Residents have been assured that the City’s financial position is “robust and healthy and that we will continue to manage it in a responsible manner”.
JOBURG has rejected recent media reports that suggest its financial position is precarious, noting that its estimated revenue corresponded with planned expenditure.
MMC Geoffrey MakhuboCity's financial position is robust, says MMC Geoffrey Makhubo (Photo: Enoch Lehung, City of Johannesburg)Portfolio head for finance, Geoffrey Makhubo, said that in terms of legislation, municipalities were subject to approve a balanced budget, as Johannesburg had done when it tabled a R33-billion medium term budget, its biggest ever, on 29 June.
A front-page story in a national daily, on 5 July carried the headline “Is Joburg going bust?” It claimed that the City was cash strapped and had asked the council to approve a R4,4-billion short-term loan to “bridge cash-flow mismatches”.
“The article … reflects an inadequate understanding of local government finance in South Africa,” retorted Makhubo.
The report claimed that the City started to experience financial woes in the run up to the World Cup in 2010, when it had to “sacrifice” R1-billion of its budget to fund the completion of the FNB Stadium. It cited the February billing issue as having exacerbated financial woes.
Makhubo, however, said the City had over the last five years budgeted for a surplus to ensure that revenue was always slightly above planned expenditure. “These financial reports are public documents which our critics continue to ignore.”
Escalating prices in the construction industry in the run up to the World Cup had resulted in the City using its internal cash reserves to “ensure that readiness for the international event was attained. Thus the normal cash reserves that would be available to manage periodic cash flow mismatches were depleted.”
In the normal course of business in the city, cash flow mismatches were a result of the “natural timing differences between when cash is utilised and when operating inflows are received”.
“An example is the Eskom tariff increases which are borne by the City in July and only realised as income from the customers at the new tariff in September. The grant allocation from the national government is utilised for the implementation of key projects such as the Bus Rapid Transit system. Such grants come periodically while our expenditure programmes for the daily running of the city are continuous.”
He explained that it was through prudent management “of the liquidity ebbs and flows” that the City ensured service delivery was not disrupted.
The report further claimed that the R4,4-billion requested by the City would come in the form of a R3,5-billion commercial paper and a R920-million general banking facility. Makhubo said general banking facilities or commercial paper was used after assessing affordability and pricing in the market.
In the last fiscal year, commercial paper had proved to be more cost-effective. Joburg was the first municipality in South Africa to successfully issue commercial paper, an interest-bearing or discounted short-term loan issued by a non-financial corporation with a good to excellent credit rating to raise cash quickly to finance short-term credit needs, such as accounts inventory.
Makhubo said the City had issued commercial paper because it had anticipated grants and minimised the risk, if any, for investors. “The commercial paper issued in the current financial year were utilised for the bridging of the cash flow mismatches and complied with the requirements of the Municipal Finance Management Act. Section 45 of the [Act] prescribes that any short-term debt issued needs to be repaid prior to the end of the financial year,” he explained.
All commercial paper issued in the 2010/11 financial year was redeemed on time. “Given the size of the City’s approved budget of R33-billion for the 2011/12 financial year, it is prudent to put in place facilities of up to R3,4-billion to manage liquidity mismatches as and when they arise,” Makhubo said.
In addition, the City had pioneered the issuing of municipal bonds in the country and had, to date, issued seven municipal bonds which had been oversubscribed. Joburg had registered a R13-billion domestic medium term note programme under which the sourcing of funds had been diversified to include commercial paper, floating rate notes, institutional bonds and Jozibonds.
The bonds required the lender to have a minimum of R1-million and ran for a year upwards. Through the bonds, the City borrowed money at an interest rate slightly above what banks offered, using the money to finance its debts and fund other capital projects.
Investors had also displayed strong confidence in Joburg’s robust economy and institutional bonds. The latest bond was issued in March and Makhubo said this had demonstrated the confidence that “reputable financial institutions” had in the financial management of the City and its long-term outlook.
“There is absolutely nothing wrong or sinister in using the available municipal bond. It is also important to note that all long term borrowing in the form of bonds or loans is used to fund non-current assets over their useful lives.”
Makhubo said the City’s latest credit rating by international ratings agencies Fitch and Moody’s for last year was at AA- with a stable outlook, affirming confidence in the City’s ability to manage its finances.
“Residents of Johannesburg can be assured that the City’s financial position is robust and healthy and that we will continue to manage it in a responsible manner to ensure that the need and expectations of all our communities are being met,” he said.
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