9.1 Medium term budget summary - Operating
The consolidated operating medium term budget for 2001/02 to 2003/04 (table 9.1), including Midrand and Modderfontein, reflects an operating surplus of R129,3 million in the first year. The surplus, in line with the financial plan of the city, is transferred to reserves to start the process of backing the city's provision with cash. The budget was prepared on the basis of ensuring that it is balanced. The process of budgeting starts with the determination of the revenue envelope. That is, how much can the citizen of Johannesburg afford to pay. This ensures that a balanced budget is not achieved by just increasing tariff charges, but through continuous improvement in seeking efficient and effective ways of operating. The years 2002/03 and 2003/04, though indicative, highlights the upward trend in the operating surplus. The year 2001/02 will be the first financial year of the city and its restructured entities. The end of the financial year will afford the city an informed basis to continue to plan and project its spending in a systematic and sustainable manner. The budgeted spending of the core council (table 9.2) saw a shift from support functions to central distribution functions like health and the Metropolitan Police Department. Like most entities, most of the costs are tied up in fixed costs, however, the 2001/02 budget has offered the city the opportunity to begin to redirect its spending to where it is needed most.
The net surplus of R993,9 million for core council (table 9.2) is expected to rise to R1,034 billion and R1,087 billion in year two and three. The main income is from assessment rates. These surpluses are arrived at after the decision was made to allow all the properties valued below R20 000 to be exempt from property rates.
The UACs reflect the total net loss of R425,4 million (see table 9.3). This is mainly due to the introduction of Generally Accepted Accounting Practice (GAAP). However, the net transfers from council to these entities amounts to R864,5 million. City Power, Johannesburg Water and the Fresh Produce Market's transfers to council totals R338.6 million in the first year. The remainder of the entities receive transfers from council amounting to R1,204 billion.
Tables 9.1 to 9.3 below reflect the medium term operating budget summary, as well as for the core functions and the UACs, followed by graphs to represent income by function, expenditure by function and income by source.
Table 9.1
| MEDIUM TERM BUDGET SUMMARY – OPERATING | |||
| CITY OF JOHANNESBURG | |||
|
Function Surplus/(Deficit) |
Draft Budget 2001/02 | Indicative Forecast 2002/03 | Indicative Forecast 2003/04 |
| UACs – Transfer to/(from) Council | -864 544 | -764 600 | -772 887 |
| Core functions | 993 883 | 1 034 705 | 1 087 027 |
| Operating surplus/(Deficit) | 129 339 | 270 105 | 314 140 |
| Less contributions to reserves | -129 339 | -270 105 | -314 140 |
| Net surplus/(Deficit) | 0 | 0 | 0 |
Table 9.2
9.2 Medium term budget summary - Capital
The medium term Capital Budget is reflected in Table 9.4 and shows the budgeted capital expenditure for 2001/2002 of R 1,2 billion, split between core council and UACs as follows:
| Council functions | R 324 million |
| UACs | R 961 million |
| Total | R 1,285 million |
It is envisaged to spend an amount of R 1,004 billion and R 724 million for the following two financial years (indicative forecasts). While year 2 and 3 reflect a decline, the analysis of the detail highlights that the capital investment into the utilities and agencies are maintained relatively constant. The decline is mainly due to the massive initial capital investment in Metrobus for the purchase of 200 new buses and the telecommunication service for the installation and setup of a call center in year one. This spending continues in year two and thereafter there is a steep decline.
The funding of the capital budget for 2001/2002 amounting to R 1,2 billion is as follows:
| External loans | R 422,6 million |
| Consolidated loans fund | R 40,8 million |
| Grant funding | R 256,0 million |
| Fixed property sales fund | R 303,3 million |
| Public contributions | R 214,5 million |
| DBSA rollover | R 30,2 million |
| Own reserves | R 17,5 million |
In determining the funding sources, due consideration had to be given to the external debt servicing-ratio, as prescribed by National Treasury, and the allocations to the respective functions were structured accordingly.
In preparing the capital budget 2001/2002, the respective functions had to ensure that consideration be given to the committed capital projects and thereafter to new projects in accordance with the City Development Plan.
Individual projects, making up the Capital Budget, will not be automatically authorised and voted, but will be subject to an authorisation process during July 2001. Each project will be motivated by the responsible function, and upon approval by the council, the project will be voted and expenditure will commence.
Table 9.4 and an accompanying graph are unavailable at present.
9.3 Tariff/revenue policies and projections
Table 9.5 summarises all tariffs for 2001/02 compared to the previous year, followed by the explanations below.
Major Tariffs: 2001/ 2002
- Water and Sanitation
The proposed overall tariff increase for water is 7,2%. The sanitation tariff increase is 6%. The water tariff increase is based on a weighted average of inflation of 6% and the expected Rand Water price increase of 7,5% or more (a formal announcement on the Rand Water increase is expected by early June 2001).The lifeline service of 6kl free water per month has been incorporated into the water tariff schedule, the effect of which will be neutral on Johannesburg Water's revenue base.
- Electricity
The National Electricity Regulator (NER) has set an annual guideline increase of 5.5% for 2001/2002.This guideline refers to the overall increase in revenue resulting from the adjustments to electricity tariffs.The proposed general increase in the 2001/2002 tariffs for electricity is 6% for domestic and 4.5% for non-domestic consumers (These tariff levels are set to achieve the annual guideline as per NER recommendations). The process of implementing cost reflective tariffs is also underway and will be phased in gradually over several years thereby lessening the financial impact on consumers.
The introduction of free basic electricity has not taken place at this stage as further research and modelling is necessary. The fact that a large portion of domestic consumers that would benefit substantially from free basic services are not supplied by City Power, but by Eskom, has a significant impact and must be investigated.
- Refuse Removal
Refuse removal tariffs for domestic consumers will generally increase by 6%. Commercial consumer tariffs have been set as a maximum charge to reflect market pricing and allow flexibility. This flexible pricing methodology affords Pikitup the ability to compete in an open market with other waste collection companies. - Assessment Rates
The rate in the Rand will be increased from 7,84 cents to 8, 31 cents. Based on the provisional valuation roll to be implemented from 1 July 2001, the abovementioned rate will yield a return of R1,9 billion. This is a 4% increase over the yield at the present rate.The prevailing level of rebates for residential properties will remain at 58% for Johannesburg (excluding flats) and 40% for Midrand and Lethabong. The rebate in respect of flats in Johannesburg is 40%.
In order to assist the poorer members of the community, council will remit the assessment rates in respect of properties where the land value is less than R20 001. This will reduce the rates yield from R1,9 billion by approximately R106 million.
Assistance will also be provided to those senior citizens who qualify for the pensioners remission in that the earnings limit has been increased to R4 000 per month.
The implementation of the provisional valuation roll from July 2001 has revealed a shift in property values with Inner City suburbs reducing sometimes by up to 40% and certain residential suburbs increasing substantially. Owing to the impact that this will have on a domestic property owner's monthly account, the council will phase the increase in assessment rates over a 3-year period where a residential property value has increased by over 30%. Thus in the first year such residential property owners will only be faced with last years rates plus one third of the increase as a result of the enhanced property value.
In the demarcation process, parts of the former Midrand and the Lethabong areas, have been included in the area of jurisdiction of the City of Johannesburg. At the time, the assessment rate in the Rand in those areas was less than that in the Johannesburg area, and subsequently the change in the assessment rate will be phased in over two years for those suburbs of Midrand, and over three years for those suburbs of Lethabong, which are now part of the City of Johannesburg. An account holder in Midrand will, in the first year, pay last years rate, plus one half of the increase, calculated at the new rate in the Rand. Similarily, an account holder in Lethabong will pay last years rate plus one third of the increase, calculated at the new rate in the Rand.
Minor tariffs: 2001/ 2002
Most minor tariffs will generally increase by 6% in line with inflation and with National Treasury expenditure limits.
One noticeable exception to the above is the proposed fare increase of 9% for the Metrobus Company. This increase is necessitated by the steep increase in the price of diesel (approximately 40%), as well as the cost of spares and labour, which have also increased by more than 6%. Industry statistics reveal that the cost of inflation in the bus industry for the previous financial year is approximately 17%. In the face of these inflationary factors, the 9% increase reflects substantial efficiency gains.
Future Tariffs
It is the city's intention that future determination of charges for services provided by the city and its agencies should adhere to the following:
- Services should be affordable and equitable
- Resources should be allocated in the most efficient manner
- Tariffs should cost-reflective
- Service quality-improvement and extensions should be allowed for
- Economic development should be promoted.
Table 9.5 Tariff Schedule
Unavailable at present.
9.4 Key budget assumptions
Summary
The key budget assumptions comprise of the policy direction set by council at the Budget Lekgotla held on February 8 and 9, general economic indicators from various sources and the National Treasury restructuring grant targets.
Policy direction
At the Budget Lekgotla in February 2001, council developed the medium term budget policy statement and indicative allocations for the medium term budget commencing in 2001 / 2002. These policy directions are shown in the tables below and set out the broad level of resource allocations for each function for the next three years.
The policy directions have been formulated in the light of significant consultation as part of the iGoli 2010 consultative process undertaken in 2000 and the Peoples Budget ward forums held early this year. The section on the consultative process provides details of process and outcomes of the recent budget consultation process.
Table 9.6 and 9.7 below indicates the intended future spending direction of each department or function and entities for operating and capital.
TABLE 9.6
Unavailable at present.
TABLE 9.7
Unavailable at present.
General economic indicators
The general economic indicators that have been taken into account for the preparation of the budget are shown in Table 9.8 below along with brief explanations of the indicator where necessary.
Table 9.8
Unavailable at present.
Note 1: Expenditure limits imposed by National Treasury
These expenditure limits apply separately to the operating and capital budgets and are set by National Treasury having a holistic approach to the financial stability of south african local government.
Note 2: Inflation
Although there are expenditure limits, the budget must take into account the actual increase in prices. If inflation plus the growth in demand for services (due to population growth etc) is greater than the allowed expenditure increases then the city would need to realise efficiencies to deliver the same or greater level of service.
CPIX - Consumer Price Index: reflects consumer inflation less changes in the home loan rates for metropolitan and urban areas. It is the measure used by the Reserve Bank for inflation targeting. A variant of the consumer price index has been opted for because headline or overall consumer price index is influenced directly by changes in the Reserve Bank's repo rate through its effect on interest rates.
Note 3: Population growth
As discussed above, population growth has an impact on the demand for service delivery. The estimates used are based on the demographic report (2000) conducted by the city.
Note 4: Labour costs
Salaries make up a significant proportion of the budget (27%) and therefore it is important to analyse the trend of increases seperately to other inflationary factors.
Note 5: Interest rates
The prime rate is the base rate in the economy. It is what banks generally charge their customers - it could be either prime plus or minus depending on the customer's risk assessment. It is mainly influenced by the repo rate (rate at which the Reserve Bank lends money to banks) and there exists a positive correlation between the two.
BA Rate : Banker's Acceptance Rate. It is an indicator of short-term money market rates.
Note 6: Payment levels
Payment levels represent the annual debtors collection rate. That is the amount of debtor revenue collected dived by the amount of debtor revenue billed expressed as a percentage. The targets show an improving trend although the annual average used for the budget might be slightly lower.
Note 7: Income growth
To determine a realistic figure for income growth, past trends are analysed. A conservative estimate is made based on the relationship between growth in population and the resulting expected growth in income given constant service levels and prices. It should be noted that growth in population does not translate directly into income growth as the sections of the community that are growing the fastest do not contribute to income growth proportionate to their number.
RSC levies growth is tied to business turnover and remuneration. Rates and services growth relates to assessment rates and provision of services such as electricity, water and refuse collection. Note that the growth estimates for these categories does not to increases to cover inflation. They relate to growth due increasing demand.
Note 8: Fuel index
The fuel index mainly affects services that depend on vehicles and plant machinery for their daily operations. It also affects prices charged by contractors. The fuel index therefore has implications for the movement in prices applicable to the operations of the city.
Financial ratio targets
Table 9.9 below set out targets, as set by the National Department of Finance, to be achieved by the City of Johannesburg. Targets are in brackets ( ) and actual results are shown without brackets.
Table 9.9
Unavailable at present.
10.5 Past performance - audited results 1999/2000
Summary
The 1999/2000 financial year was key in stabilising the city and preparing for the transition to a unicity.
Since the presentation of the previous years financial statements the city made substantial progress towards addressing the financial crisis of previous years with the 1999/2000 financial statements reflecting the elimination of the accumulated deficit and the dependance on short term borrowing. The balance sheet now reflects that the city is in a cash positive situation.
This can be attributed to the stringent control of expenditure exercised throughout the year and the fact that the iGoli 2002 plan is also starting to bear fruit. The sale of non-strategic assets, such as Metro Gas and Rand Airport, resulted in a once off inflow of cash as well as reduced operating costs since these entities were previously subsidised by the council.
The complete turnaround of the financial affairs of the city has not and cannot be achieved overnight. However, the 1999/2000 financial statements show a remarkable improvement from previous years and it is expected that this improvement will continue as the new structure takes shape and settles down.
During December 1999 the Councils of Greater Johannesburg were able to approach the capital market and successfully raised a long-term loan of R200 million for the financing of capital expenditure.
The financial plan for the city now includes a three-year capital programme which presently reflects an annual increase in capital spending, to begin to address the infrastructure backlogs of the city.
The iGoli 2002 plan has as its main aims, the addressing of the financial and institutional challenges facing Johannesburg and, at the same time, to address the changes which the city will undergo as a result of the unicity structure and the incorporation of Midrand and Modderfontein into its boundary.
This plan has, from a financial point of view, laid a sound foundation for the challenges facing the city in the future.
Financial targets for year ended 30 June 2000
The 1999/2000 financial year started with an accumulated deficit of R138,4 million and the budget was prepared on the basis that expenditure would be limited to the income generated, namely a balanced budget. Provision of R400 million was made for the under recovery of income and the intention was also to eliminate the accumulated deficit.
The budget for capital projects amounted to R299,5 million but this was revised to R384,2 million during the course of the financial year. The funding for the projects in the original budget was to be financed as follows:
The council was previously reliant on expensive short-term call bonds to finance capital expenditure. The goal was to eliminate the use of call bonds during the year and to raise long term loans during the year for capital expenditure.
Actual operating income and expenditure 1999/2000
A summary of the original budgeted income and expenditure compared to the actual income and expenditure for the financial year is detailed below:
| Budget R 000 | Actual R 000 | Deviation R 000 | |
| Income | 8 439 237 | 8 450 732 | 11 495 |
| Expenditure | 8 298 237 | 8 297 710 | 527 |
| Surplus | 141 000 | 153 022 | 12 022 |
The final income accounted for was some R11 million more than budget and this is mainly attributable to the income from regional services levies and assessment rates being higher than estimated. These increases effectively countered the under recovery of income from the sale of electricity.
Expenditure for the year was exceptionally close to budget and consequently the final surplus for the year amounted to R153 million. It was however also necessary for certain appropriation account adjustments to be made at the end of the year.
The city has succeeded in eliminating the accumulated deficit of R138,4 million and ended the year with an accumulated surplus of R61,2 million.
The resulting accumulated surplus on the balance sheet as at 30 June 2000 of R61,2 million was comprised of:
- Opening rate account deficit of (R138,4 m)
- Operating surplus for 1999 / 2000 of R153m
- Cancellation of the Eskom bulk debt agreement of R144m
- Recovery of VAT from the Receiver of Revenue of R10m
- Additional contributions to the bad-debt provision of (R55m)
- Leave provision of (R23m)
- Bonus pensionable service of (R20m)
- Sundry net adjustments of (R9,4m)
The Auditor-General has in previous years referred to the under provision for bad debts and leave provision. A policy has now been approved where all debt older than 180 days will be provided for. In this regard, in addition to the R400 million contributed to the provision during the year an extra R55 million contribution has been made.
The provision for accumulated leave which in previous years has been eroded because of a curb on expenditure has been increased to 45% of the commitment with an additional contribution of R23 million. The Auditor-General is in agreement that a provision of 50% of the leave commitment is considered adequate and it is planned to attain this cover during the 2000/2001 financial year.
A provision has also been made for bonus pensionable service with a contribution of R20 million during the year. This is estimated to be about 50% of the potential exposure as at the end of the financial year.
The two charts below show actual audited operating income and expenditure by function for the financial year ended 30 June 2000.
The 'other' category in the two graphs above represents mainly the finance and administration functions as well as miscellaneous functions.
Actual capital expenditure 1999/2000
Capital expenditure for the 1999/2000 year amounted to R295,3 million. Long-term loans of R195 million were raised on the financial market with a further guarantee to raise R150 million by the end of December 2000. It should be noted that the target to eliminate the use of call bonds (R241 million at the beginning of the year) was achieved during the year and investment of short-term surplus funds at 30 June 2000 amounted to nearly R71 million.
The major project areas for capital expenditure during the year were:
| R 000 | |
| Bulk sewerage and sewer reticulation | 38 590 |
| Housing and hostels | 83 770 |
| Roads and stormwater | 26 901 |
| Electricity | 43 863 |
| Y2K issues and financial and payroll systems | 36 621 |
| Sports facilities | 15 343 |
| Inner City and development projects | 15 252 |
| Water | 20 664 |
| Other | 14 325 |
| TOTAL | 295 329 |
10.6 Recent past performance - 2000/2001
Summary
The 2000/2001 budget is a budget to assist transition to the unicity. It was always planned to achieve two objectives. Firstly, to budget on a city-wide basis and secondly to revise the budget (after six months) to realign financial resources with the new structure.
Since June 2000 there has been further progress towards the iGoli 2002 plan and some of the more important milestones reached are:
- the corporatisation of the Fresh Produce Market, Johannesburg Zoo, the Civic Theatre and Metrobus
- the establishment of the Property Management Company
- The establishment of the water and electricity utilities, and
- Outsourcing of information technology and the administration of the council's fleet of vehicles.
Council has been fortunate in successfully motivating to National Treasury for a restructuring grant of R550m over 3 years. This grant is however conditional on the city being able to achieve set targets and requirements which include a number of performance ratios. To date, the first two installments have been received.
The city has now also progressed towards the development of a multi-term budget that conforms with the local government budget reforms issued by the National Treasury. This multi-term budgeting will encourage longer term planning and provide information on the sustainability of services and the council's financial resources to improve service delivery to the community. The improved financial position of the city brings this ideal one step closer.
In addition to the tight control of expenditure exercised throughout the year and the improved financial reporting procedures which have contributed to the improved financial position, the city is committed to the introduction of a performance management system. This is also a requirement of the Municipal Systems Act and will facilitate the ability of the executive authorities to assess the performance of senior management and to hold officials accountable for non-performance. It will therefore play a major role in improving service delivery and making the most efficient use of scarce resources whether they are financial or human resource.
Financial targets for year ended 30 June 2001
The 2000/2001 budget provided for a balanced operating budget of R7,293 billion and a capital programme of R828 million. Tariff increases were effected such that most tariffs were to be increased below the rate of inflation. Planned efficiency increases were to compensate for the reduction in real income.
This budget halted the trend of constantly reducing expenditure on repairs and maintenance and in fact increased expenditure in this area by 13%.
Capital expenditure budgeted for 2000 / 2001 of R828m was more than double than the previous years revised budget of R384m whilst maintaining a favourable trend on interest and loan redemption as a percentage of the total budget.
Actual performance to March 2001
The city is facing the challenge of ensuring that the financial systems that are being put in place to support the new institutional framework are both efficient and effective to ensure sound financial management. The creation of separate entities resulted in the spreading of financial personnel throughout the city. In addition there are new financial systems being introduced that take into account the unique operations of the various entities.
To date the operating spending has remained within budget. For the nine months to March the net operating results reflected a surplus of R74m. There is continuing pressure to intensify the efforts to transform the revenue collection systems and procedures and tight expenditure control continues to off set the slowly improving revenue position.
The city's initiative to manage the cash tightly continues to yield fruit. The cash flow position has remained positive for the major part of the year and at the end of March the bank balance was R661,0 million
The original capital budget of R844m was revised to R853m. To date R755m has been committed. It is projected that only a small proportion of the capital budget will remain unspent by the 30 June 2001.
10.7 Asset management strategy summary
The city has substantial responsibilities when it comes to maintenance and upkeep of its infrastructure-type assets.
Numerous studies have been undertaken in the past to try and ascertain the condition of and the service delivery levels provided by the city's infrastructure assets. However, the amalgamation of the five metropolitan councils as well as the inclusion of Midrand and Modderfontein has created the daunting task of preparing a city-wide asset management strategy. While there will be a concerted effort in the coming year to develop such a strategy, it is not possible at this stage to present an accurate overview of the condition of the city's infrastructure assets.
It is however, widely accepted that the infrastructure backlogs are enourmous and the development of a city wide strategy is required in order to ensure that the approach is priortitised consistent with the strategic direction of the city.
It should be noted that functional business plans have to some extent taken into account the relevant infrastructure backlogs. However, the fiscal situation of the city has required that a gradual approach be taken towards addressing the backlogs.