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Provincial Government Western Cape Provincial Treasury

ACCOUNTING REVIEW 2005 Working paper Municipalities

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Contents Foreword Executive Summary 1 Chapter 1 Introduction 3 Chapter 2 Accounting Framework 5 2.1 Relevant Legislation and Policies 5 2.2 General Functions of National Treasury and Provincial

Treasury 6

2.3 Accounting Standards and Policies 6 Basis for the preparation of annual financial statements 6 Migration from IMFO to GAMAP/GRAP 7 2.4 Reporting Timelines 8 2.5 Reporting and Oversight Process 8 2.6 Accounting Systems 9 Chapter 3 Accounting Capacity 11 Chapter 4 Analyses and Interpretation of Annual Financial Statements 13 4.1 Financial Analyses of the municipalities in the Western Cape

Province 13

4.2 Category A: Revenue and Expenditure 13 Ratio 1: Actual Revenue versus Budgeted Revenue 13 Ratio 2: Level of Reliance on Government Grants 17 Ratio 3: Actual Expenditure versus Budgeted

Expenditure 20

Ratio 4: Personnel Expenditure as a percentage of Total Expenditure

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Ratio 5: Interest as a percentage of Total Expenditure 28 Ratio 6: Repairs and Maintenance to Total Expenditure 31 4.3 Category B: Asset Management 35 Ratio 7: Acquisition of Property, Plant and Equipment –

Actual versus Budget 35

Ratio 8: Debtors Collection Period 38 4.4 Category C: Debt/Liability Management 43 Ratio 9: Acid test ratio 43 Ratio 10: Total Liabilities as a percentage of Total Assets 46 Ratio 11: Net Cash flow from Operations compared to

Total Debt of the Municipality 50

Chapter 5 Way Forward 55 References 57

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Accounting Review 2005 -Municipalities – Working Paper

Abbreviations ACFS Annual Consolidated Financial Statements AFS Annual Financial Statements A-G Auditor-General AO Accounting Officer ASB Accounting Standards Board CFO Chief Financial Officer CMIP Consolidated Municipal Infrastructure Programme DBSA Development Bank of Southern Africa DORA Division of Revenue Act, 2004 FMIP Financial Management Improvement Programme FMG Financial Management Grant FMS Financial Management System GAAP Generally Accepted Accounting Practice GAMAP Generally Accepted Municipal Accounting Practice GRAP Generally Recognised Accounting Practice IFAC International Federation of Accounting IFMS Integrated Financial Management Solution IMFO Institute of Municipal Financial Officers IMF International Monetary Fund INCA Infrastructure Finance Corporation Limited IPFA Institute of Public Finance and Auditing IT Information Technology MEC Member of the Executive Council MFMA Municipal Finance Management Act No. 56 of 2003 MIG Municipal Infrastructure Grant MMS Maintenance Management System MSA Municipal Systems Act NERF New Economic Reporting Format NT National Treasury PE Public Entities PFMA Public Finance Management Act, 1999 PGWC Provincial Government Western Cape PPE Property, Plant and Equipment PRF Provincial Revenue Fund PDC Provincial Development Council PSA Public Service Act, 1994 PSR Public Service Regulations PT Provincial Treasury REAL Revenue, Expenditure, Assets and Liabilities SALGA South African Local Government Association

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SCoA Standard Chart of Accounts SCOPA Standing Committee on Public Accounts TR’s Treasury Regulations, 2002 WC Western Cape WCHDF Western Cape Housing Development Fund WCPT Western Cape Provincial Treasury

Foreword The Accounting Review 2005 working paper for municipalities is based on the 2004/05 AFS which is a new initiative undertaken by Accounting Services within the Financial Governance component of Provincial Treasury.

The Review is an attempt to assess accounting and financial management practices by analysing and interpreting the AFS of the Western Cape municipalities. It serves to encourage municipal CFO’s (as parties in ensuring sound financial management) to share their knowledge and skills in addressing the challenges facing financial management in the public sector Local Government.

The Review should encourage CFO’s of municipalities to view the assessment objectively and to take proactive steps to remedy deviations or variances from planned performance through their strategic planning process.

The structure of the Review provides for an executive summary followed by a detailed analysis and interpretation of the AFS of municipalities focussing on REAL.

The Accounting Review 2005 working paper is a team effort by the fledgling Local Government section of the Directorate Accounting Services in PT.

DR JC STEGMANN HEAD OF DEPARTMENT DATE: 21 FEBRUARY 2008

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Executive Summary

Executive Summary The primary focus of the Accounting Review 2005 working paper is to assess the financial position of the WC municipalities using 2004/05 AFS. The accounting ratios selected for this purpose were based on certain assessment areas, namely Revenue, Expenditure, Assets and Liabilities (REAL) and the outcomes tested against accepted or determined norms.

This exercise, however, presented itself with numerous challenges, the biggest being the basis of preparation of AFS by municipalities. The accounting environment of municipalities is currently undergoing transformation and the NT has introduced transitional arrangements, which allows High, Medium and Low Capacity Municipalities to implement the new accounting reforms (i.e GRAP/GAMAP) in phases. Hence there is no consistency with regard to the basis of preparation of AFS, consequently making the benchmarking exercise extremely difficult.

Accounting Services has established various performance indicators for the effective monitoring of internal performance of municipalities. This was achieved by grouping municipalities with the same basis of preparation of AFS in order to enable benchmarking within the groups as well as to establish norms and trends.

The following key financial performance areas are highlighted as concerns and require further attention by municipalities:

• The consumer debt of 18 of the 30 municipalities increased over the financial year, emphasising the general perception that consumers are defaulting on their payments. Total consolidated debtors increased by R605 million from 2003/04 (R4.548 billion) to 2004/05 (R5.153 billion), which represents an increase of 13.1 per cent.

• The overall spending for the 2004/05 financial year on PPE in the consolidated results, shows a variance of 72.6 per cent in budget versus actual. The survey conducted on municipalities in respect of under spending on capital projects shows that this is the result of unsecured external funding sources that did not materialise.

In terms of NT’s norm, variance on operating expenditure when compared to budget should not be greater than 10 per cent. The operating expenditure of Overberg District, West Coast District, Cape Winelands District and Witzenberg municipality are largely inflexible and requires sound budgeting practices and disciplines to keep costs within budget and in line with the cash revenues.

It is important that municipalities address the aforementioned areas of concern as it could impact on service delivery.

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Chapter 1: Introduction

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Introduction The Accounting component of Financial Governance aims to ensure that financial reporting is a full and true reflection of the financial position, performance and cash flows of the Province. It is positioned to play a leading role in advising municipalities and municipal entities on sound accounting policies and financial reporting practices required to enhance good financial governance.

Key services entail monitoring compliance with standards of GAAP, GRAP and GAMAP, monitoring adherence to the NT’s AFS Specimen, and the analysis and interpretation of AFS.

This Review is an attempt to assess accounting and financial management practices by analysing and interpreting the AFS of the WC municipalities and municipal entities. It serves to encourage municipal CFO’s (as partners in ensuring sound financial management) to share their knowledge and skills in addressing the challenges facing financial management in the public sector: Local Government.

The following Metro, District and Local municipalities are situated in the Western Cape:

METRO: CITY OF CAPE TOWN (COCT)

WEST COAST DISTRICT MUNICIPALITY (WCDM)

Matzikamma (MM)

Cederberg (CM)

Bergrivier (BM)

Saldanha Bay (SBM)

Swartland (SWAM)

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Accounting Review 2005 - Municipalities – Working Paper

CAPE WINELANDS DISTRICT MUNICIPALITY (CWDM)

Witzenberg (WM)

Drakenstein (DM)

Stellenbosch (STEM)

Breede Valley (BVM)

Breede River/Winelands (BRWM)

OVERBERG DISTRICT MUNICIPALITY (ODM)

Theewaterskloof (ThM)

Overstrand (OSM)

Cape Agulhas (CAM)

Swellendam (SWEM)

EDEN DISTRICT MUNICIPALITY (EDM)

Kannaland (KM)

Hessequa/Langeberg (H/LM)

Mossel Bay (MBM)

George (GM)

Oudtshoorn (OM)

Bitou (BM)

Knysna (KNM)

CENTRAL KAROO DISTRICT MUNICIPALITY (CKDM)

Laingsburg (LM)

Prins Albert (PAM)

Beaufort West (BWM)

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Chapter 2: Accounting Framework

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Accounting Framework 2.1 Relevant Legislation and Policies The financial governance arena and particularly the accounting facet, is subject to factors such as legislation and policy. Legislation is the key driver responsible for change in the accounting environment within public financial management. The legislative framework mainly consists of the Constitution of the Republic of South Africa, 1996 (“the Constitution”), MFMA, DORA, MSA. Reforms currently taking place in the accounting environment include, inter alia, the development of standards of GRAP by the ASB and the incremental development of specimen AFS in support of the transition from IMFO to GAMAP/GRAP.

The Constitution of the Republic of South Africa, 1996 (“the Constitution”) sets the scene for the introduction of financial management that is committed to improving transparency, accountability and performance within the public service, and devolving greater responsibility of the various functions, viz. budgeting and financial management, to government departments.

The WCPT is expected to fulfill the following responsibilities in respect of Section 5(4)(a) of the MFMA with effect 1 July 2005.

(a) Must monitor -

Compliance with the MFMA by municipalities and municipal entities in the province

The preparation by municipalities in the province of their budgets

The monthly outcome of those budgets

The submission of reports by municipalities in the province as required by the MFMA

(b) May assist municipalities in the province in the preparation of their budgets

(c) May exercise any powers and must perform any duties delegated to it by the NT terms of the MFMA; and

(d) May take appropriate steps if a municipality or municipal entity in the province commits a breach of the MFMA.

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The performance of these activities by the PT is subject to the existence of appropriate skills and capacity in the province. Regular audits of such skills and capacity are to be conducted by the NT.

Municipalities are classified into High, Medium and Low Capacity Municipalities from an MFMA implementation perspective. Rating is based on the financial management capacity other than complexity or size of operations/finance of municipalities.

The MFMA is a key component of the broader legislative framework governing municipalities. The Act aims to strengthen financial management in municipalities. The legal framework empowers the mayor or the executive mayor to provide political leadership by being responsible for policy and outcomes, and holds the municipal manager responsible for implementation and outputs.

The MSA was developed for the purpose of effective co-operative government. To provide for the core principles, mechanisms and processes necessary to enable municipalities to move progressively towards the social and economic upliftment of local communities and ensure universal access to essential services that are affordable to all.

2.2 General Functions of NT & PT PT must, in accordance with the prescribed framework, assist NT in enforcing compliance with the measures established in terms of section 216(1) of the Constitution, including those established in terms of the MFMA. PT must then submit all information in terms of this Act to NT on a quarterly basis, or when necessary.

2.3 Accounting Standards and Policies Basis for the preparation of annual financial statements Currently there are three different accounting standards available in the country, namely:

• IMFO – Framework for the preparation and presentation of AFS by local government (2nd edition January 1996), as prescribed in terms of section 3 of the repealed Auditor-General Act of 1995.

• The old GAMAP – Was based on 1997 GAAP and was approved by the Minister of Finance, but not promulgated in anticipation of setting up the ASB.

• New GAMAP approved by the ASB – The new GAMAP is a mixture of the updated old GAMAP and Standards of GRAP issued by the ASB. GRAP is being introduced progressively.

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Migration from IMFO to GAMAP/GRAP NT has proposed a phased approach for municipalities in terms of capacity for converting from IMFO standards to GAMAP/GRAP standards. NT, in its quest to improve the quality of financial accounting and reporting, has outlined timelines for the transition from IMFO to GAMAP/GRAP statements. The timelines aims at having all municipalities compiling AFS in accordance with GRAP by 30 June 2008.

It was recognised that integrated and standardised accrual-based financial reporting had to be the first key deliverable on the road to transparent reporting. The implementation of the GRAP reporting standards will be rolled out over the next three financial years, with 2005/06 being year one and 30 June 2008 being the end of year three. Throughout this period issues such as management strategies; training; policies, procedures and guidelines and standards of GRAP will be addressed. During this period, PT will conduct readiness assessments and establish training needs.

The GRAP conversion (IMFO to GRAP) is currently in the early part of the first phase, viz the implementation phase. This phase comprises changes to AFS, changes to Asset Management, changes to Policies and Procedures and Cultural changes.

Section 216 of the Constitution requires NT to introduce and develop GRAP.

GRAP was introduced to bring Public Sector accounting in line with Private Sector accounting principles and practices. Current statements of GAAP, applicable to the Private Sector, have been used as a foundation for the development of initial GRAP Standards.

The ASB established in 2002, sets accounting standards for GRAP. Prior to this, the NT performed the functions of the Board in the interim and prescribed the formats for AFS and gave guidance on the accounting prescripts.

Section 122(3) of the MFMA requires municipalities and municipal entities to prepare financial statements in accordance with GRAP, with this requirement being phased in.

In August 2002 the ASB began the process of reviewing and approving Standards of GAMAP and developing new GRAP standards. GAMAP was considered interim standards for municipalities and municipal entities until the national standards of GRAP have been developed and approved by the ASB.

The ASB was established to set standards and guidelines for AFS as required by section 216 (1)(a) of the Constitution of South Africa. PT has, through internal communication mechanisms, drawn in provincial municipalities with the purpose of submitting comment in a consolidated way.

The Minister of Finance has approved the implementation of the following Standards of GRAP with effect from 1 July 2004 for municipalities:

3 GRAP Standards GRAP 1: Presentation of Financial Statements

GRAP 2: Cash Flow Statements

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GRAP 3: Accounting Policies, Changes in Accounting Estimates and Errors

8 GAMAP Standards GAMAP 4: Effects of changes in foreign exchange rates

GAMAP 6: Consolidated financial statements and accounting for controlled entities

GAMAP 7: Accounting for investments in associates

GAMAP 8: Financial reporting of interests in joint ventures

GAMAP 9: Revenue

GAMAP 12: Inventories

GAMAP 17: Property, Plant and Equipment

GAMAP 19: Provisions, contingent liabilities and contingent assets

Although workshops were held with municipalities in the Province on the implementation of GRAP 1-3 and 8 GAMAP Standards, municipalities still need to be capacitated to deal with the treatment of these GRAP Standards. PT’s role will be to proactively assist municipalities with capacity building and procedure manuals to address the implementation of the technical guidelines contained in the accounting standards.

2.4 Reporting Timelines The accounting and reporting cycle of provincial municipalities, for each financial year, starts before the beginning of the financial year in July and finishes six months after the financial year ends in June of the following year. A challenge that has been identified is to advance the year-end reporting timelines in respect of the previous year to enable the municipalities to address issues reported on by the A-G as early as possible in the current year.

2.5 Reporting and Oversight Process In terms of Section 126 of the MFMA (1) (a) The accounting officer of a municipality must prepare the AFS of the municipality and, within two months after the end of the financial year to which those statements relate, submit the statements to the A-G for auditing; and

(b) Must, in addition, in the case of a municipality with entities, prepare ACFS and, within three months after the end of the financial year to which those statements relate, submit the statements to the A-G for auditing.

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(2) The accounting officer of a municipal entity must prepare the AFS of the entity, and within two months after the end of the financial year, to which those statements relate, submit the statements to -

(a) The Parent municipality of the entity; and

(b) The A-G for auditing

(3) The A-G must –

(a) Audit those financial statements; and

(b) Submit an audit report on those statements to the accounting officer of the Municipality or Municipal entity within three months on receipt of the statements.

2.6 Accounting Systems Set out below is a summary of the accounting systems currently being used by municipalities in the Western Cape Province.

Table 1: Accounting systems utilised by municipalities in the Western Cape Province

Municipality System Municipality System

Cederberg ABACUS Overstrand SAMRAS DB4

Central Karoo District ABACUS Bitou SAMRAS DB4

Eden District ABACUS Swellendam SAMRAS DB4

Theewaterskloof ABACUS Witzenberg SAMRAS DB4

Hessequa VENUS Swartland PROMUN

Drakenstein VENUS Mossel Bay PROMUN

West Coast District SAMRAS DB4 Oudtshoorn PROMUN

Saldanha Bay SAMRAS DB4 Knysna PROMUN

Kannaland SAMRAS DB4 Breede River PROMUN

Stellenbosch SAMRAS DB4 Bergrivier PROMUN

Cape Winelands District SAMRAS DB4 Matzikama PROMUN

Overberg District SAMRAS DB4 City of Cape Town SAP

Breede Valley SAMRAS DB4 Beaufort West TURBO MUNICX

Cape Agulhas SAMRAS DB4 Prince Albert AFRIRAAD

George SAMRAS DB4 Laingsburg AFRIRAAD

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Chapter 3: Accounting Capacity

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Accounting Capacity NT offered GRAP workshops countrywide. WCPT coordinated the WC workshops held on the 4th and 5th of April 2006.

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Chapter 4: Analyses and Interpretation of Annual Financial Statements

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Analysis and Interpretation of Annual Financial Statements The AFS only become meaningful once the information has been analysed and interpreted. Consequently, the objective of this chapter is to provide an analysis of the financial position, performance and cash flows of municipalities. Ratios are applied to analyse the financial position and performance of municipalities. These ratios, as applied, provide interpretation methodologies that will add significant value when benchmarked against similar municipalities and institutions of other provinces in the future. The application of the ratios to the financial results of the Western Cape municipalities must be seen as a step in developing the analysis and interpretation of AFS that could be refined along with future improvement in financial reporting.

4.1 Financial Analyses of the municipalities in the Western Cape Province

The purpose of this section is to provide a financial analysis of the municipalities in the Western Cape Province in the following categories:

Category A: Revenue and Expenditure management

Category B: Asset management

Category C: Debt (Liability) management

4.2 Category A: Revenue and Expenditure Ratio 1: Actual Revenue versus Budgeted Revenue Purpose: The purpose of this ratio is to identify deviations between actual and budgeted revenue and to ascertain reasons for the deviations.

Formula: (Actual Revenue - Budgeted Revenue)/Budgeted Revenue

These figures are found in Appendix D to the AFS and Statement of Financial Performance.

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Table 1(a): Actual revenue versus Budgeted Revenue: Districts

2004/05

Actual Revenue

Budgeted Revenue

Variance District Municipalities

R R R %

West Coast District Municipality (medium capacity) 110 928 819 136 873 250 (25 944 431) (18.96)

Overberg District Municipality (medium capacity) 50 645 792 51 663 580 (1 017 788) (1.97)

Central Karoo District Municipality (medium capacity) 68 295 789 62 961 160 5 334 629 8.47

Eden District Municipality (medium capacity) 100 010 098 71 499 658 28 510 440 39.87

Cape Winelands District Municipality (medium capacity) 226 763 184 242 350 999 (15 587 815) (6.43)

TOTAL 556 643 682 565 348 647 (8 704 965) (1.54)

AVERAGE 111 328 736 113 069 729 (1 740 993) (1.54)

Analysis The table above provides an analysis of actual revenue versus budgeted revenue for District Municipalities for the 2004/05 financial years.

The table indicates that:

• West Coast District Municipality (WCDM)’s actual revenue is 19 per cent short of budgeted revenue - partly due to the fact that revenue from Rates and Services is 19 per cent short of budget. The municipality also attributes the difference between actual and budgeted revenue to the fact that grants and subsidies were treated as revenue when compiling the budget but not treated as revenue when compiling the AFS.

• Central Karoo District Municipality (CKDM) exceeded their revenue target by 8.47 per cent due to the fact that there was more MIG funding than announced in DORA and Health’s subsidy of R4.9 million was not budgeted for.

• Eden District Municipality (EDM) exceeded their revenue target by 39.87 per cent. The reason for the difference between actual and budget is that the budget was drawn up on IMFO basis and the AFS was drawn up on GAMAP/GRAP basis.

• Overberg District Municipality (ODM)’s actual revenue is less than 2 per cent short of revenue targets due to treatment of grants and subsidies. During the budgeting process all monies allocated to the council by Provincial and National government are displayed as revenue. All the grants do not necessarily get spent during the financial year it is received. According to the ASB, the only actual revenue to be displayed in the AFS must be equal to the actual expenditure against the same grant.

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Table 1(b): Actual revenue versus Budgeted Revenue: Metro

2004/05

Actual Revenue Budgeted Revenue Variance Metro

R’000 R’000 R’000 %

City of Cape Town (high capacity) 9 292 651 9 541 169 (2 485 18) (2.60)

Analysis The table above provides an analysis of actual revenue versus budgeted revenue for the metro for the 2004/05 financial year.

The table indicates that the actual revenue is 2.60 per cent below budget. It appears as if the overriding reason is under-delivery on housing and developmental challenges, which resulted in less income from basic services.

Table 1(c): Actual revenue versus Budgeted Revenue: IMFO

2004/05

Actual Revenue Budgeted Revenue Variance Municipalities that prepared AFS in

terms of IMFO principles R R R %

Saldanha Bay (high capacity) 226 543 971 225 235 853 1 308 118 0.58

Mossel Bay (high capacity) 223 855 935 213 284 529 10 571 406 4.96

Matzikama (medium capacity) 59 608 586 58 769 400 839 186 1.43

Bergrivier (medium capacity) 61 191 491 61 362 050 (170 559) (0.28)

Breede River/Winelands (medium capacity) 144 372 357 139 799 509 4 572 848 3.27

Theewaterskloof (medium capacity) 154 848 096 162 733 127 (7 885 031) (4.85)

Kannaland (medium capacity) 34 240 786 33 144 996 1 095 790 3.31

Oudtshoorn (medium capacity) 125 333 421 125 924 726 (591 305) (0.47)

Bitou (medium capacity) 116 187 066 109 004 523 7 182 543 6.59

Knysna (medium capacity) 191 270 704 191 517 680 (246 976) (0.13)

Laingsburg (medium capacity) 9 033 203 10 911 382 (1 878 179) (17.21)

Prince Albert (medium capacity) 9 319 199 8 998 515 320 684 3.56

Beaufort West (medium capacity) 57 050 862 53 878 839 3 172 023 5.89

Cederberg (low capacity) 48 090 551 51 508 197 (3 417 646) (6.64)

Witzenberg (low capacity) 123 014 925 132 472 254 (9 457 329) (7.14)

Cape Agulhas (low capacity) 63 539 330 62 606 680 932 650 1.49

Swellendam (low capacity) 42 328 436 41 188 630 1 139 806 2.77

TOTAL 1 689 828 919 1 682 340 890 7 488 029 0.45

AVERAGE 99 401 701 98 961 229 440 472 0.45

Analysis The table above provides an analysis of actual revenue versus budgeted revenue for Municipalities that prepared AFS on IMFO for the 2004/05 financial years.

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• Theewaterskloof (ThM), Laingsburg (LM), Cederberg (CM) and Witzenberg (WM) are more than 5 per cent short of revenue targets. Budget-compilation and over-estimation are largely to blame. Data and statistical trends are required to improve budget forecasts for consumer demand, while actual limitations such as inadequate infrastructure, network losses and lack of water resources also reduce sales. Cederberg (CM) reported a deficit for the 2004/05 financial year – expenses exceeded revenue income.

• Bergrivier (BM), Oudtshoorn (OM) and Knysna (KNM) - insignificant variation - less than 1 per cent short of revenue targets. The variation is too small to explain the large deficits reported by Bergrivier (BM) and Knysna (KNM) for the 2004/05 financial years. The reasons for the deficit will therefore have to be determined from an analysis of the ratios that will follow.

• Mossel Bay (MBM), Matzikama (MM), Kannaland (KM) and Swellendam (SWEM): The actual revenue exceeded the budgeted revenue, which does not explain the deficit reported by these municipalities for the 2004/05 financial years. The reasons for the deficit will therefore have to be determined from an analysis of the ratios that will follow.

Table 1(d): Actual revenue versus Budgeted Revenue: GAMAP/GRAP

2004/05

Actual Revenue Budgeted Revenue Variance Municipalities that prepared AFS in terms of

GAMAP/GRAP principles R R R %

Stellenbosch (high capacity) 380 930 496 347 829 162 33 101 334 9.52

George (high capacity) 413 291 786 391 290 870 22 000 916 5.62

Drakenstein (high capacity) 498 559 686 484 933 952 13 625 734 2.81

Breede Valley (high capacity) 320 814 932 355 567 871 (34 752 939) (9.77)

Overstrand (high capacity) 266 382 007 218 083 570 48 298 437 22.15

Swartland (medium capacity) 170 618 179 168 336 238 2 281 941 1.36

Langeberg/Hessequa (medium capacity) 105 099 830 88 104 324 16 995 506 19.29

TOTAL 2 155 696 916 2 054 145 987 101 550 929 4.94

AVERAGE 307 956 702 293 449 427 14 507 276 4.94

Analysis The table above provides an analysis of actual revenue versus budgeted revenue for Municipalities that prepared AFS on GAMAP/GRAP for the 2004/05 financial years.


• Stellenbosch (STEM), Overstrand (OSM) and Hessequa (H/LM) Municipalities exceeded their revenue targets by more than 9.5 per cent.

• George Municipality (GM): The actual revenue exceeds the budgeted revenue. It is necessary to find a reason for the deficit reported by George Municipality (GM) for the 2004/05 years. The reasons for the deficit will

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therefore have to be determined from an analysis of the ratios that will follow.

• The actual revenue for Breede Valley (BVM) is substantially less than the budgeted figure and this provides a reason for the decrease in surplus for Breede Valley (BVM) when compared to the previous financial year.

• The positive variance for Drakenstein (DM): substantial increase in revenue when compared to the previous financial year.

Ratio 2: Level of Reliance on Government Grants Purpose: The purpose of this ratio is to determine what percentage of the municipality’s revenue is made up of government grants to determine the level of reliance on government funding by the municipality.

Formula: Grants and Subsidies/Total Revenue


Table 2(a): Level of Reliance on Government Grants: Districts

Grants and Subsidies Total Revenue Grants &

Subsidies/Total Revenue

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 District Municipalities

R R R R % % West Coast District Municipality (medium capacity) 0 104 500 110 928 819 115 458 709 0 0.09

Overberg District Municipality (medium capacity) 13 785 928 10 636 588 50 645 792 44 413 948 27.22 23.95

Central Karoo District Municipality (medium capacity) 5 333 569 5 523 151 68 295 789 38 720 292 7.81 14.26

Eden District Municipality (medium capacity) 21 614 483 10 337 624 100 010 098 79 920 941 21.61 12.93

Cape Winelands District Municipality (medium capacity) 86 738 889 114 349 947 226 763 184 237 276 410 38.25 48.19

TOTAL 127 472 869 140 951 810 556 643 682 515 790 300 22.9 27.33

AVERAGE 25 494 574 28 190 362 111 328 736 103 158 060 22.9 27.33

Analysis The table above provides an analysis of level of reliance on government grants for District Municipalities for the 2003/04 and 2004/05 financial years.


Municipalities do not treat government grants and subsidies uniformly; therefore these figures cannot be compared. Some municipalities might have disclosed only equitable share and financial management grants on Annexure D while others would have included other grants and subsidies on Annexure D.

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Table 2(b): Level of Reliance on Government Grants: Metro


Subsidies/Total Revenue

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 % %

City of Cape Town (high capacity) 631 906 562 423 9 292 651 8 710 113 6.80 6.46

Analysis The table above provides an analysis of level of reliance on government grants for the metro for the 2003/04 and 2004/05 financial years.

The table indicates that Actual revenue of the City of Cape Town (COCT) has increased by 6.69 per cent and Grants and subsidies have increased by 12.35 per cent as compared to the previous financial year.

Table 2(c): Level of Reliance on Government Grants: IMFO


Subsidies/ Total Revenue

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of

IMFO principles

R R R R % %

Saldanha Bay (high capacity) 10 222 095 7 121 191 226 543 971 205 055 260 4.51 3.47

Mossel Bay (high capacity) 3 847 257 2 404 793 223 855 935 199 599 860 1.72 1.2

Matzikama (medium capacity) 6 844 744 754 450 59 608 586 50 050 337 11.48 1.51

Bergrivier (medium capacity) 3 806 442 3 358 683 61 191 491 55 465 172 6.22 6.06

Breede River/Winelands (medium capacity) 9 778 922 10 907 088 144 372 357 139 380 901 6.77 7.83

Theewaterskloof (medium capacity) 40 633 236 22 025 407 154 848 096 109 933 789 26.24 20.04

Kannaland (medium capacity) 7 098 923 4 790 817 34 240 786 26 386 223 20.73 18.16

Oudtshoorn (medium capacity) 5 767 219 2 296 801 125 333 421 109 232 582 4.6 2.1

Bitou (medium capacity) 3 330 978 3 224 974 116 187 066 104 454 327 2.87 3.09

Knysna (medium capacity) 8 202 198 8 498 477 191 270 704 184 760 150 4.29 4.6

Laingsburg (medium capacity) 0 0 9 033 203 8 011 393 0 0

Prince Albert (medium capacity) 0 0 9 319 199 8 216 969 0 0

Beaufort West (medium capacity) 4 684 830 4 073 936 57 050 862 50 790 178 8.21 8.02

Cederberg (low capacity) 6 130 330 3 819 898 48 090 551 44 507 871 12.75 8.58

Witzenberg (low capacity) 8 791 150 8 019 870 123 014 925 110 270 432 7.15 7.27

Cape Agulhas (low capacity) 3 274 286 2 133 402 63 539 330 53 862 909 5.15 3.96

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2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


IMFO principles

R R R R % %

Swellendam (low capacity) 0 0 42 177 848 41 188 630 0 0

TOTAL 122 412 610 83 429 787 1 689 678 331 1 501 166 983 7.24 5.56

AVERAGE 8 743 758 5 959 271 99 392 843 88 303 940 7.24 5.56

Analysis The table above provides an analysis of level of reliance on government grants for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


Of the four municipalities that place the highest level of reliance on government grants, three of them have reported deficits for the 2004/05 years. They are Matzikama (MM), Cederberg (CM) and Kannaland (KM). Reasons for the deficits are not provided and will be investigated in the next assessment.

Table 2(d): Level of Reliance on Government Grants: GAMAP/GRAP



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of GAMAP/GRAP

principles

R R R R % %

Stellenbosch (high capacity) 37 668 929 32 783 905 380 930 496 347 370 233 9.89 9.44

George (high capacity) 32 145 558 9 719 605 413 291 786 325 480 279 7.78 2.99

Drakenstein (high capacity) 49 369 147 27 674 612 498 559 686 442 573 553 9.9 6.25

Breede Valley (high capacity) 46 747 852 29 632 004 320 814 932 292 835 138 14.57 10.12

Overstrand (high capacity) 24 623 530 12 837 079 266 382 007 225 701 050 9.24 5.69

Swartland (medium capacity) 12 124 625 11 836 616 170 618 179 138 870 168 7.11 8.52

Langeberg/Hessequa (medium capacity) 15 857 636 4 722 588 105 099 830 82 027 080 15.09 5.76

TOTAL 218 537 277 129 206 409 2 155 696 916 1 854 857 501 10.14 6.97

AVERAGE 31 219 611 18 458 058 307 956 702 264 979 643 10.14 6.97

Analysis The table above provides an analysis of level of reliance on government grants for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.


Only Breede Valley and Hessequa show grants in excess of 10 per cent of total revenue. The reason for this can be attributed to the differing treatment of grants.

In accordance with GRAP all these municipalities should disclose grants in the same way.

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Ratio 3: Actual Expenditure versus Budgeted Expenditure Purpose: The purpose of this ratio is to identify deviations between actual and budgeted expenditure and to ascertain reasons for the deviations.

Formula: (Actual expenditure - Budgeted expenditure)/Budgeted Expenditure)


Table 3(a): Actual Expenditure versus Budgeted Expenditure: Districts

2004/05

Actual Expenditure

Budgeted Expenditure

Variance District Municipalities

R R R %

West Coast District Municipality (medium capacity) 98 696 272 141 996 070 (43 299 798) (30.50)

Overberg District Municipality (medium capacity) 37 193 895 51 663 580 (14 469 685) (28.00)

Central Karoo District Municipality (medium capacity) 68 285 078 62 961 160 5 323 918 8.46

Eden District Municipality (medium capacity) 91 666 773 70 988 626 20 678 147 29.13


TOTAL 498 189 864 566 848 913 (68 659 049) (12.11)

AVERAGE 99 636 973 113 369 783 (13 732 810) (12.11)

Analysis The table above provides an analysis of actual expenditure versus budgeted expenditure for District Municipalities for the 2004/05 financial years.


• West Coast District Municipality (WCDM) has under-spent by 30.50 per cent. This is the result of under-spending on the Purchase of Water, Other Services, and Salaries.

• Overberg District Municipality (ODM) under-spent by 28 per cent and the management provided the following reasons for under-spending:

> Special Allocations – The budgeted amount is in terms of DORA allocations per the National and Provincial Treasury. The municipality receives grants that do not get spent completely during the specific financial year. The unspent money, in accordance with the prescriptions of the Accounts Standards Board, are transferred to sundry creditors and does not reflect in the income and expenditure statement.

> Repairs and maintenance – The difference between the budgeted amount and the actual amount is R518 825. The original budget for repairs and

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maintenance amounted to R1 415 800. In the adjustment budget provision for specific projects to the amount of R906 950 made to be completed before the end of the financial year. Unfortunately all these projects could not be completed during the financial year.

> Contributions to fixed assets – All expenditure against special allocations are shown in the budget as general expenditure against these allocations. Occasionally capital expenditure is allocated against these special allocations. (For instance – personal computers for the Interns bought from the Finance Management Grant.) In the financial statements this expenditure is shown as contributions to capital instead of general expenditure as it was budgeted for.

• Central Karoo District Municipality overspent by 8.46 per cent as a result of MIG to the amount of R6 195 172 that was more than the budgeted amount, and Health Department to the amount of R4 900 138, which was not included in the budget.

• Cape Winelands District Municipality (CWDM) under-spent by 15.42 per cent in the following line items: Employee related costs and remuneration of Councillors less than budget, Bad debts - more than budget, Depreciation - more than budget, Collection costs - less than budget and General expenses less than budget.

• Eden District Municipality (EDM) has overspent their budget by 29.13 per cent as a result of the budget that was compiled according to IMFO principles, while the AFS have been prepared according to GRAP. Management has committed itself to ensuring that this situation will be corrected June 2006 year-end. The following are examples of line items incorrectly budgeted for: Depreciation and Capital costs - more than budget by 233.35 per cent. Grants and subsidies expenditure - not budgeted for and general expenditure - more than budget by 533.75 per cent.

Table 3(b): Actual Expenditure versus Budgeted Expenditure: Metro

2004/05

Actual Budget Variance Metro

R’000 R’000 R’000 %

City of Cape Town (high capacity) 8 925 609 8 952 142 (26 533) (0.30)

Analysis The table above provides an analysis of actual expenditure versus budgeted expenditure for the metro for the 2004/05 financial years.


The COCT spending levels for 2004/05 financial years is acceptable.

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Table 3(c): Actual Expenditure versus Budgeted Expenditure: IMFO

2004/05

Actual Expenditure

Budgeted Expenditure

Variance Municipalities that prepared AFS in

terms of IMFO principles

R R R %

Saldanha Bay (high capacity) 228 084 017 237 497 143 (9 413 126) (3.96)

Mossel Bay (high capacity) 224 911 217 226 342 178 (1 430 961) (0.63)

Matzikama (medium capacity) 68 575 677 64 964 740 3 610 937 5.56

Bergrivier (medium capacity) 65 644 351 66 543 271 (898 920) (1.35)

Breede River/Winelands (medium capacity) 133 428 119 139 800 125 (6 372 006) (4.55)


Kannaland (medium capacity) 35 511 503 33 144 996 2 366 507 7.14

Oudtshoorn (medium capacity) 117 112 536 127 385 140 (10 272 604) (8.06)

Bitou (medium capacity) 115 495 685 120 993 507 (5 497 822) (4.54)

Knysna (medium capacity) 196 407 591 199 636 650 (3 229 059) (1.62)

Laingsburg (medium capacity) 11 577 887 12 715 365 (1 137 478) (8.95)

Prince Albert (medium capacity) 10 167 342 9 838 185 329 157 3.35

Beaufort West (medium capacity) 55 725 399 56 656 188 (930 789) (1.64)

Cederberg (low capacity) 50 401 183 52 529 290 (2 128 107) (4.05)

Witzenberg (low capacity) 119 703 289 132 460 583 (12 757 294) (9.63)

Cape Agulhas (low capacity) 59 476 598 62 115 910 (2 639 312) (4.24)

Swellendam (low capacity) 44 711 456 44 356 479 354 977 0.80

TOTAL 1 689 287 692 1 749 712 877 (60 425 185) (3.45)

AVERAGE 99 369 864 102 924 287 (3 554 423) (3.45)

Analysis The table above provides an analysis of actual expenditure versus budgeted expenditure for Municipalities that prepared AFS on IMFO for the 2004/05 financial years.


• Theewaterskloof (ThM) under spent by 6.38 per cent.

• Kannaland Municipality (KM) overspent by 7.14 per cent. This is the result of the budget on purchase of electricity by R1 328 890 (higher demand of electricity), sewerage overspent by R1 030 651(maintenance of sewerage network) and water overspent by R422 534 (maintenance of water distribution network).

• Oudtshoorn Municipality (OM) under spent by 8.06 per cent. This is the result of:

> R5 million savings on salaries and wages due to the restructuring process and a majority of vacancies not being filled.

> R1.4 million savings in general expenses due to less than expected purchases of electricity from ESCOM.

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> R1.2 million savings on Departmental service, which did not materialise.

> R1.1 million savings on Repairs and Maintenance. Lease option more viable than outright purchase of motor vehicle, hence savings on repairs and maintenance which is the responsibility of the lessor.

> R1.3 million savings on Capital costs due to loans not being taken and some of the long term capital interest and redemption were released earlier than expected.

> However it needs to be emphasised that the overall under-expenditure is less than 10% and within the norm.

• Laingsburg Municipality (LM) under spent by 8.95 per cent. This is due to the fact that the budgeted revenue did not realize - the municipality was not in a position to appoint additional officials as provided. Repairs and Maintenance work could also not be undertaken as budgeted.

• Witzenberg Municipality (WM) under spent by 9.63 per cent. The municipality has used 27.57 per cent of the budget of Subsidies and Grants. However, the budget included the capital and operating expenses hence the variance.

Table 3(d): Actual Expenditure versus Budgeted Expenditure: GAMAP/GRAP

2004/05

Actual Expenditure

Actual Expenditure

Variance Municipalities that prepared AFS in terms of GAMAP/GRAP principles

R R R %

Stellenbosch (high capacity) 329 131 909 347 829 162 (18 697 253) (5.38)

George (high capacity) 420 554 783 452 906 537 (32 351 754) (7.14)

Drakenstein (high capacity) 458 442 379 484 933 952 (26 491 573) (5.46)

Breede Valley (high capacity) 304 201 579 295 082 618 9 118 961 3.09

Overstrand (high capacity) 224 674 503 222 955 840 1 718 663 0.77

Swartland (medium capacity) 171 036 804 152 677 052 18 359 752 12.03

Langeberg/Hessequa (medium capacity) 90 183 479 85 918 372 4 265 107 4.96

TOTAL 1 998 225 436 2 042 303 533 (44 078 097) (2.16)

AVERAGE 285 460 777 291 757 648 (6 296 871) (2.16)

Analysis The table above provides an analysis of actual expenditure versus budgeted expenditure for Municipalities that prepared AFS on GAMAP/GRAP for the 2004/05 financial years. The table provides an analysis from a consolidated provincial average perspective.


• George Municipality (GM) under spent by 7.14 per cent. This is the result of Employee-related costs less than budget by 14.97 per cent; Collection costs

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63.64 per cent less than budget, Repairs and maintenance 23.10 per cent more than budget and External Interest paid 65.87 per cent less than budget.

• Swartland Municipality (SWAM) over spent by 12.03 per cent. This due to Contributions exceeded the budget by R30 million due the sale of land, which resulted in a contribution to the Capital Replacement Reserve Fund (Special Development Plan).

• Drakenstein Municipality (DM) under spent by 5.46 per cent. This is the result of Depreciation overprovided by 39.92 per cent, Interest paid under spent by 18.92 per cent.

Ratio 4: Personnel Expenditure as a percentage of Total Expenditure

Purpose: The purpose of this ratio is to indicate what percentage of total expenditure is attributable to personnel costs.

Formula: Salaries, wages and allowances / Total Expenditure

These figures are found in Appendix D to AFS and Statement of Financial Performance.

Table 4(a): Personnel costs to Total Expenditure: Districts

Personnel Costs Total Expenditure Personnel

Costs/Total Expenditure


R R R R % %

West Coast District Municipality (medium capacity) 26 431 118 21 594 460 98 696 272 91 019 845 26.78 23.72





TOTAL 166 444 677 125 025 781 498 189 864 409 954 109 33.41 30.50

AVERAGE 33 288 935 25 005 156 99 637 973 76 664 213 33.41 30.50

Analysis The table above provides an analysis of personnel costs as a percentage of total expenditure for District Municipalities for the 2003/04 and 2004/05 financial years.


• West Coast District Municipality’s (WCDM) ratio has improved by 3.06 percentage points as compared to previous financial year. The ratio is still below the consolidated provincial average.

• Central Karoo District Municipality’s (CKDM) ratio has decreased by 0.60 percentage points as compared to previous financial year but is still

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above the consolidated provincial average. The management reported that the high ratio is the result of the following Agency Services which have to be taken into consideration in calculating this ratio: PMU Manager, PIMSS Personnel, Health and Roads Department:

Personnel expenditure - R 6 075 663

Health - R 3 606 804

PMU - R 310 319

PIMSS - R 516 069

Roads - R 6 925 883

R17 434 738/R68 295 789 = 25.53%

• Eden District Municipality (EDM)’s ratio has improved by 7.89 percentage points as compared to previous financial year but is still above the consolidated provincial average and management provided the following reasons for the high ratio: The increase of 33.54 per cent per from 2003/04 to 2004/05 in personnel costs is mainly due to the taking over of the Municipal Health function from local municipalities. The 2003/04 personnel budget for this function was R2.4 million opposed to R10.13 million in 2004/05, and caused an increase of 322 per cent. The creation of new posts e.g. Legal Advisor and Communication Officer, also play a role. In order to render an effective disaster management and fire fighting service, new posts have been created. The management acknowledges the fact that the staff costs are very high and the cause can be attributed to the amalgamation of two districts, which resulted in duplication of highly paid senior staff. Management also pointed out that to adhere to the principles of demographic representatively, the new management structure complies with the region’s composition. Little can be done to reduce the personnel cost due to the factors pointed above.

• Cape Winelands District Municipality’s (CWDM) ratio increased by 9.09 percentage points as compared to previous financial years. The management reported that the CWDM is currently performing an Agency function on behalf of the Western Cape Province, which is labour intensive in nature, in the following areas: Roads and Personal Primary Health Care Services. Councillor allowance expenses are also included in the CWDM wage and salary bill.

Table 4(b): Personnel costs to total expenditure: Metro

Personnel Cost Total Expenditure Personnel


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 % %

City of Cape Town (high capacity) 2 724 198 2 916 361 8 925 609 8 601 070 30.52 33.91

Analysis The table above provides an analysis of personnel costs as a percentage of total expenditure for the metro for the 2003/04 and 2004/05 financial years.

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The City of Cape Town (COCT)’s ratio has decreased by 3.39 percentage points as compared to the previous financial year.

Table 4(c): Personnel costs to Total Expenditure: IMFO



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of IMFO principles

R R R R % %



Matzikama (medium capacity) 23 891 931 22 793 196 68 575 677 51 953 464 34.84 43.87


Breede River/Winelands (medium capacity)

46 095 289 43 003 121 133 428 119 134 226 545 34.54 32.03






Laingsburg (medium capacity) 3 297 248 2 866 581 11 577 887 7 715 082 28.48 37.16

Prince Albert (medium capacity) 4 069 441 3 940 191 10 167 342 8 195 357 40.02 48.08





Swellendam (low capacity) 16 976 381 14 730 127 44 711 456 39 773 059 37.97 37.03

TOTAL 561 968 165 516 319 422 1 689 287 692 1 504 819 739 33.27 34.31

AVERAGE 33 056 951 30 371 731 99 369 864 88 518 808 33.27 34.31

Analysis The table above provides an analysis of personnel costs as a percentage of total expenditure for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


• Four municipalities are above 38 per cent norm.

• Bergrivier Municipality’s (BM) ratio increased by 1.61 percentage points as compared to previous financial year.

• Oudtshoorn Municipality’s (OM) ratio increased by 2.03 percentage points as compared to previous financial year. The management reported that Equitable Share was not included in the operational budget and it was also not included in the Income Statement. The municipality realised that this was wrong, as they must budget for all income received albeit that this fund is discretionary. The municipality is still in the process of recovering

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outstanding councillors’ remuneration, which is being paid on a monthly basis. There are however few councillors (11) who disputed this unauthorised expenditure but the municipality is in the process of addressing it through their legal advisors.

• Prince Albert Municipality’s (PAM) ratio decreased by 8.06 percentage points as compared to previous financial year, but the ratio is still high.

• Beaufort West Municipality’s (BWM) ratio decreased by 2.43 percentage points as compared to previous financial year. The management reported that: The municipality is obliged to implement the annual salary increase as agreed upon between SALGA and the unions. The annual increase plus notch increases have a negative impact on the ratio of salaries to total operating expenditure. It is anticipated that this ratio may even further increase due to vacancies that exist within various departments. The municipality is however currently in process of investigating a shared service center in an attempt to reduce staff costs.

• Swellendam Municipality’s (SWAM) ratio increased by 0.94 percentage points as compared to previous financial year. The management reported the following reasons for the high ratio: General salary increase of 6 per cent, the establishment of new posts and upgrading of a few existing posts. There is a full time IT manager that is going to be appointed in the 2006/07 financial years.

Table 4(d): Personnel costs to Total expenditure: GAMAP/GRAP



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of GAMAP/GRAP principles

R R R R % %






Swartland (medium capacity) 49 753 017 44 320 769 171 036 804 125 636 930 29.00 35.28Langeberg/Hessequa (medium capacity) 42 949 085 33 522 479 90 183 479 70 930 184 47.62 47.26

TOTAL 626 144 222 566 718 860 1 998 225 436 1 730 879 126 31.34 32.74

AVERAGE 89 449 175 80 959 837 285 460 777 247 268 447 31.34 32.74

Analysis The table above provides an analysis of personnel costs as a percentage of total expenditure for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.


• George Municipality’s (GM) ratio has improved by 0.85 percentage points but it is still too low.

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• Hessequa/Langeberg Municipality’s (H/LM) ratio has increased by 0.36 percentage points as compared to previous financial years and the items that contributed to the increase in the personnel costs are Staff Restructuring and Provisions for Job Evaluation amounting to R4,124,795 and R2,000,000 respectively which were not budgeted for. The municipality is aware of the high personnel cost and devising means to reduce it to an acceptable level. The other reasons raised by the municipality is that they have a number of removed places that they render service to which requires them to travel a lot, this results in high staff compensation.

Ratio 5: Interest as a percentage of Total Expenditure Purpose: This ratio indicates the percentage of total expenditure that is attributable to interest costs.

Formula: (External Interest paid/Total expenditure)


Table 5(a): External Interest Paid as a percentage of total expenditure: Districts

External Interest Paid Total Expenditure External Interest

Paid/Total Expenditure


R R R R % %



Central Karoo District Municipality (medium capacity) 814 0 68 285 078 12 087 249 0.01 0.00

Eden District Municipality (medium capacity) 767 727 891 663 91 666 773 57 709 867 0.84 1.55

Cape Winelands District Municipality (medium capacity) 178 968 0 202 347 846 180 969 350 0.09 0

TOTAL 5 722 475 5 485 067 498 189 864 383 321 065 1.15 1.43

AVERAGE 1 144 495 1 097 013 99 637 973 76 664 213 1.15 1.43

Analysis The table above provides an analysis of external interest paid as a percentage of total expenditure for District Municipalities for the 2003/04 and 2004/05 financial years.


All the District Municipalities have a low ratio, which is an indication that they are less dependent on external borrowings.

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Table 5(b): External Interest Paid as a percentage of total expenditure: Metro

External Interest Total Expenditure External Interest


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 % %


Analysis The table above provides an analysis of external interest paid as a percentage of total expenditure for the metro for the 2003/04 and 2004/05 financial years.


The City of Cape Town (COCT)’s ratio has improved by 0.15 percentage points as compared to the previous financial year.

Table 5(c): External interest Paid as a percentage of total expenditure: IMFO

External Interest Paid Total Expenditure External Interest


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of IMFO

principles R R R R % %


Mossel Bay (high capacity) 332 019 1 752 257 224 911 217 203 027 003 0.15 0.86









Laingsburg (medium capacity) 0 0 11 577 887 7 715 082 0 0

Prince Albert (medium capacity) 0 0 10 167 342 8 195 357 0 0




Cape Agulhas (low capacity) 865 217 1 065 223 59 476 598 50 986 501 1.45 2.08

Swellendam (low capacity) 1 112 658 861 353 44 711 456 39 773 509 2.49 2.17

TOTAL 65 291 971 70 647 541 1 689 287 692 1 504 820 189 3.87 4.69

AVERAGE 3 840 704 4 155 737 99 369 864 88 518 835 3.87 4.69

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Analysis The table above provides an analysis of external interest paid as a percentage of total expenditure for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


• Four municipalities who prepared the Annual Financial Statements on IMFO have a high ratio (above five percent).

• Kannaland Municipality’s (KM) ratio has improved by 1.59 percentage points as compared to previous financial year but the ratio is still very high. The management reported that no new loans were taken since 2005/06 financial years and the current loan book was analysed and the municipality is in the process to negotiate the restructuring of the loans with DBSA.

• Oudtshoorn Municipality’s (OM) has improved by 0.76 percentage points but is still high. The municipality undertook many needed capital projects, which resulted in high interest costs. Also, as already mentioned earlier there is maintenance work which is undertaken as capital projects because of the large amounts of money involved which will have a bearing on tariffs should it be undertaken through the operational budget.

• Knysna Municipality’s (KNM) ratio improved by 1.90 percentage points but is still high. The management reported that the municipality has more dams and pumping stations than the other municipalities. In the late 90s and early 2000 Knysna municipality was poorly managed. It borrowed at high interest rates, the effects of which are being felt now. The early loan redemptions made by Knysna Municipality (KNM), both (DBSA) and INCA have included large penalty clauses for early redemption in all loan documents nationally.

• Witzenberg Municipality’s (WM) ratio has improved by 0.93 percentage points but is still high. The municipality reported that 98.8 per cent of the interest paid is for the servicing of Long Term Liabilities related to Koekedouw Dam. Most other municipalities pay for bulk water supply whilst the interest and redemption can be seen as the bulk purchase cost of water for the municipality. The municipality will strive to lower this ratio due to the fact that the cost of bulk water is high and is not in relation to, or based on, consumption.

Table 5(d): External Interest Paid as a percentage of total expenditure: GAMAP/GRAP



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


GAMAP/GRAP principles

R R R R % %






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2004/05 2003/04 2004/05 2003/04 2004/05 2003/04



R R R R % %



TOTAL 42 532 096 37 685 967 1 998 225 436 1 730 879 126 2.13 2.18

AVERAGE 6 076 014 5 383 710 285 460 777 247 268 447 2.13 2.18

Analysis The table above provides an analysis of external interest paid as a percentage of total expenditure for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.

The table indicates that; all above municipalities have a low ratio, which is an indication that the municipalities are less dependent on external borrowings.

Ratio 6: Repairs and Maintenance to Total Expenditure Purpose: The purpose of this ratio is to determine whether municipalities are spending adequate amounts on repairs and maintenance of Property Plant and Equipment in order to maintain the useful life of these assets.

Formula: Repairs and Maintenance / Total Expenditure


Table 6(a): Repairs and maintenance to total expenditure – Districts

Repairs and maintenance Total expenditure Repairs and

Maintenance/Total Expenditure


R R R R % %



Central Karoo District Municipality (medium capacity) 182 819 197 072 68 285 078 12 087 249 0 1.63



TOTAL 56 410 125 42 735 970 498 189 864 383 321 065 11.32 11.15

AVERAGE 11 282 025 8 547 194 99 637 972 76 664 213 11.32 11.15

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Analysis The table above provides an analysis of repairs and maintenance as a percentage of total expenditure for District Municipalities for the 2003/04 and 2004/05 financial years.


• Only Cape Winelands District Municipality (CWDM) has a high ratio.

• West Coast District Municipality’s (WCDM) ratio decreased by 0.89 percentage points as compared to the previous financial year. The management reported that the reason for the inadequate budgeting for repairs and maintenance is firstly the lack of funds. The Council had never had money to really budget for the necessary amounts for repairs and maintenance. Furthermore it is the result of the contribution of grants to the total expenditure enlarging the total in such a way that the contribution to repairs and maintenance is indeed a much larger percentage. The subtraction of R4 368 848 of special allocation as well as the R8 131 250 of CMIP from the actual expenditure results in R35 488 155. Then the amount spent on repairs and maintenance will amount to 5.08 per cent this is already a huge improvement.

Table 6(b): Repairs and maintenance to total expenditure: Metro



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 METRO

R’000 R’000 R’000 R’000 % %


Analysis The table above provides an analysis of repairs and maintenance as a percentage of total expenditure for the metro for the 2003/04 and 2004/05 financial years.


The City of Cape Town (COCT)’s ratio has improved by 1.10 percentage points as compared to the previous financial year.

Table 6(c): Repairs and maintenance to total expenditure: IMFO



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles

R R R R % %





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2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles

R R R R % %







Laingsburg (medium capacity) 428 540 408 150 11 577 887 7 715 082 3.70 5.29

Prince Albert (medium capacity) 260 982 165 241 10 167 342 8 195 357 2.57 2.02






TOTAL 87 814 527 75 917 413 1 689 287 692 2 504 021 763 5.2 3.03

AVERAGE 5 165 560 4 465 730 99 369 864 147 295 398 5.2 3.03

Analysis The table above provides an analysis of repairs and maintenance as a percentage of total expenditure for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


• Ten municipalities spend less than 5 per cent on Repairs and Maintenance.

• Oudtshoorn Municipality (OM) the ratio increased by 0.18 percentage points as compared to previous financial year, the municipality budgeted to buy vehicles during the period but realised that to lease these vehicles would be more cost effective, and this resulted in a saving of R1.1 million.

• Mossel Bay Municipality’s (MBM) ratio improved by 0.56 percentage points as compared to the previous financial year and the management of the municipality reported that they have made provision in the 2006/07 budget to ensure that Property, Plant and Equipment are properly maintained. This can clearly be seen from the maintenance budget of R24 929 378 provided for maintenance in the 2006/07 budgets compared to only R12 971 380 in the 2005/06 budget. In the 2007/08 and 2008/09 budgets this figure has been increased to R27 422 315 and R30 164 547 respectively.

• Prince Albert (PAM) municipality: The ratio has improved by 0.55 percentage points as compared to the previous financial year but is still low and the management reported that some of the repair costs were transferred to the

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repairs and maintenance fund. The process of the asset maintenance plan will coincide with the implementation of the new GAMAP.

Table 6(d): Repairs and maintenance to total expenditure: GAMAP/GRAP



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles

R R R R % %








TOTAL 201 331 861 146 310 671 1 998 225 436 1 730 879 126 10.08 8.45

AVERAGE 28 761 694 20 901 524 285 460 777 247 268 447 10.08 8.45

Analysis The table above provides an analysis of repairs and maintenance as a percentage of total expenditure for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.


• Swartland Municipality’s (SWAM) ratio has decreased by 0.86 percentage points as compared to previous financial year. The management of the municipality reported that the Council of the municipality has decided to implement a fleet management for personnel in essential posts and that expenditure in this regard now forms part of the salary and allowances budget and the effect thereof will have a slight influence on the repairs and maintenance expenditure. However, Council is well aware of the responsibility placed on the municipality to maintain their assets and consequently approved on operating budget of R400 000 for the investigation into asset maintenance.

• Hessequa Municipality’s (H/LM) ratio has decreased by 0.47 percentage points as compared to previous financial year. The management reported that in terms of GAMAP a repair and maintenance plan is a requirement for Council assets. However the plan has not yet been drawn up and will receive urgent attention.

• Stellenbosch (STEM), George (GM) and Drakenstein (DM) municipalities have high ratios and reasons are not provided and will be investigated in the next review.

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4.3 Category B: Asset Management Ratio 7: Acquisition of Property, Plant and Equipment – Actual

versus Budget Purpose: The purpose of this ratio is to identify per class of asset whether a municipality has a variance of more than 5 per cent when actual and budgeted Property, Plant, and Equipment (PPE) acquisitions are compared.

Formula: (Actual PPE Acquisitions - Budgeted Acquisitions)/Budgeted PPE Acquisitions

These figures are found in the GRAP AFS Appendix E(2).

Table 7(a): Actual Acquisition of Property, Plant, and Equipment - versus Budget: Districts

2004/05

Actual Budget Variance District Municipalities

R R R %

West Coast District Municipalities (medium capacity) 5 120 373 17 821 000 (12 700 627) (71.3)

Overberg District Municipality (medium capacity) 4 486 997 4 975 000 (488 003) (9.81)

Central Karoo District Municipality (medium capacity) 13 873 459 13 224 000 649 459 4.91

Eden District Municipality (medium capacity) 1 518 061 4 163 866 (2 645 805) (63.5)


TOTAL 33 028 176 59 685 466 (26 657 290) (44.66)

AVERAGE 6 605 635 11 937 093 (5 331 458) (44.66)

Analysis The table above provides an analysis of actual acquisition of property, plant and equipment against budget for District Municipalities for the 2004/05 financial years.

The table indicates that the following District Municipalities have under spent on PPE and this will have a potential risk effect on service delivery and budget management principles:

• West Coast District Municipality under spent by 71.3 percentage points in 2004/05. This is the result of contracts budgeted that were subsequently delayed.

• Eden District Municipality under spent by 63.5 percentage points in 2004/05. Under spending is due to the extensions to building in Mission Street that did not materialise.

• Overberg District Municipality under spent by 9.81 percentage points in 2004/05. This is the result of variances in the following classes of assets:

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General Administration, Health Service and Engineering Services and reasons for the variance were not provided.

• The total capital budget figure of Cape Winelands District municipality is not available on the AFS for 2004/05 financial years but was obtained from the database of PT (Budget Office). The municipality has underspent by 58.8 percentage points. The variance for each class of asset could not be done, as the budget figures for each class of asset are not given on the AFS.

Table 7(b): Actual Acquisition of Property, Plant, and Equipment- versus Budget: Metro

2004/05

Actual Budget Variance Metro

R’000 R’000 R’000 %

City of Cape Town (high capacity) 9 514 520 15 057 400 (5 542 880) (36.81)

Analysis The table above provides an analysis of actual acquisition of property, plant and equipment against budget for the metro for the 2004/05 financial years.


The City of Cape Town(COCT) under spent by 36.81 percentage points in 2004/05 financial years and the municipality did not provide Appendix E(2) in accordance with the requirements of GRAP to provide reasons for variances above 5 per cent.

Table 7(c): Actual Acquisition of Property, Plant, and Equipment- versus Budget: IMFO

2004/05

Actual Budget Variance Municipalities that prepared AFS in


R R R %

Saldanha Bay (high capacity) 45 419 029 56 902 227 (11 483 198) (20.18)

Mossel Bay (high capacity) 42 542 749 103 440 551 (60 897 802) (58.87)

Matzikama (medium capacity) 25 563 30 935 (5 372) (17.37)

Bergrivier (medium capacity) 10 950 156 98 883 883 (87 933 727) (88.93)

Breede River/Winelands (medium capacity) 13 275 049 33 206 190 (19 931 141) (60.02)


Kannaland (medium capacity) 788 749 2 361 000 (1 572 251) (66.59)

Oudtshoorn (medium capacity) 24 109 505 40 611 530 (16 502 025) (40.63)

Bitou (medium capacity) 31 664 505 38 620 000 (6 955 495) (18.01)

Knysna (medium capacity) 45 073 877 56 453 940 (11 380 063) (20.16)

Laingsburg (medium capacity) 12 898 256 13 717 752 (819 496) (5.97)

Prince Albert (medium capacity) 424 560 5 640 270 (5 215 710) (92.47)

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2004/05

Actual Budget Variance Municipalities that prepared AFS in


R R R %

Beaufort West (medium capacity) 25 073 464 57 094 058 (32 020 594) (56.08)

Cederberg (low capacity) 7 333 406 6 989 500 343 906 4.92

Witzenberg (low capacity) 12 071 832 11 757 615 314 217 2.67

Cape Agulhas (low capacity) 16 624 341 10 758 260 5 866 081 54.53

Swellendam (low capacity) 7 758 904 67 078 700 (59 319 796) (88.43)

TOTAL 306 690 627 617 443 211 (310 752 584) (50.33)

AVERAGE 18 040 625 36 320 189 (18 279 564) (50.33)

Analysis The table above provides an analysis of actual acquisition of property, plant and equipment against budget for Municipalities that prepared AFS on IMFO for the 2004/05 financial years.


• Oudtshoorn municipality (OM) indicated that an under spending on the acquisition of PPE was due to a number of capital projects which were budgeted for but not funded such as Development of the Bridgton Pavilion for R5 000 000.

• The under spending in the PPE of Bergrivier Municipality (BM) is due to the project on the Sports ground to the value of R4 000 000 which was not spent.

• In Mossel Bay (MBM) municipality the aggravating factor of these severe levels have been caused by the calculation, which was done on the original budget of R103 440 551 whilst the Council approved an amended budget in January 2005 of R71 987 487. The main reason for the reduction was unsecured external funding sources that did not materialise.

• Kannaland Municipality (KM) indicated that capital expenditure projects were in some instances funded by external funders. The ministerial instruction prohibited any capital expenditure from own funds.

Table 7(d): Actual Acquisition of Property, Plant, and Equipment - versus Budget: GAMAP/GRAP

2004/05

Actual Budget Variance Municipalities that prepared AFS in terms of


R R R %

Stellenbosch (high capacity) 71 403 762 105 727 828 (34 324 066) (32.46)

George (high capacity) 76 165 157 122 000 000 (45 834 843) (37.57)

Drakenstein (high capacity) 54 317 141 67 124 018 (12 806 877) (19.08)

Breede Valley (high capacity) 3 671 773 7 325 837 (3 654 064) (49.88)

Overstrand (high capacity) 36 388 894 36 459 533 (70 639) (0.19)

Swartland (medium capacity) 30 563 170 47 156 195 (16 593 025) (35.19)

Langeberg/Hessequa (medium capacity) 18 189 269 21 845 268 (3 655 999) (16.74)

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2004/05

Actual Budget Variance Municipalities that prepared AFS in terms of


R R R %

TOTAL 290 699 166 407 638 679 (116 939 513) (28.69)

AVERAGE 41 528 452 58 234 097 (16 705 645) (28.69)

Analysis The table above provides an analysis of actual acquisition of property, plant and equipment against budget for Municipalities that prepared AFS on GAMAP/GRAP for the 2004/05 financial years.


• All municipalities who prepared the Annual Financial Statements on GAMAP/GRAP have under spent on their PPE.

• Swartland’s municipality (SWAM) under spent by 35.19 percentage points and the municipality reported that before the commencement of the budget, certain applications were tabled before the Housing Board and the Council made provision in the capital budget for such expenditure. However, these applications never materialised.

• Breede Valley municipality’s (BVM) under spending by 49.88 percentage points, which is due to the dependency of capital budget on the receipt of funding from other bodies, which did not fully materialise.

• Stellenbosch municipality (STEM) indicated under spending by 32.46 percentage points because of the Development of the Community Centre, which will only commence in 2005/06 financial year. Furthermore, the purchasing of Watergang (Vacant land) is not finalised yet as well as the delay in the commencement of Paradyskloof Substation, which will continue, in the 2005/06 financial year.

• Drakenstein municipality (DM) has under spent by 19.08 percentage points and reported on the Appendix E(2) that under expenditure is mainly due to the change in accounting policy.

• George municipality (GM) has under spent by 37.57 percentage points and the municipality did not provide budget figures for each class of asset on Appendix E(2) and variances on PPE will be investigated in the next review.

• Hessequa municipality (H/LM) under spent by 16.74 percentage points and variance above 5 per cent as shown in Appendix E(2) is in all classes of assets and reasons for variances will be investigated in the next review.

Ratio 8: Debtors Collection Period Purpose: The purpose of this ratio is to calculate the debtors’ collection period of the municipality by comparing the year-end balance of certain consumer debtors with the revenue earned from those debtors during the financial year.

Formula: Consumer debtors before deducting provision for bad debts * 365/ Service Revenue

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These figures are found in the Statement of Financial Performance and in the Notes to the AFS.

Table 8(a): Debtors Collection Period: Districts

Consumer Debtors Service Revenue Period


R R R R Days Days






TOTAL 36 745 326 33 362 187 325 432 516 314 271 908 41 39

AVERAGE 7 349 065 6 672 437 65 086 503 62 854 382 41 39

Analysis The table above provides an analysis of debtor’s collection period for District Municipalities for the 2003/04 and 2004/05 financial years.


All district municipalities’ collection of debtors is below 180 days with the exception of Central Karoo District Municipality (CKDM). The increase in Debtor’s collection period of Central Karoo District Municipality is the result of Credit Control Policy not being fully implemented. This is the result of a Council decision that Indigents cases should not be cut off. A Council Resolution has also been taken to fully implement the Credit Control Policy during the 2006/07 financial years and also appropriate provision for irrecoverable debts is in process with the conversion to GRAP.

Table 8(b): Debtor’s Collection Period: Metro


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 Days Days

City of Cape Town (high capacity) 4 228 962 3 580 909 7 746 213 7 299 740 199.27 179.05

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Analysis The table above provides an analysis of debtor’s collection period for the metro for the 2003/04 and 2004/05 financial years.


The comparison of the City of Cape Town (COCT) with other Metros could not be done. The City of Cape Town (COCT) debtor’s collection period is above 180 days for the 2005/06 financial years and the report from the Auditor General on the 30 November 2005 reported that an increase in outstanding Debtors is the result of non-enforcement of the City’s Credit Control Policy and also the debt is not regularly followed up, assessed and written off.

The COCT reported that concerted efforts are being pursued to recover arrears and Debtors are regularly reviewed, assessed and written off where appropriate.

Table 8(c): Debtor’s collection period: IMFO


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


IMFO principles R R R R Days Days


















TOTAL 457 582 019 426 450 122 1 441 803 099 1 322 714 762 116 118

AVERAGE 26 916 589 25 085 301 84 811 947 77 806 750 116 118

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Analysis The table above provides an analysis of debtor’s collection period for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


• The Debtors’ Collection Period for Saldanha Bay Municipality has increased by 12 days as compared to the previous financial year.

• Theewaterskloof Municipality (ThM) debtors’ collection period has increased by 29 days as compared to the previous financial year.

• The debtors’ collection period for Kannaland Municipality (KM) has increased by 8 days compared to previous financial year. Management reported that a Credit Policy has since been developed, work shopped with the community, approved by Council and implemented and the necessary “by-laws” will be published as soon as possible.

• Laingsburg Municipality’s (LM) debtors’ collection period increased by 86 days as compared to previous financial year. The Council is concerned about this ratio and intends to ensure that the approved Credit Control and Debt Collection Policy is strictly applied. Furthermore Council is thoroughly aware that the successful execution of its budget programme depends upon the measure in which debts are collected.

• The Debtors’ collection period for Beaufort West Municipality (BWM) has increased by 13 days as compared to previous financial year. The Auditor- General also reported a qualification on debtors and under-provision for bad debts which relates to consumer debtors to the value of R27.7 million having been outstanding for a period in excess of 150 days while the municipality only made provision of R469 531 for bad debts. The management reported that the municipality has implemented a Credit Control Policy; the council is currently in the process writing off debt in instances where recoverability of the debt is doubtful. Furthermore, the municipality will engage in a process of refining the Credit Control and Debt Collection Policy with a view of improving the current collection rate of 90 per cent to 99 per cent. This will improve the ratio.

• The Debtors’ collection period for Cederberg Municipality (CM) has decreased by 6 days as compared to previous year, but the ratio is still above the consolidated provincial average. The management of the municipality reported that the overall cause of the debtors backlog originates in the pre-amalgamation era where non-payment records have not been addressed prior to formation of the new municipality. Old balances were simply amalgamated into a single book over a period of two years, without adequate verification of the debt or the collectability thereof. Credit control has not been properly managed since amalgamation, and is the single main source of Cash Flow difficulties. Active steps have been taken to try and curb the trend and bring about effective credit control practices, which include the appointment of a contract worker in terms of the Recovery Plan to manage the Credit Control and Debtor’s administration functions.

• Witzenberg Municipality’s (WM) debtors collection period has decreased by 5 days as compared to previous financial year but is still above the consolidated provincial average. The management of the municipality

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reported that consumer debtors includes long outstanding debts which were handed over to attorneys, but the recovery seems doubtful. Most of these are from the previous dispensation before amalgamation. The cost to recover is high and the rate of recovery is low. These handover-accounts were recalled from the attorneys. The municipality is in the process of working through these files. The aim is to either write-off irrecoverable debts or to speed up the process of recovery as far as possible.

• The Debtors’ Collection Period for Swellendam Municipality (SWEM) has decreased by 11 days as compared to previous financial year but is above the consolidated provincial average. The AG also reported a qualification regarding the insufficient provision for doubtful debts for 2004/05 financial years. A Credit Control Policy has been adopted but the by-laws have not been promulgated and also for some months the Municipality was without a Credit Control Official. To improve this ratio the municipality appointed a new official and also installed the Geo-Reality Debtors and Summons System, which will operate at full potential.

Table 8(d): Debtor’s collection period: GAMAP/GRAP


2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles R R R R Days Days








TOTAL 429 645 919 508 041 607 1 561 357 632 1 456 197 803 100 127

AVERAGE 61 377 988 72 577 372 223 051 090 208 028 258 100 127

Analysis The table above provides an analysis of debtor’s collection period for Municipalities that prepared AFS on GAMAP/GRAP based on consumer debtors against service revenue from a consolidated provincial average perspective and per municipality for the 2003/04 and 2004/05 financial years.

The table above indicates that:

The following municipalities are above the consolidated provincial average of Western Cape and the following reasons are provided:

• Breede Valley Municipality’s (BVM) Debtor’s Collection period has decreased by 62 days as compared to previous year but is still not within the provincial average norm. The Auditor General reported that there are Municipal Staff and Council Members that are in arrears for rates and service charges for a period longer than three months. The municipality will deduct

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the arrear amounts of employees from their monthly salaries and the outstanding balance will be reported monthly to the Council and Speaker of the municipality.

• Hessequa Municipality (H/LM) is above the consolidated provincial average and the municipality has estimated that an amount approximately R12 million will be written off. This assumption is based on the following:

Housing Debt R 5 000 000

Debt handed over for collection R 4 000 000

Irrecoverable other debts R 4 000 000

If the above-mentioned amount is written off, the debtor’s collection period will be reduced.

4.4 Category C: Debt/Liability Management Ratio 9: Acid test ratio Purpose: The purpose of this ratio is to provide an indication of the ability of the municipality to meet its short-term obligation (current liabilities) with short-term liquid assets (current assets less liabilities).

Formula: Current assets less Inventory/Current Liabilities

These figures are found in the Statement of Financial Position of the AFS.

Table 9(a): Acid test ratio: Districts

Current Assets less inventory Current Liabilities Current Assets less Inventory/Current

Liabilities


R R R R Ratio Ratio

West Coast District Municipality (medium capacity) 23 652 277 19 746 672 60 191 031 48 985 628 0.39:1 0.40:1

Overberg District Municipality (medium capacity) 38 643 970 31 507 796 15 743 514 14 040 254 2.46:1 2.24:1

Central Karoo District Municipality (medium capacity) 14 845 765 15 556 539 2 652 843 6 758 558 5.60:1 2.30:1

Eden District Municipality (medium capacity) 78 056 528 118 245 619 45 228 760 52 240 889 1.73:1 2.26:1

Cape Winelands District Municipality (medium capacity) 200 333 887 164 138 490 66 745 826 24 335 964 3.00:1 6.75:1

TOTAL 355 532 427 349 195 116 190 561 974 146 361 293 1.87:1 2.39:1

AVERAGE 71 106 485 69 839 023 38 112 395 29 272 259 1.87:1 2.39:1

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Analysis The table above provides an analysis of acid test ratio for District Municipalities for the 2003/04 and 2004/05 financial years.


• Two District Municipalities are below the consolidated provincial average.

• The West Coast District Municipality (WCDM)’s acid test ratio decreased by 0.01 percentage points as compared to previous year and is still below the consolidated provincial average.

• The acid test ratio for Eden District Municipality (EDM) has decreased by 0.53 percentage points and this is mainly due to a decrease in debtors and investments. The decrease in debtors is due to the writing off of debt of the Oudtshoorn (OM) and Knysna (KM) Municipalities. These debts originated from the demarcation of December 2000 when Oudtshoorn had to take over Dysselsdorp and De Rust from Eden and Knysna had to take over Rheenendal. The decrease in investment is due to the fact that Local Municipalities started to claim priority allocations of previous financial years.

Table 9(b): Acid test ratio: Metro

Current Assets less inventory

Current Liabilities Current Assets less Inventory/Current

Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 Ratio Ratio

City of Cape Town (high capacity) 40 026 460 33 948 420 30 026 620 26 139 880 1.33:1 1.30:1

Analysis The table above provides an analysis of acid test ratio for the metro for the 2003/04 and 2004/05 financial years.


The acid test ratio has improved by 0.03 percentage points as compared to previous financial year. The comparison with other metros has not yet been done.

Table 9(c): Acid test ratio: IMFO



Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles

R R R R Ratio Ratio

Saldanha Bay (high capacity) 193 129 747 148 880 088 31 512 937 24 090 165 6.13:1 6.18:1

Mossel Bay (high capacity) 142 210 305 112 064 766 40 621 138 41 238 330 3.50:1 2.72:1

Matzikama (medium capacity) 28 165 739 30 159 936 7 577 782 6 795 865 3.72:1 4.44:1

Bergrivier (medium capacity) 35 168 130 15 863 674 13 783 698 3 596 173 2.55:1 4.41:1

Breede River/Winelands (medium capacity) 62 483 447 7 413 714 23 592 951 25 096 721 2.65:1 0.30:1

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Current Assets less inventory Current Liabilities

Current Assets less Inventory/Current

Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


principles

R R R R Ratio Ratio

Theewaterskloof (medium capacity) 35 673 043 31 993 686 21 788 612 23 911 514 1.64:1 1.34:1

Kannaland (medium capacity) 24 842 882 17 569 542 16 478 334 17 930 970 1.51:1 0.98:1

Oudtshoorn (medium capacity) 67 621 254 70 362 984 23 866 786 33 227 198 2.83:1 2.12:1

Bitou (medium capacity) 33 129 368 29 784 631 25 361 199 14 677 650 1.31:1 2.03:1

Knysna (medium capacity) 70 866 184 87 664 684 35 183 459 32 589 831 2.01:1 2.69:1

Laingsburg (medium capacity) 15 880 373 14 824 494 889 812 661 649 17.85:1 22.41:1

Prince Albert (medium capacity) 15 696 022 10 949 099 1 647 553 1 112 483 9.53:1 9.84:1

Beaufort West (medium capacity) 48 513 499 38 715 294 19 548 825 15 425 677 2.48:1 2.51:1

Cederberg (low capacity) 24 496 068 21 426 256 12 057 912 11 989 462 2.03:1 1.79:1

Witzenberg (low capacity) 12 679 343 33 619 557 20 399 675 25 218 396 0.62:1 1.33:1

Cape Agulhas (low capacity) 52 660 232 44 728 895 7 376 825 5 788 103 7.14:1 7.73:1

Swellendam (low capacity) 20 343 689 19 548 615 4 165 687 3 672 911 4.88:1 5.32:1

TOTAL 883 559 325 735 569 915 305 853 185 287 023 098 2.89:1 2.56:1

AVERAGE 51 974 078 43 268 819 17 991 364 16 883 712 2.89:1 2.56:1

Analysis The table above provides an analysis of acid test ratio for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years. The table above provides an analysis from a consolidated provincial average perspective.


The acid test ratio for the following municipalities is below the norm of 1.5:1 and the reasons are provided below:

• The ratio for Bitou Municipality (BM) has decreased by 72 percentage points. The reason can be attributed to an increase in current liabilities by 72 percentage points more than currents assets, which increased by only 11 percentage points in the 2003/04 financial year.

• The acid test ratio for Witzenberg Municipality (WM) has decreased by 71 percentage points. The Management responses state that the decrease in the ratio is due to the provision for bad debts. In the Auditor-General’s reports of previous financial years the doubtfulness of the recovery and the level of provision, was part of the qualification of the audit reports. The increase in the provision for bad debts was made possible by the restructuring of the funds, reserves and provisions. This made it possible for a contribution from the retained income. The provision was based on the Council’s policy for bad debts, for all debt outstanding longer than 90 days. The focus for 2005/06 financial years is to decrease the unspent Grants and Subsidies not funded by short-term investment and cash. The backlog in this regard, on 30 June 2005, was R4 913 282.

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Table 9(d): Acid test ratio: GAMAP/GRAP



Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04

Municipalities that prepared AFS in terms of GAMAP/GRAP principles

R R R R Ratio Ratio

Stellenbosch (high capacity) 167 319 669 170 764 653 65 523 251 74 779 977 2.55:1 2.28:1

George (high capacity) 251 269 036 212 121 944 87 657 780 66 454 399 2.87:1 3.19:1

Drakenstein (high capacity) 214 667 619 195 527 134 89 925 719 88 307 699 2.38:1 2.21:1

Breede Valley (high capacity) 57 287 882 75 893 299 38 655 470 41 136 970 1.48:1 1.85:1

Overstrand (high capacity) 117 592 161 92 104 055 80 925 825 69 368 854 1.45:1 1.33:1

Swartland (medium capacity) 30 437 917 31 233 908 22 612 929 21 766 347 1.35:1 1.44:1

Langeberg/Hessequa (medium capacity) 48 479 778 31 448 984 25 838 305 16 310 100 1.88:1 1.93:1

TOTAL 887 054 062 809 093 977 411 139 279 378 124 346 2.16:1 2.14:1

AVERAGE 126 722 009 115 584 854 58 734 183 54 017 764 2.16:1 2.14:1

Analysis The table above provides an analysis of acid test ratio for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.


• The acid test ratio for three municipalities is below 1.5:1.

• The acid test ratio for Breede Valley Municipality (BVM) has decreased by 0.37 percentage points.

• Overstrand Municipality (OSM) the ratio has improved by 0.12 percentage points but still below the provincial average norm.

• Swartland Municipality (SM) the ratio has decreased by 0.09 percentage points.

Ratio 10: Total Liabilities as a percentage of Total Assets Purpose: This ratio gives an indication of the level to which the assets of the municipality have already been utilised in the past, to take up or incur debt

Formula: Total Liabilities/Total assets

These figures are found in the Statement of Financial Position (GRAP AFS) or Balance Sheet(IMFO AFS).

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Table 10(a): Total Liabilities as a percentage of Total Assets: Districts

Total Liabilities Total Assets Total

Liabilities/Total Assets


R R R R % % West Coast District Muncipality(medium capacity) 64 951 295 54 651 283 256 997 730 240 884 183 25.27 22.69 Overberg District (medium capacity) 29 375 960 23 324 605 53 845 711 44 929 969 54.56 51.91 Central Karoo District Municipality(medium capacity) 11 426 751 11 972 465 16 155 331 15 653 290 70.73 76.49 Eden District Municipality (medium capacity) 53 913 275 78 755 983 102 655 872 144 915 785 52.52 54.35 Cape Winelands District Municipality (medium capacity) 66 745 826 24 335 964 243 037 125 205 314 830 27.46 11.85

TOTAL 226 413 107 193 040 300 672 691 769 651 698 057 33.66 29.62

AVERAGE 45 282 621 38 608 060 134 538 354 130 339 611 33.66 29.62

Analysis The table above provides an analysis of total liabilities against total assets for district municipalities for the 2003/04 and 2004/05 financial years.

The table above indicates that:

• The ratio for the Central Karoo District Municipality is above the consolidated provincial average. The ratio has decreased by 5.76 percentage points but is still above the provincial average. This is the result of MIG, which has not been fully spent, and Creditors such as Agency Subsidies not spent. The District Municipality will be within the norm during 2005/06 financial years.

Table 10(b): Total Liabilities as a percentage of Total Assets: Metro



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 Metro

R’000 R’000 R’000 R’000 % % City of Cape Town (high capacity) 6 249 335 5 931 945 12 745 428 12 060 996 49.03 49.18

Analysis The table above provides an analysis of total liabilities against total assets for the metro for the 2003/04 and 2004/05 financial years.


The ratio has decreased by 0.2 percentage points as compared to previous financial year. The reasons for the decrease are not provided and will be investigated in the next review.

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Table 10(c): Total Liabilities as a percentage of Total Assets: IMFO



2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


IMFO principles

R R R R % %





Breede River/Winelands (medium capacity) 60 967 680 60 138 178 124 546 866 132 738 118 48.95 45













TOTAL 883 022 093 842 617 467 1 833 822 929 1 701 951 390 48.15 49.51

AVERAGE 51 942 476 49 565 733 107 871 937 100 114 788 48.15 49.51

Analysis The table above provides an analysis of total liabilities against total assets for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years.


• Six municipalities have a high ratio, which is above the consolidated provincial norm of 57 per cent.

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• The ratio for Theewaterskloof Municipality (ThM) increased by 3.34 percentage points as compared to the previous financial year. The reasons for the increase in the ratio are not provided and will be investigated in the next review.

• The ratio for Kannaland Municipality (KM) decreased by 18.79 percentage points as compared to previous financial year, the ratio has improved but is still above the provincial average. The Management of the municipality is in the process of reducing its liabilities, including the rescheduling of loans and not entering into any new loan agreements.

• Oudtshoorn Municipality’s (OM) ratio increased by 4.95 percentage points as compared to previous financial year.

• Knysna Municipality’s (KNM) ratio increased by 0.98 percentages points and is above the consolidated provincial average. The management of the municipality reported that the increase in ratio is the result of high year end creditors. The ratio also implies bad capital project management but it should be noted that many projects require long lead times and external interest above which delay spending.

• The ratio for Cederberg Municipality (CM) increased by 5.19 percentage points as compared to previous financial year. The Management of the Municipality reported that the high ratio is the result of the following causes:

> Lack of financial management skills in deficient amalgamation process;

> Infrastructure assets in poor condition due to a lack of proper maintenance and the resultant cost of repairs caused by accelerated wear and tear and shortened economic life spans of these assets;

> Insufficient supervisory and /or internal control measures to ensure that budgeting and performance measurement steps were implemented to prevent deterioration of the financial position; and

> Creative accounting and the use of internal loans and reserves to finance operating expenses.

• Cederberg Municipality (CM) implemented the following action plans to address the financial position:

> Obtaining the assistance of PGWC to finance an intensive management support programme;

> Establishment of the Cash Committee to evaluate expenditure and to instill Financial control at managerial level;

> Focused debt collection initiatives which have seen some good results, particularly in respect of some state departments accounts;

> Sale of undeveloped residential erven in Lamberts Bay to secure working capital to finance some urgent infrastructure development; and

> Appointment of financial advisors in terms of the Recovery Plan to assist with creating a viable and sustainable financial administration.

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• Witzenberg Municipality’s (WM) ratio increased by 3.52 percentage points as compared to previous financial year, this is due to the provision for bad debts that resulted in the decrease of debtors amount, whilst the contribution was made from the retained income.

Table 10(d): Total Liabilities as a percentage of Total Assets: GAMAP/GRAP

Total Liabilities Total Assets Total Liabilities/Total

Assets

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04


GAMAP/GRAP principles R R R R % %

Stellenbosch (high capacity) 86 950 328 97 040 724 1 018 345 693 977 618 802 8.54 9.93







TOTAL 802 816 611 709 208 984 3 241 759 688 2 989 003 688 24.76 23.73

AVERAGE 114 688 087 101 315 569 463 108 527 427 000 527 24.76 23.73

Analysis The table above provides an analysis of total liabilities against total assets for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years.


• Breede Valley Municipality (BVM) is above the consolidated provincial average.

• The ratio for Breede Valley Municipality (BVM) has increased by 29.65 percentage points.

Ratio 11: Net Cash flow from Operations compared to Total Debt of the Municipality

Purpose: The purpose of this ratio is to measure the ability of a municipality to generate cash flow from operations that is then available to pay off debt of the municipality. The higher the ratio the better the ability of the municipality to meet its obligations (with cash flow that is generated through the operations of the municipality).

Formula: Net cash inflow from Operating activities less Investing activities/Total Liabilities

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The cash flow figures appear on the Cash Flow Statement and the Total Liabilities figure appears on the Balance Sheet (IMFO AFS) or Statement of Financial Position(GRAP AFS).

Table 11(a): Net Cash Flow from Operations compared to Total debt of the municipality: Districts

Cash Inflow Total Liabilities Cash Inflow/Total

Liabilities


R R R R % %


Overberg District Municipality (medium capacity) 1 055 941 (2 355 170) 29 375 960 23 324 605 3.59 (10.10)

Central Karoo District Municipality (medium capacity) 3 479 228 (9 236 292) 11 426 751 11 972 465 30.45 (77.15)

Eden District Municipality (medium capacity) (473 728) (6 952 691) 53 913 275 78 755 983 (0.88) (8.83)

Cape Winelands District Municipality (medium capacity) (13 031 321) 56 307 060 66 745 826 24 335 964 (19.52) 231.37

TOTAL (4 717 556) 70 585 978 226 413 107 193 040 300 (2.08) 36.57

AVERAGE (943 511) 14 117 196 45 282 621 38 608 060 (2.08) 36.57

Analysis The table above provides an analysis of net cash flow from operation compared to total debt for district municipalities for the 2003/04 and 2004/05 financial years.

The table indicates a decrease in the ratio for the following municipalities:

• West Coast District Municipality (WCDM)’s ratio decreased by 53.51 in percentage points as compared to previous financial year. The reasons for the decrease in the ratio are not provided and will be investigated in the next review.

• Cape Winelands District Municipality (CWDM)’s ratio decreased by 250.89 in percentage points as compared to previous financial year. The reasons for the decrease in the ratio are not provided and will be investigated in the next review.

Table 11(b): Net Cash Flow from Operations compared to Total debt of the municipality: Metro


Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04Metro

R’000 R’000 R’000 R’000 % %


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Analysis The table above provides an analysis of net cash flow from operation compared to total debt for the metro for the 2003/04 and 2004/05 financial years.


The ratio has improved by 6.95 percentage points as compared to the previous financial year. The comparison with other metros has not yet been done.

Table 11(c): Net Cash Flow from Operations compared to Total debt of the municipality: IMFO


Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04




Mossel Bay (high capacity) 28 991 219 17 250 042 72 692 065 68 696 378 39.88 25.11Matzikama (medium capacity) (8 061 501) (1 754 259) 29 777 674 30 077 153 (27.07) (5.83)

Bergrivier (medium capacity) 15 778 044 (1 398 157) 26 572 636 14 860 631 59.38 (9.41)Breede River/Winelands (medium capacity) 20 547 657 10 514 428 60 967 680 60 138 178 33.7 17.48Theewaterskloof (medium capacity) (797 873) (14 484 754) 46 728 723 37 354 788 (1.71) (38.78)Kannaland (medium capacity) 5 458 865 496 383 33 869 312 35 008 982 16.12 1.42Oudtshoorn (medium capacity) 4 387 641 5 693 984 92 707 532 82 237 788 4.73 6.92


Knysna (medium capacity) (6 074 998) 14 781 490 135 160 213 140 891 270 (4.49) 10.49Laingsburg (medium capacity) (1 976 644) (1 038 754) 5 175 136 4 552 383 (38.20) (22.82)Prince Albert (medium capacity) 4 043 898 1 764 874 6 883 303 3 967 389 58.75 44.48Beaufort West (medium capacity) 3 381 967 (967 195) 30 684 073 25 712 503 11.02 (3.76)

Cederberg (low capacity) 3 187 513 (2 878 183) 31 932 572 29 523 866 9.98 (9.75)



Swellendam (low capacity) 488 036 (4 628 074) 20 778 652 19 001 645 2.35 (24.36)

TOTAL 131 062 954 63 689 540 883 022 093 842 617 467 14.84 7.56

AVERAGE 7 709 586 3 746 444 51 942 476 49 565 557 14.84 7.56

Analysis The table above provides an analysis of net cash flow from operation compared to total debt for Municipalities that prepared AFS on IMFO for the 2003/04 and 2004/05 financial years from a consolidated provincial average perspective.

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• The negative ratio for the Matzikama Municipality (MM) has increased by 21.24 percentage points as compared to previous financial year.

• The Theewaterskloof Municipality‘s (ThM) ratio has improved by 40.49 percentage points as compared to previous financial year but is still a negative ratio.

• The ratio decreased by 14.98 percentage points in Knysna Municipality (KNM) as compared to previous financial year. The Management reported that the negative ratio is the result of Investment in Fixed Assets.

• Laingsburg Municipality (LM) has a negative ratio, which increased by 15.38 in percentage points as compared to previous financial year.

Table 11(d): Net Cash Flow from Operations compared to total debt of the municipality: GAMAP/GRAP


Liabilities

2004/05 2003/04 2004/05 2003/04 2004/05 2003/04




George (high capacity) 17 807 251 0 156 644 899 86 886 028 0 0.0

Drakenstein (high capacity) 20 234 605 0 163 344 306 162 478 344 0 0

Breede Valley (high capacity) (19 477 597) (17 721 929) 114 467 266 103 446 489 (17) (17)

Overstrand (high capacity) 272 278 0 170 820 605 160 655 864 0 0

Swartland (medium capacity) (3 063 092) (23 441 675) 56 421 654 58 392 057 (5.43) (40.15)


TOTAL 19 750 504 (31 759 545) 802 816 611 709 208 984 2.46 (4.48)

AVERAGE 2 821 501 (4 537 078) 114 688 087 101 315 569 2.46 (4.48)

Analysis The table above provides an analysis of net cash flow from operation compared to total debt for Municipalities that prepared AFS on GAMAP/GRAP for the 2003/04 and 2004/05 financial years. The consolidated provincial average is not calculated due to the unavailability of 2003/04 Cash Inflow amounts of three Municipalities namely George Municipality, Drakenstein Municipality and Overstrand Municipality.


• George Municipality (GM), Drakenstein Municipality (DM) and Overstrand Municipality (OSM) did not provide any figures for the Cash Inflow for the 2003/04 financial year which is as a result of GAMAP/GRAP implementation for the first year.

• The ratio for Stellenbosch Municipality (STEM) decreased by 1.46 percentage points as compared to previous financial year.

• The Breede Valley Municipality’s (BVM) ratio is constant.

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• The ratio for Swartland’s Municipality (SWAM) has improved by 34.72 percentage points as compared to previous financial year. The ratio is still negative and reasons for the negative ratio will be investigated in the next review.

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Chapter 5: Way Forward

5

Way Forward Municipalities are currently faced with many challenges and most important from an accounting perspective is the migration from the existing accounting system to GRAP/GAMAP. This is a medium term plan, which will see all municipalities on GRAP/GAMAP by 2009/2010. This will allow for benchmarking across provinces and also allow for changing of best practices.

The areas of concerns arising from the assessment of 2004/05 financial statements of municipalities are highlighted as follows and require further attention:

• The 18 out of 30 municipalities’ consumer debt increased over a year, emphasising the general perception that consumers are defaulting on their payments. Total consolidated debtors increased by R604 million from 2003/04 (R4.549 billion) to 2004/05 (R5.153 billion) which represents an increase of 13.1 per cent.

• The overall spending for 2004/05 financial year on PPP in the consolidated results, shows a variance of 72.6 per cent in budget versus actuals. The survey conducted to municipalities in respect of under spending on capital projects shows that this is the result of unsecured external funding sources that did not materialise.

• In terms of the NT’s norm, variance on operating expenditure when compared to budget should not be greater than 10 per cent. The operating expenditure of Overberg District, West Coast District, Cape Winelands District and Witzenberg municipality are largely inflexible and requires sound budgeting practices and disciplines to keep costs within budget and in line with the cash revenues.

It is important that municipalities address the aforementioned areas of concern as it could impact on their service delivery imperatives. This will require the stepping up technical support from provincial government in the form of training and capacity building.

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References

References Republic of South Africa Local Government: Municipal Finance Management Act. No 56 of 2003.

Republic of South Africa: The Constitution, Act 108 of 1996

Republic of South Africa: The Constitution, Act 216 of 1996

National Treasury Circular 18 of 23 June 2005

National Treasury Circular 36 of 11 July 2006

Annual Reports: Republic of South Africa Local Government: Western Cape Municipalities

Republic of South Africa: Audit Report, Auditor–General

Journal of the Institute of Municipal Finance Officers

provincial government western cape provincial treasury · ii accounting review 2005 -municipalities...

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