2.5 OVERVIEW OF BUDGET ASSUMPTIONS OVERVIEW OF BUDGET ASSUMPTIONS
2.5.3 BORROWING AND INVESTMENT OF FUNDS
The Municipal Finance Management Act No. 56 of 2003 permits long term borrowing by municipalities only to finance capital expenditure, property, plant and equipment.
The eThekwini Municipality’s Infrastructure Financing Strategy is to:
· Maximise internally generated funds and national transfers from other spheres of government.
· Minimize borrowings.
· Pursue alternate funding sources e.g. Development charges, and public private partnerships.
CAPITAL EXPENDITURE
The capital expenditure of the parent municipality has been funded from a mix of government transfers, internally generated funds and external loans. The 2020/21 Capital Budget of R 4.7 billion is being financed by R 3.5 billion from government grants, R 0.2 billion of internally generated funds and R 1,0 billion in external loans.
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The graph below shows the Total Capital Budget since 2013 and indicates its funding sources. The figures in the 10 bars are in billions.
Funding of Capex 2014 – 2023
Loans comprise, on average, only 15 % of the funding mix, 2014 – 2019 being actuals and 2020 to 2023 forecasts.
The table below indicates the actual borrowings and the future loans to be taken to continue the service delivery programme.
Actual Forecast
2019 2020 2021 2022
R’m R’m R’m R’m
Long Term Debt * 9,419,9 8,867.1 9,045.1 9,250.4
Loans Raised 2,000.0 500.0 1,000.0 1,000.0
Over the MTREF period gearing reduces to 20.9% at 2021/22 Financial Year.
* - Total debt is reflected after loans raised and repayment of loans maturing.
LONG TERM BORROWING APPROACH
The City had budgeted to borrow R 1.5 billion in 2019/20. However, only R500 million was incurred as debt in the 2019/20 financial year. The decrease on the debt incurred during 2019/2020 is as result of lower capital expenditure during financial year due to Covid 19 and related lockdown..
5.432 5.613
4.903 5.466
4.766 4.951
7.749
4.710 5.070
5.530
0 1 2 3 4 5 6 7 8 9
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Years
Grants
Internal Funds Loans
R'bn
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EThekwini has historically been borrowing funds by way of vanilla loans from commercial banks as well as local and international DFI’s. In order to ensure a wider range of participation from Lenders, the Municipality is currently approaching the debt capital market by means of bond issuance through Domestic Medium-Term Note Programme (DMTN). It is therefore projected that he borrowing for 2020/2021 could be term loan, bond or combination of the two depending on financial market.
DEBT CAPACITY INDICATORS
The City tracks a number of key debt capacity indicators, with the prudential limits for each of these ratios being summarised below:
· Gearing should preferably be maintained at 45 per cent of total revenues.
· Debt service costs should not exceed 8 per cent of total operating revenues.
The tables below indicate the status of the indicators mentioned above:
Gearing Ratio 2013 – 2023
Gearing Ratio = Total Debt as a % of Total Operating Income Norm = 45%
2013 - 2019 = Actual 2020 - 2022 = Forecast
This graph indicates the Municipality’s ability to afford Debt. The gearing ratio would have reduced to a healthy 21% by 2023
Debt Coverage Ratio 2013 – 2023 0,0
5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Actual 40.5 39.1
34.8
28.7 26.7
23.0 26.7
22.9 22.2 21.3
%
Forecast 20.9
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Debt Coverage Ratio = Debt Services Cost as a % of Total Operating Income Norm = 6% - 8%
2013 – 2019 = Actual 2020 - 2022 = Forecast
This graph indicates affordability of interest on loans plus capital redemption. The ratio is well within the norm of 6% to 8%
Interest Paid as a % of Total Operating Income
Interest Paid Ratio = Finance Charges as a % of Total Operating Income 2012 – 2018 = Actual
2019 – 2021 = Forecast
This graph represents the affordability of finance charges. By 2023 the finance costs will be at 2.0%, which is indeed sustainable and a healthy situation. The graphs indicate that the City will not breach any of the prudential ratios over the MTREF period. The borrowings are therefore sustainable and affordable.
FUTURE TREND
Government grants are budgeted to fund the bulk of capex spend annually ( 2020: 46%; 2021: 45%; 2022: 53% ), underpinned by the Urban Settlement Development Grant. The City is expected to source around R 3.5 billion in
0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
7.2 7.7
6.7 6.0 6.0
4.2 4.5 5.0
%
3.8Actual Forecast
4.1 3.8
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
4.0
3.4 3.3
3.0
2.7
2.0 2.3 2.2 2.2 2.3
%
Forecast Actual
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new loans annually from 2020 to 2022. TABLE SA17 provides a detailed analysis of the City’s borrowing liability.
The gearing is forecast to drop to 22.9% in 2021 and drop to 20.9% in 202.3 Furthermore, liquidity metrics are expected to remain sound, with day’s cash on hand forecast to be maintained about 50 days over the next 3 years.
Forecast Balance Actual Forecast
Sheet (Rm) 2020 2021 2022 2023
Short term debt 951.0 818.3 792.2 794.7
Long term debt 7,916.1 8,226.8 8,458.2 8,658.9
Total debt 8,867.1 9,045.1 9,250.4 9,453.6
Cash & cash investments* 4,500 5,100 5,900 6,100
Key ratios
Total debt: income (%) 22.9 22.2 21.3 20.9
Cash cover S/T debt (x) 4.7 6.2 7.4 7.7
Cash on hand (days)* 47 49 55 56
* Includes GIF and unspent conditional grants
INVESTMENTS
Investments made with the various financial institutions are strictly in compliance with Municipal Finance Management Act and the Investment Regulations.
The investment returns achieved, and projections are as follows: -
30 June 2019 30 June 2020
% %
Average rate of return on investments 7.92 6.90
Cash which is surplus to immediate requirements is invested in short term money market instruments in terms of a stringent investment policy.
TABLES SA 15 & SA 16 provides details of investments and investments by maturity.
However, it must be remembered that this entire amount does not represents ‘unrestricted’ cash. The following amounts are ring fenced, viz. Self-Insurance Fund of R 1.8 billion and Unspent Conditional Grants of R 1.2 billion.
RISKS ASSOCIATED WITH AGGRESSIVE CAPITAL BUDGET
The following risks need to be acknowledged before any consideration can be given to increasing the utilisation of internally generated funds for the financing of the Capital Budget, viz:
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· Whilst the City presently enjoys a healthy debtor’s collection rate, this has been impacted by the COVID- 19 Pandemic sustained high tariff increases being passed onto consumers may present a challenge in terms of sustaining these levels in the future as well.
· Depreciation provisions every year have to be ‘cash backed’, after providing for the National Treasury norm for Days Cash on Hand of 90 days. This places a significant higher demand on maintaining cash resources.
· The downgrading of the sovereign rating and the impact of COVID-19 is having a major impact on long term interest rates.