2010/11 – 2012/13 BUDGET 2 TABLE OF CONTENTS PAGE PART 1 – ANNUAL BUDGET 1.1 Executive Mayor’s Report 4 1.2 Budget Resolutions 5 1.3 Executive Summary 7 1.4 Annual Budget Tables 24 PART 2 – SUPPORTING DOCUMENTATION 2.1 Overview of annual budget process 41 2.2 Overview of alignment of annual budget with Integrated Development Plan 43 2.3 Measurable performance objectives and indicators 45 2.4 Overview of budget-related policies 48 2.5 Overview of budget assumptions 48 2.6 Overview of budget funding 49 2.7 Expenditure on allocations and grant programmes 53 2.8 Allocations and grants made by the municipality 56 2.9 Councillors and board members allowances and employee benefits 57 2.10 Monthly targets for revenue, expenditure and cashflow 60 2.11 Annual budgets and service delivery and budget implementation plans – Directorates 63 2.12 Contracts having future budgetary implications 63 2.13 Legislation compliance status 67 2.14 Capital expenditure details 69 2.15 Acting Municipal Manager’s quality certification 69 3 LIST OF TABLES Table No. Title Page 1 Budget Allocation According to IDP Priorities 21 & 43 2 Financial Targets 24 3 Budget Summary 24 4 Budgeted Financial Performance by standard classification 26 5. Budgeted Financial Performance by municipal vote 28 6. Budgeted Financial Performance by revenue & expenditure 29 7. Budgeted Capital Expenditure by vote, standard classification & funding 31 8. Budgeted Financial Position 33 9. Budgeted Cash Flows 34 10. Cashbacked Reserves/Accumulated Surplus Reconciliation 36 11. Asset Management 36 12. Basic Service Delivery Measurement 39 13. Investments by Type 52 LIST OF FIGURES Figure No. Title Page 1. 2010/11 Statement of Financial Performance - Budgeted: Expenditure 10 & 47 2. 2010/11 Statement of Financial Performance - Budgeted: Income 15 & 47 3. 2010/11 Capital Budget by Directorate 16 4. 2010/11 Capital Budget by Finance Sources 17 5. 2010/11 Expenditure by IDP Priorities 22 & 44 4 PART 1 – ANNUAL BUDGET 1.1 Executive Mayor’s Report The Municipality reaffirms its commitment to the following key priorities:  Meeting basic service delivery needs of communities;  Building a clean, responsive and accountable Municipality;  Strengthening oversight over the Municipality’s service delivery and financial performance;  Strengthening partnerships between the Municipality, communities and civil society. In the year ahead, the Municipality will further enhance its capacity to implement the adopted Budget, so as to positively impact on the lives of residents. The Municipality is committed towards ensuring that the limited financial resources are maximised for service delivery. To this end non-essential expenditure items will be reprioritised in favour of service delivery programmes. The achievement of unqualified audit opinions remains a key objective. The Municipality is committed towards retaining this status it has enjoyed since the 2007/08 financial year. COUNCILLOR Z WAYILE May 2010 5 1.2 Budget Resolutions (a) The Executive Mayor recommends that the Council resolves that: 1. The annual budget of the Nelson Mandela Bay Municipality for the financial year 2010/11 and the indicative allocations for the projected outer years 2011/12 and 2012/13; and the multi-year and single year capital appropriations be approved in accordance with section 24 of the Municipal Finance Management Act No. 56 of 2003, as set-out in the following tables: 1.1 Budgeted Financial Performance (revenue and expenditure by standard classification); [Page 26] 1.2 Budgeted Financial Performance (revenue and expenditure by municipal vote); [Page 28] 1.3 Budgeted Financial Performance (revenue by source and expenditure by type); [Page 29] 1.4 and Multi-year and single year capital appropriations by municipal vote and standard classification and associated funding by source. [Page 31] 2. The budgeted financial position, budgeted cash flows, cash-backed reserve/accumulated surplus, asset management and basic service delivery targets be noted as set-out in the following tables: 2.1 Budgeted Financial Position; [Page 33] 2.2 Budgeted Cash Flows; [Page 34] 2.3 Cash backed reserves and accumulated surplus reconciliation; [Page 36] 2.4 Asset management; [Page 36] 2.5 Basic service delivery measurement. [Page 39] 3. The consolidated budget that includes the financial impact of the municipal entity (Mandela Bay Development Agency) be noted. 4. The draft revised Integrated Development Plan (IDP) be approved as reflected elsewhere in the agenda. 5. The proposed amendments to the draft rates policy be approved, in accordance with Section 5 of the Municipal Property Rates Act, 6 of 2004 (see report elsewhere in the agenda). 6. With regard to primary health care services, the Acting Municipal Manager report on the progress made towards concluding a Delegation Agreement with the Provincial Government for the future provision of primary health care services, specifying the required services/service standards and indicating the level of financial contribution by the Municipality. 7. Administrative costs (“hidden costs”) amounting to R3 611 010 relating to the provision of housing, be funded from the RSC levy income replacement, and that the current funding from the RSC levy income replacement be phased out over a maximum 6 period of 5 years that commenced in the 2008/09 financial year, i.e. a reduction of 20% per annum. 8. Tariffs be increased as follows with effect from 1 July 2010: Property rates - 11% Water - 12% Sanitation - 11% Electricity - 22% Refuse - 11% 9. The Acting Municipal Manager, in conjunction with the relevant Executive Directors report on their respective project plans, including the capacity to implement the draft 2010/11 to 2012/13 Capital Budget and Programme, so as to ensure the achievement of a minimum spending level of 95%. 10. In accordance with Section 19 of the Municipal Finance Management Act, the affected Executive Directors submit comprehensive reports in relation to new projects, inter alia, dealing with the total project costs, funding sources, future operating budget implications and associated tariff implications, before Council finally approves the implementation of any new project. 11. The Chief Financial Officer raises new external loan financing in the amount of R470 million, to finance the infrastructural development reflected in the 2010/11 Capital Budget. 12. The Chief Financial Officer report fully on the associated financial implications relating to the potential level and availability of external loan financing to support the 2011/12 (year 2) and 2012/13 (year 3) of the draft Capital Programme. 13. The Acting Municipal Manager obtain written confirmation from the Provincial Government as to the transfers to be allocated for health, housing, transportation and library services for the 2010/11 to 2012/13 financial years, and that the possibility of a Metro delegation engaging the Provincial Government in this regard be considered. 14. The matters as set out in section 1.3.3 of the budget framework document, be monitored and evaluated on an ongoing basis. 15. The revised Financial Management Policies be approved as reflected in Annexure “B”. 16. The Funding and Reserves Policy be approved as reflected in Annexure “C”. 7 1.3 Executive Summary The 2010/11 to 2012/13 Budget preparation commenced in August 2009 after Council approved a timetable for the IDP and Budget preparation process. The Budget comprises both Operating and Capital Budgets, which is a requirement of the Constitution and the Municipal Finance Management Act (MFMA). The capital budget generally contain new or replacement assets such as roads, vehicles, buildings, etc. The Operating Budget, which is by far the largest component of the Budget, includes the provision of services, such as health, water, refuse collection, etc. One of the objectives of the budget timetable is to ensure integration between the development of the Integrated Development Plan (IDP) and the Budget. The IDP is the strategic plan of the Municipality and it is critical that the Budget enables the achievement of the IDP objectives. The Table in section 1.3.5 illustrates the link between the IDP and Budget. The assumptions and principles applied in the development of this Budget are mainly based upon guidelines received from National Treasury (expenditure growth) and other external bodies such as the National Electricity Regulator of South Africa (NERSA), South African Local Government Bargaining Council, Department of Water Affairs (DWA), major service providers, etc. The IDP’s strategic focus areas informed the development of the Budget, in addition to assessing the relative capacity to implement the Budget, taking affordability considerations into account. The aforementioned guidelines were considered appropriate to inform the development of the Budget. The Operating Budget totals R5,64 billion, which funds the continued provision of services provided by the Municipality. The major expenditure items are employee costs (30.42%), bulk electricity and water purchases (27.23%), general expenses (11.26%), grants and subsidies paid (10.25), repairs and maintenance (8.67%) and depreciation (5.09%). Funding is obtained from various sources, the major sources being service charges such as electricity, water, sanitation and refuse collection and disposal (52.60%), property rates (15.10%), grants and subsidies received from National and Provincial Governments (22.21%). In order to support the 2010/11 Operating Budget, the following increase in rates and service charges have been proposed, with effect from 1 July 2010: Property rates - 11% Water - 12% Sanitation - 11% Electricity - 22% Refuse - 11% 8 A provision of R49 million has been set aside to cover potential bad debts arising from property rates and service charges not collected. This is based upon a level of payment of debtors’ accounts averaging 98%. In the past as a result of limited funds, a number of important issues such as addressing maintenance backlogs, making adequate contributions to provision and reserves, staffing requirements, etc. were not fully covered. However strategies to address these issues were undertaken and as at 30 June 2010 all of the provisions were at their required levels. In relation to staffing requirements, budget provisions are set aside on an annual basis, in order to fill vacant positions critical to service delivery. In relation to maintenance backlogs, the full extent of the backlogs, has been determined. The 2010/11 Budget does make provision for increased allocations to deal with the maintenance of infrastructure. The Assistance to the Poor Programme currently, provides the following monthly benefits to poor households in the Metro:  Free 8kl of water  Free basic sanitation  Free 75 kwh Electricity  Free basic refuse removal  Property rates subsidy  Environmental charges Out of approximately 275 000 households, some 111 950 households receive the assistance listed above. The total cost of free basic services currently amounts to R378 million and is anticipated to increase to R581.95 million in 2012/13, with about 132 950 households bene- fiting out of approximately 296 000 households. The Capital Budget totals R2.183 billion and this is funded mainly through revenue from operations (23.5%), Government grants (51.4%) and external loans (21.5%). Grants and subsidies are mainly earmarked for the sanitation and water infrastructure and transportation projects. It is to be noted that new external loan financing in the amount of R470 million will be raised to support the 2010/11 Capital Budget. The proposed amount of new external loan financing is significantly influenced by the need to rehabilitate water, sanitation, electricity and roads infrastructure. Furthermore, it has been possible to accommodate the consequential loan servicing costs, without negatively impacting on the proposed tariff increases. Budget provisions to assist in attending to the rehabilitation of infrastructure, is also provided for. The full extent of the required rehabilitation of infrastructure, has been determined. Annexure “A” provides a summary of the capital projects included in the Capital Budget. The Budget related policies as outlined in section 1.3.8 have been adhered to in the development of the Budget, whilst continuous monitoring of budget performance is possible through Key Performance Indicators in section 2.3 and the Service Delivery and Budget Implementation Plan. 9 1.3.1 Total Service Delivery Package of the Municipality and associated financial implications The Municipality provides the following services: Services Provided Operating Expenditure R’000 Corporate Services 1,005,338 Budget and Treasury 601,281 Corporate Services 215,488 Executive and Council 188,569 Community Services 1,516,657 Public Health 568,483 Housing and Land 270,600 Economic Development and Recreational Services 344,411 Safety and Security 333,163 Infrastructure Services 3,118,305 Roads and Stormwater 257,382 Water Service 415,068 Sanitation Service 357,066 Electricity and Energy 2,003,009 2010 World Cup Office 60,068 Strategic Programmes Directate 25,712 Total Costs 5,640,300 Funded as follows: - Transfers recognised – operating 1,268,308 Service Charges 3,003,749 Investment revenue 135,913 Property Rates 862,387 Other Own Revenue 439,931 Total 5,710,288 1.3.2 Effect of the Annual Budget In this section the Operating and Capital Budgets are discussed. 1.3.2.1 Operating Budget The operating budget amounts to R5,64 billion. 10 The graph below reflects the expenditure components of the budgeted statement of financial performance. 2010/11 Statement of Financial Performance ‐ Budget Expenditure Employee Related  Costs  30.4% Remuneration to  Councillors 0.9% Bad Debts General Expenses  0.9% 11.3% Depreciation 5.1% Repairs and  Grants and  Maintenance Subsidies Paid 8.7% 10.3% Finance Charges  Contracted  3.2% Services 2.1% Bulk Purchases 27.2% Below is a discussion of the main expenditure components: Employee Costs The 2010/11 draft budget provides for annual increments, where applicable, and a general increase of 7.7% in line with the negotiated agreement. The total budget provision of R1.715 billion represents an increase of 15.97% over the 2009/10 budget. The total number of vacancies to be filled was to be determined on a corporate basis at the time the budget process commenced in August 2009. The annual cost of vacancies at the end of August 2009 amounted to R99.1 million, which is R17.8 million less than the original annual budget provision for vacancies to be filled in the 2009/10 Operating Budget. An amount of approximately R25 million has been provided to ensure the implementation of the new wage curve in the 2010/11 financial year, as agreed to by the South African Local Government Bargaining Council. The budget further includes an amount, of approximately R19 million to cover 9 months’ back pay, in accordance with the wage curves collective agreement. Council’s target for 2010/11 is to restrict personnel costs to 34% of total expenditure. Personnel costs in the 2010/11 Budget represent 30.42% of total expenditure.