Financial Plan

CATASTROPHES IMPACTING ON MUNICIPAL FINANCES OVER THE PAST TWO AND A HALF YEARS

• March 2020 – COVID-19 pandemic, high levels of lockdown.

• Still in the midst of the pandemic, the July 2021 unrest and riots in KwaZulu-Natal.

• The floods in KwaZulu-Natal in April 2022.

• The Russia and Ukraine conflict causing volatility all over, but mostly affecting the cost of living - crude oil prices.

WHAT THE COVID-19 PANDEMIC HAS TAUGHT US

• Although the National State of Disaster has been lifted on 5 April 2022, the impact of a depressed economy on municipalities’ operations and affordability on its consumers will be with us for some time.

• One of the major lessons learnt during the deepest time of the pandemic was resilience. Short- and medium term financial plans had to be changed, including amended positions on cash flow projections, collection rates, expenditure priorities, -programs and -plans and associated funding arrangements, etc.

• Even though the collection rate dropped to a low of 90% Swartland Municipality’s Finance Department did not give in to pressure during COVID-19 lockdown by allowing a blanket approach of non-payment.

• Where other municipalities took this stance, the financial impact of such actions were subsequently felt. 

CHALLENGES FACING MUNICIPALITIES

• Local and international economy – recessions

• Electricity supply constraints

• Electricity demand (diminishing)

• A failing State

• Potential of drought

• Ability to collect revenue in challenging environments

• Growing population of non-paying consumers (expanding subsidy package)

• Expenditure growth higher than revenue growth

• Capital implementation

• Impact of aging infrastructure

• Changes in regulatory environment e.g. MPRA, mSCOA Regulations, GRAP etc.

MUNICIPAL FOCUS AREAS

• If National Government (COGTA) does not lead/assist as purported, municipalities must find innovative ways to play its part in opening the economy

• Municipalities need to plan to be resilient

• Focus on providing effective municipal services to all

• Ensure optimal tariff structures

• Affordable consumer tariffs

• Considering the impact of general valuations on owners

• Keep on doing the right things

EXAMPLE OF OPENING THE ECONOMY

Opening the local economy not only to stimulate economic growth, but to draw more professionals to the area. Challenges around inhibiting growth should be priority. Swartland Municipality is in completion stages of the Moorreesburg waste water treatment works which is an example of not inhibiting growth.

With total envisaged investment of around R600 million for water and sanitation, what would the approximate return be by 2030?

ELECTRICITY:  COST REFLECTIVITY IS KEY FOR SUSTAINABILITY

• Declining sales yet demand increasing (connections)

• Changing load profiles

• Cost of supply studies imperative to understand fixed vs variable costs

• Levels of cross subsidisation must be understood

• Service/fixed charges are key

• We see a move to commercial and residential Time-of-use tariffs in the future

• Protection of the poor

• Customers installing SSEG and exporting excess electricity to the grid

MOTIVATION FOR REVIEWING WATER TARIFF STRUCTURE

Fixed charges to all customers based on consumer category

Historically, water use in the highest tariff block provided a mechanism to subsidize lower-usage and indigent customers. However, after the drought, consumption in the highest block is greatly reduced. Thus, cross subsidization now hardly benefits low usage and indigent customers.

The current tariff structure is largely based on volume of water consumed, meaning exogenous factors can control water revenues.  Examples are climate change, industrial efficiency gains, domestic plumbing improvements, etc. that all reduce water consumed and revenues.

Fixed charges – independent of water consumption – provide 24% of water ‘s total revenues.

TARIFF RESTRUCTURING OR NOT?

Should we not start considering different proposals and each to be modelled to determine the best option to ensure revenue stability and minimal impact on consumers? For example:

• Change fixed charge from consumer category to property value for all domestic customers

• Only relevant to domestic customers

Advantages of this proposal:

• Improved revenue stability

• Higher percentage of revenue are recovered independent of consumption

• Ability to target subsidies to lower and indigent customers

Disadvantages of this proposal, however, is the dependency on accuracy of municipal property real values.

CAN THE CURRENT PROVISION OF FREE SERVICES BE MAINTAINED?

• Free water and sanitation to approximately 9 600 indigent customers including informal settlements - mandated 6kl per National government

• Electricity provision of 50kWh is applicable, plus provision of free electricity in Eskom supplied areas to around 9 600 households

• Approximately 40% of households on residential properties receive subsidized refuse removal

• Property rates subsidised to R100 000

• These services amount to approximately R83 million annually and are funded from the Local Government Equitable Share Grant.

REVENUE STREAMS AND COLLECTION OF DEBT

Even with the best of tariff structures, policies on tariff determinations, ultimately collection of cash is the most important imperative of ensuring a sustainable Municipality. The Municipality’s Debt Collection and Credit Control Policy is therefore important to be fluid in different circumstances.

For Swartland Municipality this was evident during the COVID-19 pandemic as it was the case when the Council in May 2020 forfeited around R70 million in revenue with a multiplier effect of never being recovered. This was done to ease economic hardship. 

MODELLING CONSIDERATIONS

SIGNIFICANT COST DRIVERS FURTHER IMPACTING THE COST OF SERVICES

• Cost of/and multiplier effect of inflationary pressures and load shedding crippling the economy

• Fuel price increases and its impact on disposable income levels and on service delivery 

• Spiralling cost of keeping the Municipal areas clean

• Cost of legal compliance and landfill site

• Cost of expanding Fleet and “Functions”

SMART USE OF EQUITABLE SHARE

The number of indigents in the Swartland municipal area are approximately 9300. Growth over next three years to increase by 2800 x 70% due to the addition of low cost housing units. How do we guard against impact of 70% of LCH adding to our expenditure without adding to revenue generation? 

Summary of equitable share 

REDUCING PRESSURE ON TARIFF INCREASES THROUGH HANDS-ON CASH FLOW MANAGEMENT

WHY IS IT IMPORTANT FOR COUNCIL TO PROTECT/DEFEND THESE INVESTMENTS?

GEARING RATIO AND IMPACT OF BORROWING

Current Long-term Debt Amount: R99 485m 

Current Audited Gearing Ratio: 10.6%

Projected Gearing Ratio (including R70m loan): 16.6%

Projected Gearing Ratio (If a further R200m is borrowed over longer term: 35.2% 

ENVISAGED REVENUE STREAMS

MODELLING OF FUTURE INCREASES IN THE PRIOR YEAR NOT SUFFICIENT TO FUND NEW MTREF

ELECTRICITY SERVICES - SURPLUS CREEP AND COMPARISON WITH OTHER MUNICIPALITIES

Swartland

Current Year 2022/2023 

APPROACH

Must continue to assess future financial sustainability based on:

• Impact of OPEX on tariffs and ultimately cash

• Level of consumer collections

• Impact of capital funding requirements on cash

• Level of gearing anticipated

• Level of cash reserves required

Guard against unrealistic increase in expenditure given the economic conditions.

• Leveraging of property portfolio

• Accessing all available grant and private funding?

• Is innovation/space for alternatives driving our business model?

ENSURING LONGER-TERM FINANCIAL SUSTAINABILITY

• What serves as a basis for long term financial planning?

• Are we prioritising real investment decisions in terms of the growth nodes in our SDF?

• Proceed in ensuring a balance between the have-nots and those able to pay? Do we say no to more low cost housing units?

• We need to prioritise protecting and expanding our revenue streams and not only spending our budgets.

• We must tap-into all available grant funding as borrowing is going to become more expensive.

• Council must limit/cap expenditure on infrastructure investment to a maximum of 16.5% of total operating expenditure to keep tariffs within affordable ranges given the impact of capital costs on the operating account.

WHAT ARE WE GETTING RIGHT

• Swartland Municipality is rated amongst the best four municipalities in the country

• Budget informed by multi-year real financial modelling

• Sound financial policies, practices and management oversight arrangements - resulting in financial discipline

• Excellent financial position

• Cash flow grip: past →present → future

• Allocations informed/influenced by financial position

• Infrastructure Investment prioritized per council’s financial strategy