Emfuleni Budget 2017/2018– a provisional macro view

Opinion piece by Johan Sipho Coetzee (B.Sc., MBA) – An Independent ICT & Management consultant in the Vaal Triangle:
As the Finance and Revenue portfolio member of one of the Emfuleni ward committees I was tasked to analyse the 2017 / 2018 Emfuleni budget in preparation for the Emfuleni IDP & Budget Public Participation Meeting which was planned for 25/04/2017. This meeting had to be rescheduled last minute due to a strike by the Emfuleni fire brigade because Emfuleni allegedly failed to pay them for overtime worked.
The opinions expressed in this article are my own based on my personal experience serving on various financial committees (past and present) and managing large business concerns in the private sector. I don’t claim to be a financial guru but rather a pragmatist trying to simplify matters. I therefore firstly analysed the budget at a macro level. This involved trying to determine whether the Emfuleni 2017 / 2018 budget adhered to the basics of budgeting.
In my experience a budget is a financial plan to ensure that a business – in this case Emfuleni Local Municipality (ELM) – can survive and continue as a going concern. To ensure “going concern” status, the following basics should in my opinion be present in a budget:
1. The income should be more than expenditure. I am not sure this is true for the ELM budget. Both the 2017 / 2018 budget and monthly report (Jan 2017) I had access to show a financial income excess but why then does ELM need a R500 million overdraft (ELM council meeting held on 28 March 2017 refers) or a bailout by the Gauteng premier? (Vaalweekblad of 19 April 2017 refers) It seems somebody is stretching the truth.
2. The income budget should be realistic. This is in my opinion not true for the 2017 / 2018 ELM budget. In the budget assumptions, it is mentioned that the ELM current collection rate is 74% (highly debateable) but in the 2017 / 2018 budget the income is predicted at a collection rate of 80%. From the budget pack I had access to it is not clear what actions (if any) are going to be taken to ensure that this higher collection rate realise. It is also not clear whether these actions were budgeted for on the expense side of the budget.
3. The income sources should be realistic. This is in my opinion not true for the ELM 2017 / 2018 budget. In the budget assumptions I had access to, it is mentioned that Arcelor Mittal (AMSA) is scaling down but it is not mentioned what % of ELM’s operational income is coming from AMSA and what the foreseen impact on the ELM income is due to AMSA’s foreseen economic position. The top 5 operational income sources (clients) for ELM is not mentioned in the 2017 / 2018 budget neither the % of ELM’s income they are each contributing. I would expect that Vaal Mall would be high on the list of top ELM clients. In my observation, Vaal Mall is far down the line implementing a solar project that would cut their power consumption according to sources by 70% in the current phase and by 100% in the next phase. Was this taken into consideration in the ELM 2017 / 2018 operational income budget? Not clear from the budget pack I had access to. Also not clear whether ELM engaged with their top 5 clients in the 2017 / 2018 budgetting process.
4. Main expenditure items should be clear. The ELM 2017 / 2018 budget pack drowns one in pages of data except the important data nicely presented in chart format. (A moment of silence for our ELM ward councillors who are expected to make sense of this!) What are the 5 top ELM expenditure items? What % of the total ELM expenditure do they represent? Not clear from the ELM 2017 / 2018 budget pack I had access to.
5. If expenditure is more than income – major cost cutting actions should be introduced. In my opinion this is where we are as ELM. (Expenditure is more than the income.) Unless ELM has clear-cut and believable actions to increase collections and the ELM income drastically, the focus in my opinion should be on the 5 top expenditure items in the ELM budget in terms of cost cutting actions. I suspect salaries are top of the list. If it is for arguments sake 50% of the total operational expenditure, expense saving plans should be focused there first – not on smaller expense items. I have not seen any ELM retrenchment plans in the 2017 / 2018 budget. Politically not popular but from a financial survival aspect in my opinion crucial.
6. Bad debt should be minimised. This is not true for the ELM 2017 / 2018 budget in my opinion. With a budget of approximately R6,3 bn / annum ELM provides for approximately R1 bn of bad debt per year. (This translates to approximately 17% of the budget) If ELM’s stated current collection rate is only 74% (meaning a 26% shortfall on collections) and ELM’s budgeted collection rate for 2017 / 2018 is 80% as stated in the budget assumptions I had access to (20% shortfall on collections) the 17% bad debt provision is in my opinion also suspect. It is not clear which actions if any are going to be taken by ELM to reduce bad debt and whether ELM budgeted for these actions on the expense side of the 2017 / 2018 budget.
Because the basics on a macro level are in my opinion not in place for the ELM 2017 / 2018 budget, it is not worth the effort to analyse the ELM 2017 / 2018 budget on a micro level. Let’s hope the rescheduled Emfuleni IDP & Budget Public Participation Meeting allows honest debate on the proposed budget and provides answers on the major questions regarding the basics of this budget.