DRAFT MEDIUM TERM REVENUE AND EXPENDITURE FORECAST 2015/ 2016 TO 2017/2018 MEDIUM TERM REVENUE AND EXPENDITURE FORECASTS Copies of this document can be viewed: In the foyers at 242 Langalibalele Street, PMB and At www.umdm.gov.za Table of Contents PART 1 1. Mayor’s Report 2. Resolutions 3. Executive Summary 4. Operating Budget Framework 4.1 Operating Revenue Framework 4.2 Operating Expenditure Framework 5. Capital Expenditure PART 2 6. Budget Assumptions 7. Overview of the Annual Budget Process 8. Budget Process Overview 9. Financial Modelling & Key Planning Drivers 10. Community Consultation 11. IDP Strategic Objectives 12. Measrurable Performance Objectives & Indicators 13. Quality Certificate PART 1 1. MAYOR’S REPORT In order to fulfil the mandate, the uMgungundlovu District Municipality (u MDM) needs to be able to continuously provide uninterrupted and deliver improved high quality of life and services to our citizens. uMgungundlovu District Municipality (u MDM) needs to generate the required revenues in order to sustain the services and strive to overcome grant dependency. Our municipal plans and strategies are supported by this budget. Our budget is informed by the IDP process that allows for input from our citizens. In compiling this draft budget, as a Municipality, we had to consider the electricity increase, inflation, water tariffs, and other factors that largely contribute to our budget and the provision of our services. In these tough economic times, strong revenue management and cost controlling measures becomes fundamental to the financial sustainability of every municipality. The reality our municipality like majority of other municipalities nationwide is, we are faced with challenges such as frail and ageing infrastructure; past and current development backlogs; social ills poverty, etc. However we continue to strive, forge ahead, regardless of the socio-economic challenges, and deliver our core services through, and reach all four corners in the District for a better life for all our citizens. We are experiencing a steady incline in revenue generation and collection. We will also embark on programs and road shows that will encourage a culture of paying to our citizens. These roadshows will be hosted in all the Local Municipalities we service. However, we continue to rely on grants to fund both our operational and capital expenditure. Our income generated from trading services is still insufficient to facilitate profits and growth of the services. The amount required to address the injustices of the past, continues exceed available funding; hence difficult choices are made between the tariff increases, expenditure prioritization and balancing against realistically anticipated revenues. We continue to strive by educating qualifying customers to register their indigent status. This will assist the municipality to budget better and make better income projections. This exercise is conducted in collaboration with other Locals within the District. Although the municipality is grant reliant, it is making efforts to improve on revenue raising and collection strategies to remedy the situation, and in efforts to improve our profitability, a lot of work has been done to reduce unnecessary expenditure. This is evident from the fact that the municipality has had a positive bank balance and an average cash coverage ratio of 3 months which has been improving over the last 3 years. Despite rising costs of goods and services and weak economic growth the municipality has managed over the years to keep a linear trend in operating costs through the reprioritisation of expenditure. The average increase in operating costs between 2013/2014 to the proposed 2015/2016 budget has been 0.7% against an inflation average of 5.6%. The 0.7% increase in the proposed operating expenditure budget is R4, 2 million from a prior year adjusted operating expenditure budget of R566,781 million. In addition the capital budget for 2014/15 year was sitting at R 293.3 million and has increased to R 383.4 million for the 2015/2016 budget year. As a municipality we endeavour to contain and limit our expenditure and fund core service provision. The Technical Services Unit responsible for water provision and sanitation services receives close to 60% of our operational budget. Our capital projects implementation is one of the best performing areas of the municipality. We have managed as a municipality to utilise the full National Treasury allocation of the Municipal Infrastructure Grant. The municipality has, whilst finalising the loan agreement with DBSA, been funding its capital projects from its own funding. The draw down schedule for the loan withdrawals is expected to resume before the end of the 2014 /2015 financial year. Once more uMDM has done well in practicing sound financial management by acquiring a clean audit from the Auditor General for the 2013/2014 audit. This of course wouldn’t have been possible without the commitment of political and administration leadership and the staff. As a citizen centric Municipality we continue to promote social programmes that contribute towards nation building and social cohesion which is meant to be strengthened by some of our projects and programs in the 2015/2016 financial year being funded amongst other programs by the Extended Public Works Program which is an initiative by the National Treasury implemented through the Municipalities. uMDM has recently hosted another successful Mandela Day Marathon, with over 10 000 participants, and associated with AIMS (Association of International Marathon and Road Running) and Nelson Mandela Foundation. 2. RESOLUTIONS It is recommended that the Full Council: 2.1. Approves the proposed Tariff increases, acting in terms of section 75A of the Local Government Municipal Systems Act ( Act 32 of 2000 with effect from 01 July 2015: 2.1.1 The tariffs for the supply of water 2.1.2 The tariffs for the sanitation services 2.2. Approves the First Draft multi year 2015 2016 – 2017 / 2018 annual budget and single capital appropriations for the 2015 / 2016 annual budget as follows: 2.2.1 The Total Operating Revenue of R 579 million. 2.2.2 The Total Funding of R955 million 2.2.3 The Total Operating Expenditure of R 571 million. 2.2.4 Total Capital Expenditure of R383.4 million. 2.2.5 The Operating Surplus of R 8 million 2.3 Approves the public participation meetings for the Budget and Integrated Development Plan to be conducted in the month of April 2015. 3. EXECUTIVE SUMMARY TABLE 1 Consolidated Overview of the 2015 /2016 MTREF Adjustment Budget Budget Year Budget Year +1 Budget Year +2 R 2014 /2015 2015 / 2016 2016/ 2017 2017/ 2018 Total Operating Revenue 532 539 579 001 611 512 655 736 Total Operating Expenditure (566 781) (571 001) (602 977) (631 919) Surplus/ ( Deficit) for the year (34 242) 8 000 8 535 23 817 Total Capital Expenditure (209 159) (376 020) (140 647) (169 947) The operating revenue has increased by R 46.5 million from R 532.5 million as approved during the Adjustment Budget to R 579 million which represents a 8% increase. For the outer years, the revenue is anticipated to increase by 5.6% and 7.2% respectively. Despite expected increase in costs by 5,6% expenditure managed to only grow by under 1% as costs were cut lean on other operating costs in order to begin to prepare space for the finance costs on loans as the municipality continues to embark on accelerated implementation of water and sanitation infrastructure. In response to tough economic times and in efforts to improve the profitability of the municipality, the municipality has embarked on an expenditure prioritisation exercise, cut out spending on frills and implemented revenue collection strategies. Further to the revenue collection strategies, the municipality is improving in its investment in the revenue generation strategies such as new capital projects implementation, meter verifications and customer data cleansing. As can be witnessed from Table 1 above, the investment in capital projects is to increase by R 166.9 million (79%) in the 2015 /2016 financial year. This increase is expected to bring out a reduction in contracted operation and maintenance cost and further reduce the costs of water tankers and in turn contribute towards increased revenue generation. Key to this strategy is the need to realise immediately the new consumers onto the billing system so that revenue growth can also be attained. As a citizen centric municipality, the municipality has a 24 hour customer care line and a functional customer care / Batho Pele unit that promotes customer involvement, accountability by the municipality. The Table 2 below depict that the Municipality is to turn around from an anticipated operating deficit of R 34.2 million in 2014 /2015 financial to an operating surplus of R8 million in the 2015 /2016 financial year. This is to allow the municipality to rebuild it’s depleting reserves for future financing of capital infrastructure. TABLE 2 DC 22 uMgungundlovu – Table A1 Budget Summary 2015/16 Medium Term Revenue & Description 2011/12 2012/13 2013/14 Current Year 2014/15 Expenditure Framework Budget Budget Budget Audited Audited Audited Original Adjusted Full Year Pre-audit R thousands Year Year +1 Year +2 Outcome Outcome Outcome Budget Budget Forecast outcome 2015/16 2016/17 2017/18 Financial Performance Property rates – – – – – – – – – – Service charges 44 282 118 136 132 685 107 291 107 291 107 291 75 169 153 031 161 601 169 358 Investment revenue 8 040 7 979 10 413 15 311 9 360 9 360 6 524 8 960 9 462 9 916 Transfers recognised - operational 295 926 327 088 348 651 390 746 390 746 390 746 285 489 405 737 437 416 473 283 Other own revenue 11 255 28 620 22 371 35 132 25 142 25 142 11 038 11 272 3 033 3 179 Total Revenue 359 504 481 824 514 120 548 480 532 539 532 539 378 220 579 001 611 512 655 736 (excluding capital transfers and contributions) Employee costs 130 233 151 411 157 176 198 840 195 549 195 549 115 000 218 052 230 263 241 315 Remuneration of councillors 7 201 9 466 9 944 14 878 11 684 11 684 6 625 12 327 13 017 13 642 Depreciation & asset impairment 78 453 80 989 56 330 45 391 45 391 45 391 27 812 30 000 31 680 33 201 Finance charges 1 460 1 919 2 976 5 300 1 200 1 200 8 749 13 284 14 028 14 701 Materials and bulk purchases 43 385 63 346 71 336 73 125 77 096 77 096 51 042 97 093 102 530 107 451 Transfers and grants – – – 48 992 28 690 28 690 16 060 3 000 – – Other expenditure 133 283 295 639 249 096 177 192 207 170 207 170 110 251 197 245 208 291 218 288 Total Expenditure 394 014 602 770 546 858 563 718 566 781 566 781 335 539 571 001 599 809 628 599 (120 Surplus/(Deficit) (34 511) 946) (32 738) (15 238) (34 242) (34 242) 42 681 8 000 11 703 27 137 The budget is compiled taking into account previous National Treasury’s budget circulars, including Circular 74 (issued 12 December 2014) & 75 (issued 9 March 2015). During the compilation of the 2015 /2016 MTREF the following summarised challenges were experienced: • The persistent slow economic growth and general affordability of our customers. • The water and sanitation aged infrastructure and the limited resources available to address the shortcoming. • The increase of bulk cost of water and the anticipated increases of electricity by ESKOM and servicing Local Municipalities. • The gap between the employer offer and the union offer for the salary negotiations. • The affordability of servicing the debt to be incurred as long term borrowings to revitalize water and sanitation infrastructure. • The prioritization of fixed costs to facilitate quality and stable services. 4. OPERATING BUDGET FRAMEWORK 4.1 OPERATING REVENUE FRAMEWORK The municipality has allocated a total of R 955 million worth of funding for the 2015/2016 financial year as tabled below in table 3 below. In total, the operating revenue amounts to R 579 million or 59 % of the funding sources of which 71% is contributed from equitable share and RSC levy replacement grant which confirms the municipalities continued reliance on grants. The demands against the municipality’s resources still outweigh the municipality’s ability to generate sufficient revenue to fund operations and also make contributions to capital investment. The growth in revenue of 9% from R 532.5 million to R 579 million has been attributed to the increase in tariffs in line with the overall increase in costs of providing the services and the realisation of new customers from completed projects. The growth in operational grant drew mainly from marginal growth in equitable share and RSC levy replacement grant. TABLE 3 Sources of Funding % Own Revenue 563 732 580 59.00 Operational Grants 7 268 000 0.76 Capital Grants 208 732 000 21.86 Loans 167 288 000 17.52 Roll Over Funding 8 000 000 0.84 TOTAL 955 020 580 100 GRAPH 1 Illustration of contributions to the total funding sources 1% 12% Own Revenue 23% Operational 63% Grants 1% Although the funding sources reflects that the own funding category is the main funder of the budget, a closer look at the categories reveals that the municipality is grant reliant. Table 4 below reflects the splits of the own revenue source and the contribution of each source. TABLE 4 Own Revenue Split Amount Contribution Water 145 048 185 25.73 Sanitation 7 983 158 1.42 RSC Levy Replacement 206 602 000 36.65 Equitable Share 191 867 000 34.04 Interest 12 232 237 2.17 563 732 580 Put together, the RSC Levy Replacement and the Equitable share amount to R 398.5 million ( 70.69 %) which confirms grant reliance. GRAPH 2 2% Water 26% Sanitation 34% 1% RSC Levy Replacement Equitable Share 37% Interest 4.1.1 SALE OF WATER AND IMPACT ON TARIFF INCREASES The National Treasury encourages Municipalities to charge a cost reflective tariff to be able to recover its costs of providing the service, taking into account the cost of bulk services, cost of renewing assets, funding new assets to allow for the growth of the service and a tariff that promotes conservative consumption. As part of the revenue raising strategy, the Municipality had to revisit its tariff structure, and finalise the reconciliation of existing customers in billing information to actual existing customers. National Treasury further encourages municipalities to charge a tariff that promotes conservative patterns of consumption. The proposed increase on the tariff structure, is based on the inclining block tariff model, which suggests steeper tariffs being charged to high consumption customers. The increases are also informed by an eased introduction of cost reflective tariffs and avoid a drastic increase in tariffs. The proposed tariff structure is as follows: TABLE 5. PROPOSED WATER TARIFF INCREASES, DOMESTIC AND BUSINESS Consumption KL/PM 2014/2015 Increase 2015/2016 DOMESTIC 0 - 6 6.63 10% 7.30 7 – 15 9.91 10% 10.90 16 - 25 10.88 10% 12.00 26 - 35 13.31 12% 16.50 36 – 60 19.96 12% 22.00 60 + 23.3 15% 26.80 Basic charge 16.5 BUSINESSES 0 – 999999 11.56 15% 13.29 As can be seen, the lesser the consumption, the lesser the proposed tariff increase. TABLE 6. PRIOR YEAR TARIFF COMPARISON 2014/ 2015 Difference Consumptio 2014/2015 2014 /2015 2015 /2016 2015 /2016 Difference 2015 /2016 Consumpti n Consumption Rand Value Consumption Rand Value Rand Value Tariff Tariff on 0 - 6 6.63 173 502 1 150 318 7.30 157 981.00 1 153 261.30 -15 521 2 943.04 7 - 15 9.91 694 989 6 887 341 10.90 932 641.00 10 165 786.90 237 652 3 278 445.91 16 - 25 10.88 503 360 5 476 557 12.00 590 106.00 7 081 272.00 86 746 1 604 715.20 26 - 35 13.31 425 177 5 659 106 16.50 549 391.00 9 067 368.82 124 214 3 408 262.95 36 - 60 19.96 635 135 12 677 295 22.00 926 614.00 20 385 508.00 291 479 7 708 213.40 60 + 23.3 2 133 189 49 703 304 26.80 1 883 902.00 50 479 154.09 -249 287 775 850.39 Basic charge 16.5 Flat rate 100 Businesses / Commercial 0 - 999999 11.56 1 549 697 17 914 497 13.29 3 514 054.00 46 715 833.88 1 964 357 28 801 336.56 Basic charge 27.5 TOTAL WATER 6 115 049 99 468 418 8 554 689.00 145 048 184.99 2 439 640 45 579 767 MFMA Circular No. 74 requires municipalities who proposes above 6% increases to their tariffs to justify the proposed increases. For this municipality, the water income represent an increase of 45.8 % from R99.5 million to R145 million. The increase in only due to the inflation increase but from the following reasons: i. The average consumption of our commercial customers increased by 126.7 % ii. High consumption customers ( 36- 60 kl) increased by 45.89% iii. Average consumption customers increased on average by 26.88% The increase is from the reduction of non revenue water, through illegal connections, bypassed meters and completion of bulk services lines that the municipality anticipate to collect revenues from such sources and customers. Further to the increase in consumption, the municipality is providing the water and sanitation function at a loss. The Technical Services department , which mainly is dealing with water provision, is allocated an amount of R 336.8 ,million for operational reasons( see Table 9) whilst, the municipality is only able to generate a total of R153 million from the water and sanitation functions. TABLE 7 PROPOSED SANITATION TARIFF INCREASES, DOMESTIC AND BUSINESS Household/Domestic Consumption 2014/2015 Increase 2015/2015 0 - 6 3.76 9.04% 4.10 7 – 15 5.59 9.12% 6.10 16 - 25 6.18 13.26% 7.00 26+ 7.1 15.07% 8.17 Business /Comme rcial 0 - 9999999999 7.1 15.07% 8.17 TABLE 8 SUMMARY OF REVENUE CLASSIFIED BY MAIN REVENUE SOURCE 2015/16 Medium Term Description 2011/12 2012/13 2013/14 Current Year 2014/15 Revenue & Expenditure Framework Full Pre- Budget Budget Budget Audited Audited Audited Original Adjusted R thousand Year audit Year Year +1 Year +2 Outcome Outcome Outcome Budget Budget Forecast outcome 2015/16 2016/17 2017/18 Revenue By Source Property rates – – – – – – – – – – Service charges - electricity revenue – – – – – – – – – – Service charges - water revenue 37 241 94 293 125 072 99 459 99 459 99 459 67 939 145 048 153 171 160 523 Service charges - sanitation revenue 6 870 23 748 7 604 7 832 7 832 7 832 7 078 7 983 8 430 8 835 Service charges - refuse revenue – – – – – – – – – – Service charges - other 172 95 9 – – – 152 – – – Rental of facilities and equipment 335 289 405 320 320 320 189 – – – Interest earned - external investments 16 688 20 835 29 904 15 311 9 360 9 360 6 524 8 960 9 462 9 916 Interest earned - outstanding debtors – – – 8 000 4 800 4 800 9 393 2 872 3 033 3 179 Dividends received – – – – – – – – – – Agency services – – – – – – – – – – Transfers recognised - operational 299 071 329 082 359 213 390 746 390 746 390 746 285 489 405 737 437 416 473 283 Other revenue 68 583 15 063 19 022 26 812 20 022 20 022 1 456 8 400 – – Gains on disposal of PPE (1 155) -513 – – – – – – – – Total Revenue (excluding capital transfers and contributions) 427 805 482 891 541 229 548 480 532 539 532 539 378 220 579 001 611 512 655 736