FINANCIAL MANAGEMENT REFORM & ACCOUNTABILITY

IMFO CONFERENCE 2011

Presenter: Carl Stroud | Specialist: Local Government Budget Reforms, CD: LGBA, National Treasury | 13 September 2011

Consolidated LG financial performance: 2010/2011

2

Financial performance

3

• Significant increases in spending at the end of fourth quarter • Evidence of weak multi-year budgeting• Possible unofficial stockpiling• Risk to cash flow and liquidity

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Q1 Q2 Q3 Q4

Metro Spending Patterns - 2010/11

Nelson Mandela Bay

Ekurhuleni Metro

City Of Johannesburg

City Of Tshwane

eThekwini

Cape Town

Declining own funding

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–

5 000

10 000

15 000

20 000

25 000

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R m

illio

n

Capital transfers received Municipal own capital funds

• Decline in own contribution to capital programme (internal and borrowing)• 2009/10 own funding of R12.1 billion• 2012/13 own funding of R6.6 billion, significant reduction

Challenges

• Municipalities are finding it increasingly difficult to generate own revenue

• Insufficient funds for repairs and maintenance

• Ineffective supply chain management

• Financial mismanagement and financial misconduct

• Councils face severe long-term social challenges as the demand for services grows

• Demographic changes, migration patterns & increasing demand for basic services

• Threatens the sustainability and viability of municipalities

• Service delivery protests

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Recent LG benchmarking engagements

Key issues: MTREF 2011/2012• Three of the eight metro’s and eight of the nine

secondary cities’ budgets are unfunded;• Tariff setting and cost recovery is generally weak;• Ineffective debt collection processes, incorrect billing and

inaccurate data impedes the ability to bill and collect own revenue;

• Cash flow forecasting, funding compliance and funding measurement efforts are dismal; and

• Inadequate allocations for asset renewal and maintenance.

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Financial management reform focus areas

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The need for financial management reforms

• Funded, sustainable and credible budgets over the MTREF; and improve cash flow management

• Strengthen revenue management; billing and collection activities

• Introduce minimum standards informed by business processes for software applications

• Introduce costing methodologies; informed tariff determination

• Introduce a standard chart of accounts • Promote financial management accountability

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Key elements of service delivery

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SERVIC

E DELIVER

Y

CONSTITUTIONAL OBJECTIVES OF LG AND LEGISLATIVE FRAMEWORKS

Democratic and

accountable government

Provision of sustainable

services

Social and economic

development

Safe and healthy

environment

Communities involvement in

LG

Economies of Scale Choice of Technology

BUDGET REFORM

Need for structured budgeting

• ‘Balanced budget’ versus ‘funded budgets’• Budgeting for a ‘surplus’• Effective cash flow management• Support implementation of Service Delivery and Budget

Implementation Plans (SDBIPs)• Improve quality of reporting• Improve transparency and accountability – MBRR• Move beyond compliance

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Dimensions of municipal planning – MBRR

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Key focus areas of budget reform

• Alignment of the SDF, IDP and MTREF

• Promote multi-year budgeting

• Enhance funding strategy - capital programme

– notable decline in own revenue contribution to capital programme

• Asset renewal and repairs and maintenance

• Effective cash flow management and funding compliance

• Transparency

• Accountability

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FINANCIAL MODELLING

Cost recovery of trading services19 secondary cities – 2010/11 FY

• 15 (79 per cent) have at least one service trading at a deficit• Electricity – 3 are trading at a deficit; R143 million• Water – 6 are trading at a deficit; R194 million• Sanitation – 7 are trading at a deficit; R74 million• Refuse removal – 9 are trading at a deficit; R94 million• Such trading deficits:

– require cross subsidisation– result from flawed tariff determination– place sustainability of service at risk– mean no surpluses to fund capital programme

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The need for financial modeling

• Applying basic accounting principles and costing methodologies to determine the ‘real’ cost of providing services

• Tariff determination informed by accurate costing that incorporates direct, indirect and hidden costs of services

• To enable municipalities to achieve cost efficiencies• Improve project prioritisation in respect of capital expenditure • Sound costing methodologies that inform the municipal

budget

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Key focus areas of financial modeling

• Develop costing methodologies for municipal services • Tariff policies• Informed tariff determination processes• Develop modelling tools to inform capital spending priorities• Introduce financial indicators to measure performance

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REVENUE MANAGEMENT

Challenges

• Inaccurate billing information• Lack of data integrity – at various stages in process• Growing number of billing queries• Ineffective customer service - unresolved queries• Billing and revenue collection targets not met• Growth in debtors• Ineffective policy implementation • Negative public perception related to poor service delivery

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Key focus areas of revenue management

• Improve management of the revenue value chain• Data integrity in the transaction processing environment• Effective implementation of policies and procedures• Targeted approach to debt collection• Improve customer service • Completeness of revenue - verifying the revenue base• Getting the basics right!

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Generating accurate bills

• Effective processes and procedures to translate data into accurate billing records

• Service level standards between the municipal departments along the revenue value chain

• Effective service level agreements particularly when functions impacting the revenue value chain are outsourced

• Optimally utilised billing systems to ensure that accurate statements of account are presented to customers for payment

• Data ‘cleansing’ efforts will be in vain if the data is not validated throughout the transaction processing environment on a continuous basis

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REVENUE MANAGEMENT VALUE CHAINREVENUE MANAGEMENT VALUE CHAIN

Town Planning

Town Planning ValuationsValuations

Infrastructure/ Metered Services

Infrastructure/ Metered Services

HousingHousingGeographic Information

System

Geographic Information

System

Cash collectionCash collectionCustomer Service

Customer Service

Debtor management

Debtor management

Opening & closing

accounts

Opening & closing

accounts

Billing & Distribution

Billing & Distribution

Surveyor General

Deeds Registry

CUSTOMER SERVICE

Waste/ RefuseWaste/ Refuse

DATA INTEGRITY

DATA INTEGRITY

CUSTOMER SERVICE

LEGAL FRAM

EWO

RKLEG

AL FRAMEW

ORK

What must change:

• Ensure effective data handovers between departments along the revenue value chain

• Reconcile billing records to the data source• Protect and grow the revenue base • Ensure the correctness of the Valuation Roll• Accurate metering of water and electricity services• Improve refuse/waste management billing activities

• Credibility of billing information is paramount

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DEFINING BUSINESS PROCESSES

Challenges

• Uninformed decision-making • System solutions not always meeting business

requirements• Lack of system integration• System’s functionality not fully utilised by the municipality;

cost ineffective• Ineffective system implementation; costly maintenance• Implementation compromising data integrity • Too much reliance on system vendors• Value for money not achieved

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Distribution of current financial applications

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Key focus areas of business processes

• Defining business processes• Integrated financial solutions• Ownership of management tools/applications rather than

reliance on system vendors• Consider costs in terms of value for money

– shared services instead of stand-alone solutions• Norms and standards for financial applications and related

systems – purpose fit for LG• Align financial applications to the Standard Chart of Accounts

(SCOA) for LG

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Framework for business processes

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FINANCIAL SYSTEMS & APPLICATIONS

POLICIES

PRO

CED

UR

ESSTRATEGIES

STRU

CTU

RE

BU

SIN

ESS

PRO

CES

S

IT INFRA- STRUCTURE

HO

W IT M

UST B

E DO

NE

What must change:

• Implement monthly reconciliations - systems must balance• Define all transaction processing such as meter reading,

cash, opening and closing accounts, payments ... • Align job descriptions to the relevant business processes• Take ownership of the financial systems - reduce the

dependency on system vendors • Optimally utilise the current financial applications - ensure

integration

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Standard Chart of Accounts (SCOA) for LG

SCOA – Objectives for LG

• Modernising the COA to ensure:– Contributing to evidence-based financial management and decision-making– Improved data quality ito transparency, consistency, comparability & relevance– More predictable financial classification to benchmark

• Alleviate present challenges:– No access to operating and financial systems– No SCOA – inconsistent classification across 278 municipalities– Multi-year budgeting – relatively new concept– Limited decision making; and– Consistency in reporting across LG

• Scope of project– Vendor interaction to assist system development but excludes “onsite”

implementation– Framework will be regulated– On-going consultation– CoA piloted before regulated– Centralised support through guidelines, circulars and SCOA Technical Committee

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Conceptual Framework

• Design Principles– International standards and leading practice– Labels and accounts ~ clearly defined– Alignment of financial and budget reporting – GRAP alignment (accrual vs cash accounting)– Consistent use of terminology– Standardisation across local government– Reporting on “whole-of-local government & government”– Simple classification; and– Cost minimising

• Classification framework specific to Local Government, incorporating– All transaction types– Appropriation of funds– Spending on service delivery– Capital and operating spending– Policy outcomes – Legislative reporting

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MAXIMUM MAXIMUM EXTENT EXTENT POSSIBLEPOSSIBLE

Segments of SCOA for Munics

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Where are we in the process?

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Jan – Oct 2010

Nov – Dec 2011

Jan – Jul 2012

Aug – Dec 2012

Jan – Aug 2013

Produce Draft SCOA

Systematic Consultation

Broader Consultation

Publication

Finalisation

Legal Consultation

Leading Financial Management underpinned by three lines of enquiry

1. Are finances planned effectively to deliver on priority spending?

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2. What is the understanding of costs and performance efficiencies?

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3. Is financial reporting timely, reliable and does it add value?

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Thank You

Please join the team for a discussion after lunch (Breakaway Session)