BUDGETS 2015/16 MTREF1

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NATIONAL TREASURY – EXECUTIVE SUMMARY

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NATIONAL TREASURY MAIN RECOMMENDATIONS

1. To reconsider the prioritisation of projects – social vs trading services. Current priorities are impacting negatively on growth in own revenue (strategic budgeting) and economic development – including improving strategies to deal with backlogs quicker that will not negatively impact on tariffs / cash flow.

2. Engagements with national and provincial sector departments to align planning and funding (grants) and achieve BEPP and SDF outcomes.

3. Only implement national and provincial mandates in line with funding provided / possibility and cost of taking mandate over.

4. Investigate additional strategies to curb water losses. 5. Review the provision of the social package in terms of future

affordability.6. Separate discussion on funding for 2022 Commonwealth Games

required.

TARIFFS

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TARIFF INCREASES Tariffs are cost reflective, affordable and sustainable i.t.o the

MFMA and Systems Act The adverse impact of the current economic climate, coupled

with unfavourable external financial pressures on services, make tariff increases higher than CPI levels inevitable

Cross subsidisation also impacts on tariffs Growth percentages conservative for tariffs – average not more

than 1%, however, electricity has a negative growth. Electricity tariffs could be increased further

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PROPOSED TARIFF INCREASES YEAR ON YEAR COMPARISONS 2015/16PROPOSED

2014/15 2013/14 2012/13 2011/12 2010/11

Electricity 12.2% Eskom proposed

14.24%

7.39% 5.5% 11% 19.8% 25%

Water: Domestic Business

9.5% 12.9%

Umgeni Water 7.7%

9.9%12.9%

9.5%12.5%

12.5%15.5%

7.5%12.5%

9.5%12.5%

Refuse Removal 7.9% 7.9% 6.9% 7% 6.5% 7.5%

Sanitation 7.9% 7.9% 6.9% 6.5% 6.5% NEW

Rates:Average

6.9% 6.9% 6.9% 6.5% 6.5% 7.9%

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HOUSEHOLD BILLS

MONTHLY ACCOUNT FOR HIGHER INCOME RANGE

Ref Current Year 2014/15

Budget Year 2015/16

% increase

Rates and services charges:

Property rates 1 504.84 539.67 6.9%

Electricity: Consumption (Residential) 1 153.20 1293.89 12.2% Water: Consumption 408.98 447.83 9.5% Sanitation 91.88 99.14 7.9% Refuse removal 74.88 80.80 7.9% Other

sub-total 2 233.78 2 461.33 VAT on Services 242.05 269.03

Total large household bill: 2 475.83 2 730.36 Total % increase : Higher Range 10.28 %

Affordable Range 10.00% Indigent Range 10.50%References 1. Use as basis: property value of R700 000, 1 000 kWh electricity and 30kl water

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FREE BASIC SERVICES

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FREE BASIC SERVICES - RESIDENTIAL

COST HOUSEHOLDS

Rates: Life Line R1.8 bn 207 705

Water R705.5m 521 374

Electricity R96.8m 112 960

Sewerage/ Sanitation R278.4m 386 872

Refuse removal R394.8m 559 560

COST OF FBS IS APPROXIMATELY R3.2 BILLION. PARTIALLY COVERED BY EQUITABLE SHARE OF R 2.11 BILLION FROM NATIONAL TREASURY

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When reviewing the Free Basic Services we need to consider: Sustainability Impact of new Housing Impact on non indigent ratepayers/consumers

NUMBER OF PROPERTIES PAYING RATES

RESIDENCE TYPE NO. OF HOUSEHOLDS

FORMAL HOUSE 380 029

FORMAL FLAT 110 465

TOTAL FORMAL 490 494

INFORMAL ROOFS TOTAL 313 958

RURAL 94 586

RURAL "FORMAL HOUSE" 4 524

ETHEKWINI MUNICIPALITY TOTAL 903 562

ONLY 54% OF HOUSEHOLDS PAY RATES CURRENTLY

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OPERATING EXPENDITURE

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FLEXIBILITY - MAJOR EXPENDITURE ITEMS 2015/16

DETAILS 2014/2015 ORIGINAL BUDGET

2015/2016 ESTIMATES

2015/16 EST VS

TOTAL EXP % INCR

R’000 R’000 %

BULK PURCHASES 8 520 259 9 760 765 29.5%

SALARIES AND ALLOWANCES 7 353 431 7 972 674 24.1%REPAIRS AND MAINTENANCE - including internal charges 3 101 050 3 152 219 9.5%

DEPRECIATION 1 990 225 2 145 381 6.5%

FINANCE CHARGES 1 177 331 1 427 941 4.3%

TOTAL 22 142 296 24 458 980 73.9%

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• Sustained inflationary pressure on key operating costs have seen total costs escalate.

• The largest component of the cost base relates to its bulk purchases – 29.5% of total expenditure

• The other large expenditure item relates to staff costs – 24.1%. Further, salaries and wages rose by 8.42% to R7.97 billion. Provided for 542 additional posts when compared to 2014/15

• Repairs & Maintenance registered 9.5% of total expenditure

• Depreciation comprise 6.5% of the total expenditure

• Finance charges increased by 21.2% and is 4.3% of the total expenditure

EXPENDITURE

SALARY INCREASE vs. INFLATION

Year CPI (Inflation) Salary Increase

     

2015/2016 5.8% 7.5%

2014/2015 6.2% 7.5%

2013/2014 5.9% 6.85%

2012/2013 5.6% 7.0%

Backlog reduction over MTEF

Basic ServiceEstimated Backlog

(consumer units) as at 31 June 2015

Estimated Delivery per annum (units)

over MTEFBacklog at 31 June 2018

based on current delivery/funding levels

Water 67 271 2 250 60 521

Sanitation 180 527 16 000 141 527

Electricity 263 573 13 250 223 823

Refuse removal

0 8 600 0

Roads (KMS) 1 102 17 1 051

Housing 392 317 6 100 374 017

BACKLOGS

Even though vast strides have been made, backlogs are huge Not spending sufficiently on replacement and maintenance of assets Urbanisation trends – pushes backlogs upwards Effective Asset Management will further impact on expenditure Existing grants and income insufficient Municipal Infrastructure Investment Framework addresses Infrastructure backlogs

Social facilities accessible model used to match demand of facilities based on

population, income and age profiles (census information) Backlogs being fast tracked with the interim services program and a major dent in the

backlog will be made over the next 5 years

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IRPTNFINANCIAL IMPLICATIONSCORRIDOR C3

15/16 to 17/18 Grant allocations DIVISION OF REVENUE BILL - 2015/2016 MTREF

2015/16 2016/17 2017/2018

R'000 R'000 R'000

1Public Transport Infrastructure Grant and Systems Grant 719 455 759 272 836 878

2Public Transport Network Operations Grant 162 713 171 337 179 904

882 168 930 609 1 016 782

No DESCRIPTION

TOTAL ALLOCATIONS

Total Q1 Jul-Sep Q2 Oct-Dec Q3 Jan-Mar Q4 Apr-Jun Q1 Jul-Sep Q2 Oct-Dec Q3 Jan-Mar Q4 Apr-Jun Q1 Jul-SepQ2 Oct-

DecQ3 Jan-

MarQ4 Apr-

JunProposed Funding Allocation

R 2,315,605,000

Rollover R 277,943,267

Contributions from Ethekwini

R 200,000,000

Total R 2,793,548,267

340,585,991 277,825,361 228,742,236 271,504,228 470,255,234 130,801,840 222,244,429 207,500,000 215,650,755

10,276,644 18,258,503 26,240,363 34,222,222 42,204,082 50,185,941 38,612,245

7,006,803 12,448,979 17,891,157 23,333,333 28,775,510 34,217,687 26,326,531

9,342,404 16,598,639 23,854,875 31,111,111 38,367,347 45,623,583 35,102,041

9,424,881 17,446,056 25,467,232 33,488,407 41,509,582 35,092,642

14,264,142 26,403,837 38,543,532 50,683,227 62,822,922 53,111,166

25,000,000 25,000,000 25,000,000 25,000,000

Anticipated Expenditure

R 3,683,192,264

Anticipated Rollover/(Shortfall)

-R 889,643,997.26

R 315,691,572

R 521,186,428

59,956,141

R 1,878,504,066

2017/18

R 836,878,000

R 836,878,000

Pinetown CBD

R -291,598,359 R -1,119,232,066

Other R 239,824,564 59,956,141

TOTAL R 3,683,192,264

R 1,488,996,626

59,956,141 59,956,141

Feeder Stops R 100,000,000

TMC R 200,000,000

ITS R 245,828,826

Depot R 220,000,000

IFMS R 162,428,800

Terminal R 150,000,000

R 1,197,398,267 R 759,272,000

C3 R 2,365,110,074

R 277,943,267

R 200,000,000

2015/16 2016/17

R 719,455,000 R 759,272,000

INFRASTRUCTURE CASH FLOW

C3 16/17 17/18 18/19Fare Revenue+PTNO 280 869 106 285 303 870 354 457 884 Direct Operating Cost 174 981 410 185 480 295 225 856 882 Vehicle insurance 17 213 361 18 246 163 23 831 374 Support Services 88 122 550 98 423 539 108 932 321

* Station Services 64 584 000 68 459 040 72 566 582

* Inspection & Monitoring 2 341 133 3 102 001 7 891 491

* Fare Systems Management 12 753 917 13 519 152 14 330 301

* ITS Management 8 443 500 13 343 346 14 143 947

Oversight Entity 48 615 800 46 463 270 50 979 257 Marketing 13 127 206 11 529 282 10 473 312

Maintenance 21 647 276 45 892 225 48 645 759

Sub-total (Direct and other operating costs) 363 707 604 406 034 774 468 718 905

Shortfall btw fare revenue and all operating costs (Direct and other)

-82 838 498 -120 730 903 -114 261 021

Shortfall btw fare revenue and direct operating costs -105 887 696 - 99 823 576 -128 601 001

C3 Operational Cost

FINANCIAL COMMENTARY – PHASE 1 – C3

• The capital shortfall to implement phase 1 – C3 is +/- R 889M over the MTREF 2015/16 to 2017/18.

• The operating shortfall from date of commencement of operations (anticipated January 2017) to the end of June 2019 is anticipated to be R 318m.

• These cash-flows assumes that no other corridor will be implemented in 2017/18.

IRPTN – PHASE 1 – c3,c1,c9

2015/16 2016/17 2017/18

Total Capital Cost R 1 488 R 1 878 R 2 558 R 7 093 R 13 017Total Funding R 1 197 R 759 R 836 R 0 R 2 792Capital Funding Surplus/(Shortfall) -R 291 -R 1 119 -R 1 722 -R 7 093 -R 10 225

Operational Cost R 0 R 363 R 406 R 49 446 R 50 215Income R 0 R 280 R 285 R 32 349 R 32 914Operational Surplus/(Shortfall) R 0 -R 83 -R 121 -R 17 097 -R 17 301

Compensation Surplus/(Shortfall) -R 150 -R 200 -R 350 -R 4 239 -R 4 939

Total Funding Surplus/(Shortfall) -R 441 -R 1 402 -R 2 193 -R 28 429 -R 32 465

Compensation costs and funding

IRPTN - eThekwini-Phase 1

Description

MTREF (R'm) Projected Cost/Income after 30 June 2017 to full implementation (R'm) (2028) Total

Capital Costs and Funding

Operating costs and income

FINANCIAL COMMENTARY – PHASE 1• The estimated capital costs for phase 1 to the year 2019 is R 13bn.• The Public Transport Infrastructure Grant is only projected for the MTREF

ending 2017/18 amounting to R2,7bn including the 2014/15 rollover. • The anticipated capital shortfall is in the region of R10bn assuming that

the PTIG is projected till the end of 2017/18.• The compensation model is not finalized and is expected to be between

R4,5bn to R11bn.• The average operational shortfall per annum is anticipated to be R 1,7bn.

CASH FLOW MANAGEMENT

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CASH FLOW APPLICATION - REVIEWED BY NATIONAL TREASURY

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ETH eThekwini - Table A8 Cash backed reserves/accumulated surplus reconciliation

Description

R thousandFull Year

Forecast

Budget Year

2015/16

NT

Calculation

Budget Year

+1 2016/17

Budget Year

+2 2017/18

Cash and investments availableCash/cash equivalents at the year end 5 217 163 4 990 786 4 900 327 4 619 437 4 238 331 Other current investments > 90 days 166 002 437 664 437 664 797 680 1 159 151 Non current assets - Investments – – – –

Cash and investments available: 5 383 165 5 428 450 5 337 991 5 417 117 5 397 482

Application of cash and investmentsUnspent conditional transfers 400 000 350 000 350 000 300 000 275 000 Unspent borrowing – – – – Statutory requirementsOther working capital requirements 261 436 31 580 31 580 (136 192) (364 374) Other provisions 380 665 381 983 381 983 383 991 386 730 Long term investments committed – – – – Reserves to be backed by cash/investments 3 611 570 3 712 369 3 712 369 3 855 294 3 941 951

Total Application of cash and investments: 4 653 670 4 475 932 4 475 932 4 403 093 4 239 307 Surplus(shortfall) 729 494 952 518 862 059 1 014 024 1 158 175

Current Year

2014/15

2015/16 Medium Term Revenue & Expenditure

Framework

Cash is monitored on a daily basis – reconciliation of daily cash Multi year cash forecasts prepared Regular analysis of payments and income streams to ensure realistic cash flow

projections Monthly cash flow , investments and borrowings report to Council Financial strategy to target 90 days cash on hand. However, Capital budget will be

reviewed in line with the borrowing limits Cash flow forecast informs the Investment plan An investment register and a daily summary of all investments maintained Surplus cash invested ito the Investment Policy /Framework Borrowings to fund capital made ito Borrowing Policy Framework and Guidelines Regular meetings scheduled for cash flow, investments and borrowings The 2015/16 MTREF provide for a projected positive cash position of over R 952

million year end, and increases to R1.1 billion by 2017/18, applying funds to cash backed reserves

CASH FLOW MANAGEMENT (contd)

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FINANCING THE CAPITAL BUDGET/ BORROWINGS

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R'000 % R'000 % R'000 %

National Government 2,761,547 45.7 2,883,073 44.8 3,079,516 44.39 Provincial Government 793,906 13.1 795,144 12.4 811,532 11.70 Other Transfers and Grant 17,800 0.3 4,100 0.1 - Total Capital grants 3,573,253 59.1 3,682,317 57.2 3,891,048 56.1 Internal Funding 1,473,673 24.4 1,753,034 27.24 2,046,052 29.5 Borrowings 1,000,000 16.5 1,000,000 15.54 1,000,000 14.4

6,046,926 100 6,435,351 100 6,937,100 100

Details 2015/2016 2017/20182016/2017

FINANCING OF CAPITAL BUDGET

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FINANCING OF CAPITAL BUDGET

The Capital budget which increased from R6.0bn to R6.9bn over the MTREF period. The 2015/16 budget is financed from three sources viz Grant Funding (59.1%), Loans(16.5%) and internally generated funds(24.4%)

Maximum internally generated funds and national transfers from other spheres of government

All loans are utilised for capital projects and approximately 90% of loans applied to infrastructure type of projects

“Life is an echo. What you send out – comes back. What you sow – you reap. What you give – you get. What you see in others – exists in you. Remember, life is an echo. It always gets back to you.”

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BORROWINGS

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Strategy based on Borrowing Regulations Framework and Guidelines

Borrow long term at lowest possible rate with minimum risk Borrowing requirement based on three year CAPEX coinciding

with MTREF Can commit to a loan facility but cannot borrow in advance of

need. Only Capital expenditure funded

by borrowings

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BORROWING STRATEGY

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Notwithstanding that the gearing ratio indicates a scope for borrowing any additional borrowings will impact adversely on Rates/Tariffs which is above the CPI. Accordingly, alternative funding may need to be sourced.

Duration of Loans to match, as far as possible, the useful lives of the infrastructure assets.

Large concentrations of capital repayments avoided in any particular year to ensure a smooth debt servicing profile over time.

No borrowing for investments purposes

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BORROWINGS STRATEGY (CONTD)

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KEY ISSUES AND CHALLENGES

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KEY ISSUES AND CHALLENGES• Current status is that land is being used for social purposes, namely

housing. Our spend is also focused on social.

• Accordingly, there has been little to no real growth in the rates base.

• Focus on a densification strategy or nodal development, if not, the growth in the rates base will stagnate even further.

• Minimal level of growth, major costs to unblock development –

return on investments - will impact on tariffs

• We need to turn this around. Have a wider population to serve.

• This requires a revision of our Land Policy

• Need to share land with economic development and job creation projects and broaden economic spend

KEY ISSUES AND CHALLENGES

• eThekwini high unemployment rate 25% to 45 %. Accordingly, there has been little to no real growth in the rates base.

• Huge backlogs and further demands due to impact on urbanization

• Economic growth about 3% however growth in rates base only 1% to 2 % whilst here is negative growth in real terms on water and electricity income

• The key risk areas are:

1. The impact of the FBS package

2. Housing - Sustainability of housing provision from current financing sources – heavily impacting on cash flows

3. IRPTN capital and operating costs

KEY ISSUES AND CHALLENGES

KEY ISSUES AND CHALLENGES

• Impact of Bulk purchase costs

• Unaccounted for water and theft of electricity

• Unemployment – sustaining existing collection rates

• Economic outlook and inflation.

• Salary increases continue to be above inflation

• Wage settlement this year need to carefully managed

• No increase in grants whilst there have been a reduction on some grants

• The funding for the Commonwealth Games and the Olympic Games

KEY ISSUES AND CHALLENGES

THANK YOU

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