The importance of funding for Sustainable Cities

Jason Ngobeni 20 September 2006City Treasurer Johannesburg, South Africa

Cape TownCape Town

ThekwiniThekwini

JohannesburgJohannesburg

South Africa CitiesSouth Africa Cities

TshwaneTshwaneEkurhuleniEkurhuleni

Nelson MandelaNelson Mandela

POPULATION OF METROS IN SA - 2001

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

PO

PU

LA

TIO

N

Joburg 3225810

eThekwini 3090117

Cape Town 2893251

Ekurhuleni 2482090

Tshwane 1985984

Nelson Mandela 1005776

1

PopulationPopulation

Objectives and mandates of Local Government in terms of the Constitution

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

Local Government in SALocal Government in SA

Metropolitan Municipalities 6

Local Municipalities 231

District Municipalities 47

TOTAL 284

Local Government in SA (Cont)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

Challenges for BudgetingChallenges 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

Challenges for Budgeting (Cont)Challenges for Budgeting (Cont)

Achieve optimum revenue collection is essential to support operational expenditure,

Efficient use of resources

How well do funds reach the levels where they are needed

Challenges for Budgeting (Cont)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

Challenges for Budgeting (Cont)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

Challenges for FundingChallenges 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

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

Challenges for Funding (Cont)Challenges for Funding (Cont)

Strong Legal Framework for InvestorsStrong 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

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%

THE CITY AT A GLANCETHE CITY AT A GLANCE

Johannesburg – Africa’s only world cityJohannesburg – Africa’s only world city

The GaWC Inventory of World Cities

ALPHAWORLD CITIES

MILANSINGAPORE

HONGKONG

TOKYO

LONDON

PARIS

FRANKFURT

NEW YORK

CHICAGO

LOS ANGELES

BETAWORLD CITIES

SYDNEY

SEOULMOSCOW

BRUSSELS

MADRID

ZURICH

TORONTO

SAN FRANCISCO

MEXICO CITY

SAO PAULO

GammaWorld Cities

Melbourne

Rome

Istanbul

Jakarta

Kuala Lumpur

Manila

Bangkok

Taipei

ShanghaiOsaka

Beijing

Copenhagen

Stockholm

Hamburg

Amsterdam

DusseldorfBerlin

Warsaw

Prague

Munich Budapest

Geneva

Barcelona

Montreal

BostonMinneapolis

Washington

DallasAtlanta

Miami

Houston

Caracas

SantiagoBuenos Aires

Share of National Economic ProductShare of National Economic Product

16%16%

39%39%

100%100%

USD 12bnUSD 12bn USD 30bnUSD 30bn USD 78bnUSD 78bn

Johannesburg Gauteng South Africa

Basic parametersBasic 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

The City of JohannesburgThe City of Johannesburg

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

BackgroundBackground

Credit rating historyCredit rating history

1999:1999: FitchFitch BBB+BBB+ F2+F2+1999:1999: FitchFitch BBB+BBB+ F2+F2+

2003:2003: Fitch (Upgraded)Fitch (Upgraded) A-A- F2+F2+

CA Ratings (New)CA Ratings (New) AA A2+A2+

2003:2003: Fitch (Upgraded)Fitch (Upgraded) A-A- F2+F2+

CA Ratings (New)CA Ratings (New) AA A2+A2+

2004:2004: Fitch (Reaffirmed)Fitch (Reaffirmed) A-A- F2+F2+

CA Ratings (Reaffirmed)CA Ratings (Reaffirmed) AA A2+A2+

2004:2004: Fitch (Reaffirmed)Fitch (Reaffirmed) A-A- F2+F2+

CA Ratings (Reaffirmed)CA Ratings (Reaffirmed) AA A2+A2+

2005:2005: Fitch (Reaffirmed)Fitch (Reaffirmed) A-A- F1 (Upgraded from F1 (Upgraded from F2+)F2+)

CA Ratings (Reaffirmed)CA Ratings (Reaffirmed) AA A1 (Upgraded from A1 (Upgraded from A2+)A2+)

2005:2005: Fitch (Reaffirmed)Fitch (Reaffirmed) A-A- F1 (Upgraded from F1 (Upgraded from F2+)F2+)

CA Ratings (Reaffirmed)CA Ratings (Reaffirmed) AA A1 (Upgraded from A1 (Upgraded from A2+)A2+)

2006:2006: Fitch (Upgraded from A-) AFitch (Upgraded from A-) A F1 (Reaffirmed)F1 (Reaffirmed)

CA Ratings (Upgraded from A) A+CA Ratings (Upgraded from A) A+ A1 (Reaffirmed)A1 (Reaffirmed)

2006:2006: Fitch (Upgraded from A-) AFitch (Upgraded from A-) A F1 (Reaffirmed)F1 (Reaffirmed)

CA Ratings (Upgraded from A) A+CA Ratings (Upgraded from A) A+ A1 (Reaffirmed)A1 (Reaffirmed)

Sources of operating IncomeSources of operating Income

Refuse3%

Fines & Licences2%

Other4%

Payroll & turnover taxes

13%

Subsidies3%

Electricity29%

Property Rates23%

Water & Sewerage

23%

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

949

1,280

592

309 295

632

1,105

1,346 1,295

1,978

3,035

3,500

3750

4000 4000

0

400

800

1200

1600

2000

2400

2800

3200

3600

4000

1995

/6

1996

/7

1997

/8

1998

/9

1999

/0

2000

/1

2001

/2

2002

/3

2003

/4

2004

/5

2005

/6

2006

/7

2007

/8

2008

/9

Oct

-09

Sources of CAPEX FundingSources of CAPEX Funding

National infrastructure grant

8%

Developers contributions

7%Loan funding

60%Provincial housing grants

25%

About the Joburg Municipal Bonds ?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

About the Joburg Municipal Bonds? (Cont)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

Pre-conditions for a successful municipal bond issuePre-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%)

Historical bond performanceHistorical bond performance

Performance as at 18 Sep 2006

Bond code

Nominal amount Maturity Coupon

Government benchmark

Original credit spread

Spread (bps)

COJ01 R1bn 12-Apr-10 11.95 R153 230bps 90

COJ02 R1bn 15-Sept-16 11.90 R157 164bps 120

COJ03 R700m 26-Apr-13 9.70 R157 154bps 105

COJ04 R1.2bn 5 June 2018 9.00 R203 120bps 105

Key Prudential Ratios

Benchmark Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

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%

Key Ratio

For more information please visit the following websites …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