City of Johannesburg 16 October 2012

1. Report to Select Committee on Appropriations on Gauteng Municipalities – 2011/12 City of Johannesburg16 October 2012

2. CONTENTS • Municipal cash flow financial status • Sources of revenue, collection and expenditure management • Spending patterns and performance of the municipality with regards to conditional grants • Development and implementation of budgets • Compliance with the MFMA and other legislation • Current assets and liabilities • Plans to address audit findings

3. Municipal cash flow status

4. Cash flow Trends Cash Balances • Average of around R2 billion cash balances since December 2011 • On 30 June 2012 the City closed the year with a positive cash balance of R2,1 billion. • Cash balances in the first quarter (July to September 2012) have continued to be above R2billion Short term Funding • Commercial paper (CPs) issuances have been used to manage cash flow mismatches • R1.1 billion worth of CPs was issued in 2011/12 compared to R3,402 billion raised in the 2010/11 financial year. Furthermore, all CPs were redeemed by April 2012.

5. Cash flow Trends Cash Receipts and Payments – Including Grants • Month on Month cash receipts, which includes grants received depicted by blue line, were higher than expenditure, depicted by red line • Treasury keeps as liquidity buffer, healthy cash balances and utilizes funding mechanisms in the form of General Banking Facilities(GBF) and Commercial Paper.

6. Working Capital Trends Current Assets v/s Current Liabilities • The City’s financial strength and liquidity have improved as reflected by the Current Ratio ending the financial year at 1,25:1 which is slightly higher than the benchmark of 1:1 Debtors v/s Creditors • The debtors & creditors balances are key contributors to the current ratio • As at the end of the financial year, the ratio between consumer debtors and Trade payables had improved to almost 1:1.

7. Credit Rating Background • The City of Johannesburg Metropolitan Municipality has dual rating agreement with Fitch Ratings and Moody’s investor service. • The beginning of the year 2012 – the City had the following ratings: Fitch ratings AA-(zaf) Long-term/ F1+(zaf)short-term Stable Outlook Moody’s Aa3.zaLong-term / P – 1.zashort-term Stable Outlook • The rating outlook on RSA national government was downgraded to negative in Feb 2012 and as a result the City’s outlook was also downgraded to negative from Stable • Moody’s Investor Service affirmed the City’s rating in March 2012 at Aa3.za Long term and P-1.za short term with negative outlook. Moody’s further downgrade CoJ to A1 on 1. October following the sovereign downgrade. • Fitch Ratings in July 2012, affirmed its rating at AA-(zaf) long term and F1+(zaf) short term.

8. Credit Rating Action Drivers • Based on the previous rating analysis, the two rating agencies cited credit strengths that lead to the rating affirmation • Fitch Ratings: Steady recovery of liquidity Stable operating performance Growing investments Balanced budget over cycle • Moody’s Investor Services: Strong revenue growth supported by broad tax base Moderating and stabilizing financial leverage Viable consolidation strategy for billing challenges In Oct 2012, Moody’s downgraded CoJ by one notch (to A1.za/P-1.za) and other sub-sovereigns due to a single notch RSA sovereign downgrade from A3 to Baa1.

9. Credit Rating Triggers On Sovereign • The Moody’s CoJ downgrade was not due to internal financial fundamentals but due to the assumed dependency of a sub-sovereign to its national government. • Despite the downgrade, the stand-alone credit strength of the City remains intact. • Moody’s reasons for the sovereign downgrade were: • Infrastructure shortfalls and relatively high labour costs • Uncertain revenue prospects and low-levels of interest rates • ANC’s policy conference left many discussions unresolved • South African authorities reduced capacity to handle the current political and economic situation • Moody’s cited that higher domestic and investment rates restrained debt accumulation and maintenance of sound economic policy would support a stable outlook and potentially an upgrade.

10. Credit Rating Financial Impact On COJ • The impact of the downgrade would be increased borrowing rates. This, however, talks to future debt raisings initiatives • Currently, 79.1% proportion of the liability book is fixed. And the remaining 20.9% is floating. There would be very minimal impact on the current book, limited to a the floating portion of the book • This occurrence, therefore, speaks to the City’s debt raising capabilities in the future as opposed to the current book. • The low interest rate economic cycle somewhat has dampening effect on the rating downgrade and thus cushions the Public Sector from a real increase in the cost of funding

11. Sources of Revenue, Collections and Expenditure Management - 2011/2012

12. Sources of City Revenues

13. Collection Levels Historically collection levels over the last 3 financial years have been on average 91.5%, of which approximately 7.0% is of debt older than 120 days. In the medium term collection rates are anticipated to gradually rise as follows (Source: Budget Book 20012/13-2014/15): • The City is compliant with Chapter 9 of the Municipal Systems Act as relates to debtors and debt collection and as required by the MFMA.

14. Expenditure Management • The City has managed to ensure that creditors are settled within the legislated 30 days of invoice • By applying stringent daily cash flow management processes, the City has in the main managed to ensure 100% compliance. There are however limited cases of exceptions to this where accounts are under query. • Suppliers therefore have a favourable perception of doing business with the City as there have been limited defaults on obligations due • Monthly expenditure monitoring against budget ensure budgeted targets are achieved • Budget adjustments where necessary on the basis of spending patterns are done in line with provisions of the MFMA.

15. Spending Patterns and performance of conditional grants

16. Capital Budget performance by funding Sources – June 2012 (Preliminary)

17. Capital Budget performance by funding Sources – June 2012 (Preliminary) An application will be submitted to National Treasury to roll-over the entire unspent portion of the grant. The closing date for the submission of applications is 31 August 2012.

18. Spending on Conditional Grants (Preliminary)

19. Spending on Conditional Grants Grants and Subsidies Other • Spending for the period amounted to R1, 1 billion which represents spending of 75%. • The reasons for some of the major variances are: • Community Development - non-spending of the Carnegie grant on furniture and equipment for the Centre of Excellence due to project delays. Project delays were as a result of the unforeseen condition of the building's electrical wiring, which delayed the completion of the building and the awarding of the tender for the computers and equipment. The project is a committed project and will be completed in the following financial year. • JHB Water - The under spending is as a result of delays on the EPWP funded Orlando East sewer realignment project due to rain, hard rock and the need to relocate the pipe route due to new services intersecting the line. The project is a committed project and will be completed in the new financial year. • Development Planning – The under spending of R 10, 7 million relates to the Neighbourhood Development Grant projects. An application for a roll over of R8, 8 million is being submitted and a saving of R1, 9 million is envisaged. • Transportation- Under spending mainly due to the decision to relocate route 1C from Oxford Rd to Louis Botha Ave resulted in a delay in the project as planned. A request will be submitted to National Treasury for approval to roll over unspent funding. • JHB City Parks – Cost allocated to operational costs in error. Being corrected at year end. • Emergency Management Services – delay on Cosmo City fire station and wash bay project.

20. Development and implementation of budgets

21. Long term Plan - Joburg 2040 • Approved a vision for the City: • ‘Johannesburg-a World Class African City of the future-a vibrant, equitable African city, strengthened through its diversity; a city that provides real quality of life; a city that provides sustainability for all its citizens; a resilient and adaptive society. • Joburg 2040 strategy is about resilience, sustainability and liveability: • Resilience: ability to work together and support each other in times of need. It is about our ability to adapt to difficult situations by recognizing the strength and assets and by having the capacity to mobilize them in times of need and still deliver on our promises • Sustainability: is about getting rid of inequality and poverty as well as the creation of a better life for all. It is about striving for a healthy and good lifestyle. It is also about acknowledging that the City must continue , therefore we must harness natural resources that can be sustained in to the future. • Liveability: is about an environment that promotes civic engagements and a sense of place through safety, sustainable choices of socio-economic opportunities. It is about having access to an adequate , affordable and environmentally sustainable and coordinated transportation system , as well as housing and economic opportunities.

22. Boulders, Pebbles and Granules Joburg 2040 5-Year IDP Business Plans • Who will do what and • how in the next year? • What are the future trends? • Where do we want to be? • How do we approach development? • Programmes for current term of office • What can we get done in the 5 years? LONG TERM FINANCIAL PERSPECTIVE MEDIUM TERM FINANCIAL PLAN BUDGET & SDBIP Strategic Planning Framework

23. Medium Term Budget Direction LONG TERM SHORT TERM MEDIUM TERM • Stabilise City’s finances • Refining and initial implementation of the IDP • Accelerated service delivery and improve customer and citizens experience • Consolidation of the City’s finances • Service delivery excellence is the “norm” • Accelerate the implementation of IDP flagship programmes • Financial sustainability and resilience • Impact assessment of implementation of the IDP flagship programmes against GDS outcomes CHANGING THE CITY’S COURSE TOWARDS 2040 VISION

24. Changing the City’s Course: Alignment to Current Imperatives • Changing the Course • Redirecting and reorienting our collective energies to a new service delivery approach • Building capacity for inclusion • Creating a high performing municipality • Continuity • Accelerating basic services (water, roads, electricity, etc.) Paving the way for the realisation of the Joburg 2040 vision

25. Joburg 2040 Strategy Outcomes • The City’s vision is framed around the 4 outcomes: • Outcome 1: Improved Quality of Life and development driven resilience for all • Outcome 2: Well-developed, sustainable, resilient and liveable urban infrastructure, that is supportive of the low-carbon economy • Outcome 3: Inclusive, job-intensive, resilient and competitive economy • Outcome 4: A leading metropolitan government that proactively contributes to and builds a sustainable, socially inclusive, locally integrated and globally competitive GCR

26. Key IDP Flagships sequencing: Enablers and catalytic interventions • In aligning the imperatives of changing the City’s course, continuity and revenue optimisation, the following key IDP flagship programmes that are proposed for implementation: • Financial Sustainability • Shift to Low Carbon Infrastructure • Integrated Waste Management • Green Ways and Mobility • From Informal Settlements to Sustainable Human Settlements • Urban Water Management • Citizen Participation & Empowerment • Strategic Communications and Marketing • Human Capital Development & Management • A Safe, Secure and Resilient City that Protects, Serves, Builds and Empowers Communities • Economic Growth • A City Where None Go Hungry

27. Total Budget – 2012/2013

28. Compliance with Legislation

29. Compliance • The City maintains a legislative compliance register. • The following process is followed to complete the legislative compliance register. • Templates on Legislative compliance including Fruitless and Wasteful expenditure (Section 32 and 102 of MFMA) are completed by departments on a monthly basis to indicate whether or not they have complied with the various legislative provisions. • Reasons must given for any non compliance and corrective measures as well as mitigations to ensure that non compliance is not repeated • Legal department, the department maintains a Compliance Register and a Fruitless and Wasteful Expenditure Register. • Legal department reports to Mayoral Committee and senior management regarding the level of compliance as recorded in the compliance registers. • Legal department also monitors new draft bills, bills and legislation which impacts on the City. These are forwarded to the relevant departments. Where applicable, comments are made to relevant national departments in an attempt to influence legislation which impacts on the City.

30. Current Assets and Current Liabilities

31. Analysis of Financial Position • Preliminary results for 2011/12 indicate a current ratio of 1.02:1 which is in line with benchmark

32. Plans to address Audit findings – June 2011

33. Response to Audit Report • A detailed action plan is in place not only for the audit report issues, but also for the entire management letter; • All findings are shared not only with the affected departments but with all departments to ensure that the issues are addressed organization wide; • Regular follow ups (milestones)are done with each department, ensuring that the relevant target dated are achieved. • This is an opportunity for the City to give attention to the internal control environment and strengthening internal control mechanisms; • Implement recommendations made by the AG in the audit report regarding internal controls (i.e. leadership and governance);

34. Interventions • A strengthened oversight system and responsibility at senior management level; • Improve the consistency of data and records; • Further engagement with the AG and find common ground on the interpretation and understanding of SCM regulations (deviations); • Enhancing revenue management through the Revenue Step change Roadmap announce in November 2011; • A more customer centric approach to billing and revenue issues • A comprehensive turnaround plan for the improvement of the revenue system with clearly defined time frames and deliverables • Focus on identifying key risks and step up the role of JRAS (internal audit) and risk management; • Secured the services of KPMG to assist in addressing audit challenges

35. JRAS: Internal Audit Services OPCAR Plan 2011/12

36. JRAS: Internal Audit Services OPCAR Plan 2011/12

37. JRAS: Internal Audit Services OPCAR Plan 2011/12

38. JRAS: Internal Audit Services OPCAR Plan 2011/12 – Contd…….

39. Revenue intervention – Revenue Step Change

40. Revenue Step Change Objectives 1. Revenue - To maintain and continue a sustainable Revenue model for the City of Joburg where service delivery continues to thrive. 2. Revenue Collection - To collect revenue from all customers and maintain the current growth in Revenue collection. - To implement a revenue collection strategy which identifies the needs of the various customer segments 3. Customer Experience - To reduce waiting times in the call center and customer service centers. - To reduce the calls lost due to customer frustration with waiting - To develop and implement service standards that improve the customer experience. - To improve query resolution turnaround times

41. Revenue Step Change Phases The Roadmap comprises 3 phases, namely: Phase One (Quick Wins) - 28 February 2012 Phase Two (Stabilization) – 30 June 2012 & 31December 2012 Phase Three (Maintenance and Improvement) – 30 June 2013

42. Context of the Interventions Other CoJ change initiatives Customer Operating Model IT Vision Benefit interventions Areas 1. Customer details 2. Query resolution 3. Call Volume Management 4. Revenue complete ness 5. Revenue accuracy 6. Credit Management CoJ portfolio Revenue Dept. Long list of gaps Backlogs Time Intervention Impact from approx. 6 months Longer Term (2-3 years)

43. Non-Technical Queries Logged

44. Non-Technical Queries Logged - Notes • Reasons for the increase in queries from May 2012 to August 2012: • Zero Tolerance Project – Meter reading estimates reduced due to the use of actual meter readings. This resulted in some instances in bills being higher when the actual meter readings were used for billing compared to the previous estimations, hence the spike in queries. • Valuation Roll – The properties were revised either up or downwards resulted in queries. • Electricity Consumption – Seasonal and annual tariff effected in July 2012. The customer’s bill were higher resulted in queries.

45. Technical Queries Logged

46. Acromyms • USDG Urban Settlements Development Grant • EPWP Extended Public Works Programme • PTIS Public Transport Infrastructure and Systems • NDPG Neighbourhood Development Partnership Grant • MFMA Municipal Finance Management Act No. 56 of 2003 • IDP Integrated Development Plan • SDBIP Service Delivery and Budget Implementation Plan • GDS Growth and Development Strategy • GCR Gauteng City Region • AG Auditor General

47. Questions and Answers