expenditure Sound costing methodologies that inform the municipal budget 16

17. Key focus areas of financial modeling Develop costing methodologies for municipal services Tariff policies Informed tariff determination processes Develop modelling tools to inform capital spending priorities Introduce financial indicators to measure performance 17

18. REVENUE MANAGEMENT

19. Challenges Inaccurate billing information Lack of data integrity – at various stages in process Growing number of billing queries Ineffective customer service - unresolved queries Billing and revenue collection targets not met Growth in debtors Ineffective policy implementation Negative public perception related to poor service delivery 19

20. Key focus areas of revenue management Improve management of the revenue value chain Data integrity in the transaction processing environment Effective implementation of policies and procedures Targeted approach to debt collection Improve customer service Completeness of revenue - verifying the revenue base Getting the basics right! 20

21. Generating accurate bills Effective processes and procedures to translate data into accurate billing records Service level standards between the municipal departments along the revenue value chain Effective service level agreements particularly when functions impacting the revenue value chain are outsourced Optimally utilised billing systems to ensure that accurate statements of account are presented to customers for payment Data ‘cleansing’ efforts will be in vain if the data is not validated throughout the transaction processing environment on a continuous basis 21

22. REVENUE MANAGEMENT VALUE CHAIN Town Planning Valuations Infrastructure / Metered Services Housing Geographic Information System Cash collection Customer Service Debtor management Opening & closing accounts Billing & Distribution Surveyor General Deeds Registry CUSTOMER SERVICE Waste/ Refuse DATA INTEGRITY CUSTOMER SERVICE LEGAL FRAMEWORK

23. What must change: Ensure effective data handovers between departments along the revenue value chain Reconcile billing records to the data source Protect and grow the revenue base Ensure the correctness of the Valuation Roll Accurate metering of water and electricity services Improve refuse/waste management billing activities Credibility of billing information is paramount 23

24. DEFINING BUSINESS PROCESSES

25. Challenges Uninformed decision-making System solutions not always meeting business requirements Lack of system integration System’s functionality not fully utilised by the municipality; cost ineffective Ineffective system implementation; costly maintenance Implementation compromising data integrity Too much reliance on system vendors Value for money not achieved 25

26. Distribution of current financial applications 26

27. Key focus areas of business processes Defining business processes Integrated financial solutions Ownership of management tools/applications rather than reliance on system vendors Consider costs in terms of value for money –shared services instead of stand-alone solutions Norms and standards for financial applications and related systems – purpose fit for LG Align financial applications to the Standard Chart of Accounts (SCOA) for LG 27

28. Framework for business processes 28 FINANCIAL SYSTEMS & APPLICATIONS JOB DESCRIPTIONS POLICIES PROCEDURES STRATEGIES STRUCTURE BUSINESS PROCESS IT INFRA- STRUCTURE WHO MUST DO WHAT HOW IT MUST BE DONE

29. What must change: Implement monthly reconciliations - systems must balance Define all transaction processing such as meter reading, cash, opening and closing accounts, payments... Align job descriptions to the relevant business processes Take ownership of the financial systems - reduce the dependency on system vendors Optimally utilise the current financial applications - ensure integration 29

30. Standard Chart of Accounts (SCOA) for LG

31. SCOA – Objectives for LG Modernising the COA to ensure: –Contributing to evidence-based financial management and decision-making –Improved data quality ito transparency, consistency, comparability & relevance –More predictable financial classification to benchmark Alleviate present challenges: –No access to operating and financial systems –No SCOA – inconsistent classification across 278 municipalities –Multi-year budgeting – relatively new concept –Limited decision making; and –Consistency in reporting across LG Scope of project –Vendor interaction to assist system development but excludes “onsite” implementation –Framework will be regulated –On-going consultation –CoA piloted before regulated –Centralised support through guidelines, circulars and SCOA Technical Committee 31

32. Conceptual Framework Design Principles –International standards and leading practice –Labels and accounts ~ clearly defined –Alignment of financial and budget reporting –GRAP alignment (accrual vs cash accounting) –Consistent use of terminology –Standardisation across local government –Reporting on “whole-of-local government & government” –Simple classification; and –Cost minimising Classification framework specific to Local Government, incorporating –All transaction types –Appropriation of funds –Spending on service delivery –Capital and operating spending –Policy outcomes –Legislative reporting 32 MAXIMUM EXTENT POSSIBLE

33. Segments of SCOA for Munics 33 Categories Source of Funding Function and Sub-Functions Item Project Region Org. Struct. (Vote / Sub Vote)

34. Where are we in the process? 34 Jan – Oct 2010 Nov – Dec 2011 Jan – Jul 2012 Aug – Dec 2012 Jan – Aug 2013 Produce Draft SCOA Systematic Consultation Broader Consultation Publication Finalisation Legal Consultation

35. Leading Financial Management underpinned by three lines of enquiry

36. 1. Are finances planned effectively to deliver on priority spending? 36 Is spending in line with Constitutional priorities?Is the budget a “balanced budget” or a “funded budget”? Is adequate provision made for asset renewal; repairs and maintenance? Is the revenue value chain working effectively to ensure accurate billing? Is value for money achieved?

37. 2. What is the understanding of costs and performance efficiencies? 37 Are tariffs for trading services cost reflective?If so, are indirect costs considered? Does cost management and efficiencies inform planning? Is the municipality billing for ALL services and collecting ALL money due?

38. 3. Is financial reporting timely, reliable and does it add value? 38 How accurate are the section 71 and 72 reports? Is the Municipal Budget and Reporting Regulations effectively utilised ? Is reporting driven by compliance? Are reporting outcomes regularly reviewed and does it inform decision making? Are reports meeting stakeholder requirements?

39. Thank You Please join the team for a discussion after lunch (Breakaway Session)