financial management reform & accountability imfo conference 2011 presenter: carl stroud |...
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FINANCIAL MANAGEMENT REFORM & ACCOUNTABILITY
IMFO CONFERENCE 2011
Presenter: Carl Stroud | Specialist: Local Government Budget Reforms, CD: LGBA, National Treasury | 13 September 2011
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Consolidated LG financial performance: 2010/2011
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Financial performance
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• 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
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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
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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
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BUDGET REFORM
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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
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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
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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
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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
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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
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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
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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
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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
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Leading Financial Management underpinned by three lines of enquiry
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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)