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The importance of funding for Sustainable Cities

The importance of funding for Sustainable Cities. Jason Ngobeni 20 September 2006 City Treasurer Johannesburg, South Africa. South Africa Cities. Tshwane. Ekurhuleni. Johannesburg. Thekwini. Nelson Mandela. Cape Town. Population.

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The importance of funding for Sustainable Cities

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  1. The importance of funding for Sustainable Cities Jason Ngobeni 20 September 2006 City Treasurer Johannesburg, South Africa

  2. South Africa Cities Tshwane Ekurhuleni Johannesburg Thekwini Nelson Mandela Cape Town

  3. Population

  4. Objectives and mandates of Local Government in terms of the Constitution • Ensure the provision of services to communities in a sustainable manner • Promote social and economic development • Promote safety and health environment • Encourage the involvement of communities and organisation in the matters of local government

  5. Local Government in SA • Metropolitan Municipalities 6 • Local Municipalities 231 • District Municipalities 47 • TOTAL 284

  6. Local Government in SA (Cont) OPERATING AND CAPITAL BUDGETS 2004/5 • Capital Budget R 17 billion • Operating Budget R 84 billion • Combined R101 billion Metro’s reported an avarage spending above 90% in its capital budget

  7. Challenges for Budgeting • Striking a balance between social and economic expenditure in local government • Budget preparation and implementation process requires the involvement of both financial and non-financial managers (both should take ownership of, and responsibility for, the decisions made around the budget, and its implementation. • Economic indicators point towards further growth acceleration

  8. Challenges for Budgeting (Cont) • Achieve optimum revenue collectionis essential to support operational expenditure, • Efficient use of resources • How well do funds reach the levels where they are needed

  9. Challenges for Budgeting (Cont) In order for Local Government to deliver in its mandate the following should be considered • Financial Resources • Debt Management (working together with consumers) • Developing long term financial plan that takes into account financial and service delivery sustainability • Human resources (Capacity building) The emphasis should be on how the funds are being spend rather than how much has been spend

  10. Challenges for Budgeting (Cont) • Recognize the relationship between operating and capital budgets • Taking care of the assets and plan the replacement of infrastructure • Infrastructure and service backlogs acceleration

  11. Challenges for Funding • Long-term financial planning to support funding plans • Demonstrating Capital expenditure spending (Joburg 95% 2005/6) • Achieving an optimum CAPEX allocation, i.e. maintaining and increasing the municipal revenue base and providing needed service delivery • Consistency of CAPEX prioritization models • Cashflow projections, easier to project outflows than inflows • Availability of funding instruments to matching assets and liabilities profiles

  12. Challenges for Funding (Cont) • Need for a credit rating, i.e. at the least a national scale local currency • Interest rate environment, fixed rate vs variable rate borrowing • Demonstrated fiscal discipline, both in budgeting and spending • Compliance to all legislative and legal requirements

  13. Strong Legal Framework for Investors • Depth of legal system • Independence of judiciary • Enforceability and ccontinuity of agreements • Strict compliance tolegal framework required of Municipalities • Comprehensivelyregulated financial market

  14. THE CITY AT A GLANCE • Population of Johannesburg grew from 2 639 110 to 3 225 810 (between 1996 and 2001) • Suggests that the population grew by 22% over a 5 year period – average of 4.4% per annum • City economy has been growing at an average of 6% • Previous studies suggested that the population will only grow by about 1% per annum • Result of high migration and lower-than-expected mortality (however, Stats SA did not release mortality figures) • Number of burials (City Parks’ figures): 15 000 (1995); 20 000 (2000); 19 000 (2002); 22 000 (2004) • Females = 50.2%; and males = 49.8%

  15. Montreal Stockholm TOKYO MOSCOW SEOUL TORONTO Minneapolis Boston Hamburg Beijing LONDON Amsterdam Copenhagen Berlin Warsaw SAN FRANCISCO Dusseldorf Shanghai NEW YORK Osaka PARIS HONG KONG CHICAGO Washington FRANKFURT Taipei BRUSSELS Dallas Atlanta Prague Bangkok Manila ZURICH Miami Munich Budapest LOS ANGELES Kuala Lumpur Geneva Houston Barcelona SINGAPORE MEXICO CITY MILAN Istanbul Caracas Jakarta MADRID Rome SAO PAULO SYDNEY Santiago Buenos Aires Melbourne ALPHA WORLD CITIES BETA WORLD CITIES Gamma World Cities Johannesburg – Africa’s only world city The GaWC Inventory of World Cities

  16. Share of National Economic Product 100% 39% 16% USD 12bn USD 30bn USD 78bn Johannesburg Gauteng South Africa

  17. Basic parameters • 25 000 staff employed in 15 service delivery entities • Provide services to over 3.2 million people • Over 1 million households • Approximately 100 000 businesses • Consolidated 2006/7 budgets • Operating ZAR 17,800 m (approx USD 1,840 m) • Capital ZAR 3,200 m (approx USD 300 m) • Total ZAR 21,000 m (approx USD 2,140 m) • Revenue function has 805 000 active customer accounts * Conversion rate – 1 USD = 6.5 ZAR

  18. The City of Johannesburg

  19. Background Timeline of CoJ progress Pre 1994 Johannesburg is divided into 13 separate local government administrations, categorised along racial lines 1995 First local government election in November 1995. Creation of the Greater Johannesburg Municipal Council, with sub-structures or metropolitan local councils (MLCs) 1996 –1999 Inexperienced management, aggressive spending, wasteful expenditure and low collections which led to financial crisis 1998 City reports a R300 million budget deficit, a R405 million overdraft and a no capital budget 1999 Introduction of iGoli2002, a three year financial restructuring and service delivery reorganisation plan 2000 Amalgamation of the Greater Johannesburg Municipal Council with the four MLCs. Boundries were extended to include Edenvale, Modderfontein and Midrand. Formation of CoJ 2001/2002 City reports a R153 million operating surplus 2004/2005 City reports a net surplus of R1.1 billion and cash and short-term investments of R1.6 billion Source: Mayoral Review 2006

  20. Credit rating history 1999: Fitch BBB+ F2+ 2003: Fitch (Upgraded) A- F2+ CA Ratings (New) A A2+ 2004: Fitch (Reaffirmed) A- F2+ CA Ratings (Reaffirmed) A A2+ 2005: Fitch (Reaffirmed) A- F1 (Upgraded from F2+) CA Ratings (Reaffirmed) A A1 (Upgraded from A2+) 2006: Fitch (Upgraded from A-) A F1 (Reaffirmed) CA Ratings (Upgraded from A) A+ A1 (Reaffirmed)

  21. Sources of operating Income

  22. City of Joburg projected CAPEX (ZAR m) to 2010

  23. Sources of CAPEX Funding

  24. About the Joburg Municipal Bonds ? • The City’s capital investment requirements are too larger for traditional bank loans (single obligor limits per institution) • Estimated at over R8 billion, CAPEX backlog require a substantial funding strategy • Need to reduce the cost of funding • Changing market practice, to fund capital projects sustainably and reduce carry costs • Expand the alternative sources of funding

  25. About the Joburg Municipal Bonds? (Cont) • The proceeds will be invested mainly in revenue-generating capital projects … • … resulting in an expanded revenue base for the City • To extend the funding maturity profile • To more closely match the asset and liability profile • Great potential for further credit rating improvement due to a stable financial profile and investor spotlite • Employment is generated and poverty alleviation enhanced

  26. Pre-conditions for a successful municipal bond issue • Sound legal framework • Sound public policies - sound fiscal policies, low interest rates, strong currency • Investment grade long-term credit rating - • Ability to manage the bond issue - internal treasury capacity • Good long-term strategy & planning e.g. economic development strategy and long term capital development plans • Sound and stable leadership & management • Politicians & officials • Know your problems, have a plan to deal with them, and show some progress. • Significant spending of CAPEX (at least 90%)

  27. Performance as at 18 Sep 2006 Historical bond performance

  28. Key Prudential Ratios Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Key Ratio Benchmark Debt / Revenue 50% 38.5% 44.6% 49.2% 48.1% 49.9% 50.0% Interest / Operating 7% 6% 5% 6% 7% 7% 7% Salaries / Operating 28% 26.4% 27.2% 27.2% 26.8% 26.6% 26.5%

  29. For more information please visit the following websites … • http://www.joburg.org.za- Joburg Home page • http://www.joburg.org.za/city_vision/index_plans.stm- 2030 Vision • http://www.joburg.org.za/cmu/cmu_uac.stm- Utilities • http://www.blueiq.co.za- Blue IQ Home page

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