City Finances in Healthy State

6 August 2017

The City of Johannesburg refutes allegations made by the ANC in Joburg this morning regarding the financial position of the City of Johannesburg.

The comments are nothing more than the ANC’s attempt at reviving Cllr Parks Tau’s political career from the ashes.

The truth of the matter is that under ANC administration, the City and its finances were run in an environment of chaos and disorder, all of which allowed a culture of corruption to fester and flourish. Since coming into office, we have learnt that almost 19% of the City’s R55 billion budget has, over years, been lost to corruption.

Added to this, instead of using valuable City resources to drive service delivery and the creation of economic opportunities within the City, funds were used to promote vanity projects which provided little return on investment for residents – this City’s 181 sprawling informal settlements and an unemployment rate of 30% is testament to that fact.

This is the ANC government the people of Johannesburg rejected over a year ago on 03 August 2016, following 23 years of persistent governance and service delivery failures. This was the failed government of Cllr Tau.

Our determination to create an honest and transparent City that fights corruption and ensures a culture of enhanced service delivery with pride is what we do every day in the City of Johannesburg.

The management of the City’s finances is a matter of public interest. We welcome scrutiny into the City’s finances by our residents. However, I would caution that the City’s finances should never be used as an instrument for petty politics.

Stakeholders such as the Auditor General South Africa (AGSA), National Treasury and Investors City keep us honest and constantly advise us on how finances can improve. The financial performance for the financial year (FY) 2016/17 is yet to be audited by the AGSA and any proclamation on the figures undermines the role of the Auditor General South Africa.

REVENUE COLLECTION

In terms of our revenue collection for the year 2016/17, the unaudited numbers show a significant reduction in the variance between the budgeted and the actual revenue collected compared to FY 2015/16.

This is an improvement from R3,4 billion negative variance of FY 2015/16 to an improved R2,7 billion negative variance for FY 2016/17. In March and June 2017, revenue collected exceeded R3 billion – a first in the City of Johannesburg where revenue collection exceeding R3 billion for two months.

Total revenue collections in 2015/16 FY was R34, 9 billion versus an improved collection of R35, 2 billion in the 2016/17 FY. We also assess our revenue collection performance through the financial ratios, and our forecasted debt to revenue ratio is 40.7%, well within our target. Our main liquidity ration measure, cost coverage ratio is also projected to be a healthy 36 days, well above National Treasury benchmark.

2017/18 BUDGET

The City’s 2017/18 budget was assessed by National Treasury, and it was found to be funded. There are many customers in the City that we believe were not being billed for the three metered services – electricity, water and sewerage. The plans that we proclaimed during the State of the City Address and the Budget Speech of collecting more revenue are already being implemented. We have ascertained claims by various consulting firms that there are customers that we are not collecting revenue from, these are mostly corporate South Africa. We have done spot checks at major developments in the City and we have found serious bylaw transgressions that have a negative impact on the City’s ability to collect money.

THE BILLING CRISIS

The Billing Crisis was never reduced but rather ‘swept under the carpet’ during the previous administration by way of:

- Reduced credit management – this reduces customer complaints;

- Increasing customer indebtedness by ‘pay for what you are not disputing model’; and

- ‘Fake actual readings’ – these were called ‘calculated actuals’.

We conducted an analytics exercise on our debtors’ book with the assistance of an independent auditor. We found 189 521 accounts, with a total value of R4, 4 billion where customers were not paying and there was no credit management instituted on the accounts.

A further analysis revealed that there was no excuse for non-payment of these accounts. The reason for excluding them from credit management was to reduce customer complaints. Upon identifying these customers we have instituted a credit management. We are in the process of conclusively resolving each and every account query that has been registered with the City.

A qualitative and quantitative assessment of our engagements with customers and looking at the number of open queries, we have the confidence of the people that we are fully capable of resolving the billing crisis. 

There was an increase in the noise when we exposed what was under the carpet.

LIQUIDITY MANAGEMENT

In terms of the City’s liquidity status, as at June 2017, the closing cash balance was between R3 billion and R4 billion. It should also be noted that liquidity has been deteriorating year on year due to the billing challenges that went unresolved under the watch of the previous administration.

The City’s current cash balances are around R4 billion. The City pays all its short-term financial obligations as they fall due. The City continues to pay salaries and its creditors. Creditors are paid in compliance with the National Treasury requirement that suppliers should be paid within 30 days of receiving a valid tax invoice.

The City of Johannesburg as part of prudent liquidity management raises standby short-term borrowing to manage potential cash flow mismatches. Having standby short-term facilities is a market best practice and viewed favourably by all credit rating agencies as it provides the origination ability to manage potential cash flow mismatches efficiently. This strategy was employed by the previous administration for a number of years and at the height of the liquidity squeeze in 2010, the City utilised R5.9 billion short-term borrowing.

As for the short-term borrowing in the 2017/18 financial year the City can confirm that Council has approved raising of up to R3 billion short-term borrowing from the DBSA to manage potential cash flow mismatches that might arise in the future.

The City of Johannesburg’s Group Finance has multiple redemption and liquidity strategies to address repayment of borrowings when they fall due. For the current financial year, borrowings amounting to R2, 733 billion will be repaid from the sinking fund which is currently sitting around R4 billion rand.

Further, the redemption strategies cover current and future borrowings to ascertain repayment.

The Redemption Fund was historically reported as a long term asset within the balance sheet of the City. Some of these assets are short term in nature. According to the Portfolio Management Agreement to govern operations for the Redemption Fund which was approved by the previous administration, the City has the liberty to withdraw from the Fund to report short term assets under current assets. In the previous year R300 million was drawn; this was under the previous administration.

We inherited a pay-as-go model for funding the City’s capital expenditure. In this model, CAPEX is funded by the revenue which is generated during the same FY. The pay-as-go model creates a liquidity squeeze since the cash is not readily available. In the next three years, the City will be moving away from this model and adopting a pre-paid model. In the pre-paid model, the CAPEX is funded by available cash.

Over the years, there have been many inefficiencies in the financial management of the Municipal Owned Entities (MOEs) such as City Power, Joburg Water, and PIKITUP. The inefficiencies had a negative impact on the MOEs’ finances, this prompted the DA-led administration to start a process of reabsorbing the MOEs to improve efficiencies in financial management amongst other things.

A MOE such as City Power has had to deal with a number situations that deteriorated its liquidity position.

A VAT refund of about R300 million has been withheld by the South African Revenue Service (SARS) due to an income tax issue which went unresolved for years under the watch of the previous administration.

A few weeks after the DA-led administration took office, the Kelvin Power contract between City Power and ESKOM was terminated further negatively impacting the financial performance of the MOE to the tune R268 million.

We have commissioned a forensic accounting investigation to determine the root cause of the liquidity degradation at City Power. The results of the investigation will empower us to implement administrative controls that will improve the MOEs’ finances. 

A number of revenue enhancement interventions are underway to improve the completeness of revenue and consequently the liquidity position of the City.

The City’s finances are in a sound position. The DA-led administration has made tremendous progress since taking office to ensure that we run a clean administration following acceptable governance practices. The financial state of affairs will be revealed by the AGSA when he issues his report in November 2017.

The City of Joburg is the least dependent on national government grants and the highest spender – proportionately – on social housing, community facilities and equipment to enable frontline services.

We have increased access to basic services, including electricity, to unprecedented levels, including through our new micro-grids in informal settlements. We have increased investment in roads and traffic signals which are the arteries of life and commerce in this great city, upgrading our key bridges and highways as we go.

It’s totally inaccurate for the ANC Joburg to purport that under Mayor Mashaba’s tenure the City of Johannesburg’s financial stability has been in a state of perpetual decline or precarious. This is a characterisation of their time in government.

Should the ANC continue on their present path, they will not only expose themselves as failed government but a failed opposition party as well.

Issued by Lesego Ngobeni, Stakeholder Manager, Office of MMC of Finance, Rabelani Dagada, 6 August 2017