Revenue Master Class: Reflections from Durban’s Chief Financial Officer

Reporting on performance

information and results

Monitoring and Measuring

Results

Budgeting

Accountability Matrix

IDP/SDBIPLTDF

Getting feedback from

Key Stakeholders

Using performance

information and results

INTRODUCTION• Effective financial management is critical to any organisation.

• In the context of local government, a lack of sound financial management will have a direct adverse impact on service delivery.

• As there is a strong correlation between sound financial management and effective service delivery.

• “The aims of a democratic society and growing economy can only be realised through a responsive, accountable, effective and efficient system of local government. If local government fails, South Africa fails.”

“You are not just paid to work. You are paid to be uncomfortable – and to pursue projects that scare you.”

RECAP 10 COMMANDEMENTS• Build confidence

• Income collect revenue

• Expenditure Value for money

• Credit worthiness – strive to improve credit rating

• Resilience / Sustainability

• Asset management

• Grow the economy

• Financial System

• Skills Performance and Planning

• GOD

ROLE OF CFO – s81 OF MFMA• Must perform:

- budgeting

- cash management

- accounting analysis

- financial reporting

- debt management

- supply chain management

- financial management

• The CFO is accountable to the accounting officer for the performance of the duties referred to above.

WHAT IS FINANCIAL MANAGEMENT?• Stewardship of public funds

• Financial analysis of local authority activity to secure value for money through effective management accounting

• Identification of risk and from that defining internal control and internal audit requirements

• Ensuring efficient management of cash and borrowing

• Safeguarding assets

• Securing a prudential financial framework so that a balanced budget exists and is maintained

“Take care of your relationships and the money will take care of itself.”

OBLIGATION ON MUNICIPALITIES• Responsive to needs of communities

• Create culture of accountability and good governance

• Prevent corruption

• Establish communication channels

• Give information to all stakeholders

• Inform stakeholders on costs of management

“To double your income, triple your rate of learning”

PRINCIPLES OF FINANCIAL MANAGEMENT Return on investment

Maximize current infrastructure investment Use Value Filters in IDP Sustainability Balancing capital expenditure for social, economic, rehabilitation and

support (including fleet and IT) Social housing impact on free basic services Need to ensure rates base growth to ensure sustainability of free

basic services Energy efficiency and green economy Increase in informal settlements Investigate feasibility of a minimum service charge for residents

13 “Don’t fall in love with your press releases”

BUDGET• Must be balanced and income projections must be realistic

• 3-year budgeting (MTEF) – better planning and funding strategy

• Linked to IDP – value filters & needs analysis

• Also linkages to NDP (National), PGDS (Provincial) and LGTAS (COGTA)

• Key issue is balancing social, economic, rehabilitative and support expenditures

• No over-expenditure – adjustments budget

• Community participation another key issue

• The main budget-related policies – Credit Control and Debt Collection Policy, Rates Policy, SCM Policy, Tariff Policy, etc

• Municipalities need to be economically viable – cannot rely on grants

• Look to fund capital budget from internal funds and borrowings

POLICIES• Don’t do anything not in your Policy or bylaws

• No use having policies and bylaws in place but not complying with them

• No political interference

• Zero tolerance towards non-compliance

• Requirements: transparency, accuracy, etc

“If you’re in business, you’re in show business. The moment you get to work, you’re on stage. Give us the performance of your life”

CASH MANAGEMENT• No overdraft or borrowing for operating budget

• Liquidity – current ratio – 1:1

• Daily cash flow analysis

• Reserves

• Cash on hand > 90 days

“The purpose of work is to help people. The other rewards are inevitable by-products of this singular focus.”

HOW ETHEKWINI INCREASED DAYS CASH ON HAND

• Basic Strategy :

- Increase Income

- Contain Costs

• ‘Increase Income’ Measures :-

- Actively chasing up Debtors

- Top level interaction with Government depts. owing money.

- Vigorously applying Credit Control Policies

- Ensure DORA Payments timeously received.

19“Every visionary was initially called crazy.”

INVESTMENTS & BORROWNGS • No risk

• Gearing ratio < 40%

• What is your debt appetite?

• Fund capital budget from internal funds

• Reduce borrowings –what is your borrowing horizon?

• Debt service cost < 10%

• Long term loans have to be sustainable and affordable

• Loans vs bonds

“Keep promises and be impeccable with your word. People buy more than just your products and services. They invest in your credibility.”

BORROWING STRATEGY Strategy based on Borrowing Framework and Guidelines Borrow long term at lowest possible rate with minimum risk Borrowing requirement based on three year CAPEX coinciding with

MTREF Flexibility to borrow for three years or one year based on market

conditions

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“You’ll get your game-changing ideas away from the office versus the middle of work. Make time for solitude. Creativity needs the space to present itself.”

ETHEKWINI CREDIT RATING• Rating agency provided an independent assessment of the credit

quality of the municipality to provide investors with information on which to base investment & pricing decisions.

• Ethekwini has been awarded an Investment Grade:

A1 SHORT TERM

- Very high certainty of timely payment. - Liquidity factors are excellent

AA - LONG TERM

- Very high credit quality. Protection factors are very strong. Adverse changes in business, economic or financial conditions would increase risk although not significantly.

- Highest Credit Rating in Municipal Sector allows ETM to borrow at very competitive interest rates.

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ASSET MANAGEMENT• To support more efficient service delivery – less down time in terms

of plant and equipment

• To reduce costs in terms of reduced maintenance cost in the long term – maintenance vs replacement costs

• Maximises the use of the asset – sweat value

• Identifies the correct time to replace asset – when no longer cost effective to maintain asset

• Hence good asset management facilitates the provision of services in a financially sustainable manner

• Asset management policy must be in place

• Software and technology available must be explored

• Compliance with GRAP requirements with regard to immovables and movables

ASSET MANAGEMENT• Immovable assets

- review of useful life

- identification of impairment

- extending the lives of fully depreciated assets

- componentisation

- location of asset (on GPS)

- asset loaded on system and linked to asset register – 100% coverage

• Movable assets

- physical verification

- conditional assessment

- major clean up

- reassessment of useful lives of fully depreciated assets

SUPPLY CHAIN MANAGEMENT• SCM regulations in terms of MFMA

• Councillors cannot be part of tender process even as observers

• SCM Policy

• Irregular expenditure

• Planning is critical

• ISO 9001 accreditation – key processes and SOP’s documented

• SSS system – e-procurement

• Contract management – tracking of tender through every stage – will also help with the timeous renewal of contracts

• Centralised contract register

“Don’t do your best work for the applause it generates but for the personal pride it delivers.”

SUPPLY CHAIN MANAGEMENT• Procurement scheduling – key to ensuring optimal capital spend

• Bid Committees: BSC, BEC, BAC

• Blacklisting

• Appeals

• Conflict of interest – officials and councillors in the employ of the Municipality and State doing business with the Council

• Internal controls – pre-screening all expenditure in terms of a checklist, 100% pre-payment audit in Accounts Payable

• Service level agreements with suppliers and customers

“Remember that what makes a great business – in part – are the seemingly insignificant details. Obsess over them.”

FINANCIAL MODELLING• Infrastructure planning is a key issue

• MIIF model

• Financial model – 20-year projection

• Capmon / JDE Enterprise One

• Access model

• Rates model

“If you’re not failing regularly, you’re definitely not making much progress”

SKILLS• Need to have the necessary financial and business skills

• According to Deloitte sound financial management requires the deployment of suitably skilled people at the right places, and a continuous building of internal capacity

• Reduce reliance on consultants – skills transfer as part of SLA

• Strategic HR – recruitment, retention and development of skills

• Succession planning and talent management

• MINIMUM COMPETENCY FRAMEWORK

• Strong leadership

• Trainee Accountant and Graduate Trainee Accountant schemes

“The only standard worth reaching for is BIW (Best in World)”

MUNICIPAL ACCOUNTABILITY CYCLE

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IDP

Budget

SDBIP

In - year Reporting

Annual Financial

Statements

Annual Report

5 year Strategy

Three year Budget

Annual Plan to Implement

Monitoring

Oversight Reports

IDP

Budget

SDBIP

In -year Reporting

Annual Financial

Statements

Annual Report

5 year Strategy

Three year Budget

Annual Plan to Implement

Monitoring

Oversight Reports

ORGANISATIONAL PERFORMANCE MONITORING

It is also necessary to establish processes to ensure all major organisational components of the city are integrated into an overall organisational monitoring and reporting framework.

Monthly

Departments

Departments

Report against Business Plan

Report Against Managers Performance Agreements

Report against Departmental SDBIP

Report against

Business Plan

Consolidated Report that Measures

Organisational Performance

against IDP /SDBIP Targets

Quarterly

Report against SDBIP

Report Against Head Performance Agreement

RATIO DESCRIPTION MEASURE BENCHMARK / TARGET

Debtors/Income % 20.0

Net debtors/Income % 15.0

Debtors Days Days 60.0

Personnel to total Expenditure % 30.0

Debt Servicing Costs to total Expenditure % 10.0 to15.0

Creditor Days Days 30.0

Current ratio Ratio 1:1

Distribution Losses Electricity Water

%%

6.0 to10.020.0 to 25.0

Maintenance cost to total Expenditure % 10.0

Cash collection rate % 95.0

Gearing ratio % 40.0

Debt coverage No. of times 18.0

Cost coverage No. of times 2.0

Cash on hand No of days 90

SOME KEY KPI’S

OVERSIGHT• Committees

- Finance & procurement Committee

- EXCO- Council- MPAC- Audit Committee- Bid Committees

• Other governments and departments- Province

- National Treasury- Auditor General

• Internal departments- Internal Audit

- Ombuds Office- Internal Control

“It could take you 30 years to build a great reputation and 30 seconds of bad judgment to lose it.

HOW TO MAKE A CITY GREAT• According to a McKinsey & Company report on “How to make a city

great” the following key issues were identified:

1. Economic growth

2. Do more with less

3. Win support for change

• In terms of the relevance to this presentation, I will discuss the first two issues

“The job of the leader is to grow more leaders”

CONCLUSION• Common thread running through all issues are return-on-investment,

value-for-money, and sustainability

• Productivity and benchmarking are hence vital issues

• Do more with less

• Opportunities: technology, outsourcing, standardisation

• Technology: data, CCTV, smart technology, fleet monitoring & management, on-line forms and complaints line, billboards

• Explore partnerships – PPP’s

• Densification strategy

• Risk management

• Performance management – SDBIP and scorecard

CONCLUSION• Prioritise spending – capital, repairs & maintenance

• No irregular, wasteful or fruitless expenditure – service delivery not an excuse for non-compliance

• Monitor Top 150 projects actively

• Strict compliance with legislative framework and regulations key

• Strict adherence to policies

• Balanced budget – economic/social/rehabilitation balance

• Linkage of budget to IDP and other strategies

• No unfunded mandates should be allowed

• Interrogate Top 10 items of expenditure

“Remember that the things that get scheduled are the things that get done.”

CONCLUSION• Economic development and growth – rates base and job creation

• Cash collection must be > 95%

• Cash management – 90 days cash on hand

• Gearing ratio < 40%

• Unqualified / clean audit report

• Fully reconciled asset registers

• Ensure value for money in respect of procurement

• Ensure technological opportunities are maximised

• Financial modeling is a useful tool for long-term planning

• Loss in distribution strategies should be introduced

• Eliminate fraud and corruption – everyone needs to play their role

THE END

Live with the 3 E's … Energy, Enthusiasm, Empathy, and the 3 F's … Faith, Family, Friends.