EFFECTIVE INTEGRATED REVENUE MANAGEMENT MASTER CLASS 2017 PROJECT REPORT

EFFECTIVE INTEGRATED REVENUE MANAGEMENT MASTER CLASS 2017 PROJECT REPORT 1. Introduction Good financial governance is built on a set of principles such as accountability and transparency and includes key issues such as effective integrated revenue management. Ineffective and insufficient revenue management is a serious risk that impacts negatively on the financial sustainability of municipalities. The School of Public Leadership, Stellenbosch University, hosted the Revenue Management Master Class 2017 in co-operation with the Western Cape Provincial Treasury. During this Master Class various issues were discussed, and best practices were shared with a view to improve revenue management in all municipalities and thus to contribute to promoting good financial governance. It was attended by some local councillors and senior officials in local and provincial government. 2. Context When discussing revenue management in municipalities it is important to understand the local as well as the national and international context within which municipalities in South Africa have to function. Globally there is a lot of uncertainty that relates inter alia to political developments in some of the major economies such as the US under Trump and the UK following the Brexit vote. Terror attacks in various European cities over the past few years contribute to this uncertainty. In the Eurozone there is low but steady economic growth, but the high debt of some member countries such as Greece, Italy and Spain place a heavy burden on the other member states, in particular on Germany. China s economic growth has slowed but the character of its economy has changed to a fast-growing consumer market and the country also produces a huge number of graduates, including PhD s every year, which contributes to its rising profile as a major global player. These developments are relevant for South Africa because of our trade links with the major economies such as China, the US, Germany, UK and other EU states. The current political and economic situation in South Africa also creates uncertainty. Corruption and state capture are part of the current reality in South Africa. The situation has inter alia led to various international credit ratings agencies downgrading South Africa s credit profile, thus confirming the uncertainty for foreign investors and financial institutions about South Africa s future. Economic growth is very low below 1% in 2017 and unemployment, in particular youth unemployment, far too high. Local government in South Africa is 1

characterised by many service delivery failures, a lack of sufficient administrative and management capacity and financial mismanagement in many cases. In addition, the Western Cape currently experiences the worst drought in 100 years and it has a significant impact on the budgets of municipalities. Lower water consumption leads to lower revenue from water, but there is at the same time an increasing need to invest more in additional water resources which creates additional budgetary pressure. It is in this global and national context that municipalities in South Africa have to function and must manage their scarce resources efficiently. Effective revenue management is a key component of good financial governance in municipalities and was the focus of the two-day Revenue Management Master Class 2017 presented on 15 and 16 November 2017. In his address the Western Cape Minister of Finance, Dr Ivan Meyer, confirmed the importance of effective revenue and expenditure management as key principles in support of fiscal discipline. The focus of the Western Cape Government is mainly on managing cost efficiencies and resource allocation to achieve sustainability and viable municipalities. There is also a special focus on measures to combat the current drought and ensure water provision to all communities. 3. Key issues from 2016 During the 2016 Revenue Management Master Class various practitioners made presentations on some recent case studies, innovative approaches and best practices in municipalities. Out of these discussions the following key points were identified and included in the program report: The following recommendations were made on a collective basis, and were also summarised during the last session: a. Political will i. Cut and collect it is the only tool to use to ensure that residents that can pay, actually settle their debts on a timely basis. ii. Culture of non payment can be changed through cut and collect process. Many retail industries and mobile phone companies are extremely effective in this regard. iii. No bailout for public entities Other government departments and entities should be held accountable for their own expenses. iv. Money for effectiveness conditional grants should be granted to municipalities that can spend their capital and operational grants effectively, and conversely be taken away from municipalities that do not spend the budgets effectively. 2

v. Property owners accounts should only be granted to property owners, where the property will be the surety against the outstanding debt. Consumer deposit processes should be ended as it is an ineffective way of securing debt. vi. Dashboard should be developed at council level and should at least include the following:- 1. Cash flow ratios 2. Debt collection ratios 3. Financial ratios b. National Treasury oversight can be improved as a lot of the information that is available to them, is not analysed to ensure accountability where needed. Such oversight should have the following focus:- i. Key ratios, which include the ten critical liquidity ratios; ii. Preventative oversight, instead of responding to crisis situations where it occurs. iii. Payments for Bulk services should be correlated to distribution of equitable share. iv. Active communication of Case law, which should pro-actively influence credit policies. c. Validate non-rate payers a strong point was made by several presenters that recipients of free basic services should be validated, and some comments included:- i. Indigent registration on an annual process of application and approval. ii. The definition of indigents should be revisited from time to time and a decision should be made whether income streams or asset base should be used in the definition. iii. Automated tools should be utilised to validate the financial status of indigents, and ITC, SARS and Vehicle registration systems should be utilized in this regard. iv. Regular updating of the indigent register should be explored and the role of internal audits should be explored. v. Automated process across government departments, and SARS should be established to enhance the validation of indigents. d. Back the debt against the asset many comments have elevated the asset as an effective credit control mechanism. Some comments included:- i. Accounts for owners of property only. ii. Deposit process not needed if the asset back the debt; iii. A significant reduction of administrative and staff cost when deposit processes are eliminated. It also negates any potential interest payments on deposits. iv. Eliminating the deposits has a positive Influence on the current ratio of municipalities. 3

v. Property registration is one of the critical processes in a municipality, and can effectively be applied to enhance the recommendations above. e. Automation is the key to effective and efficient credit control. It allows for:- i. Data mining and analysis of trends, movement of residents, selling and buying of property, and validation of indigent applications. ii. Immediate decision making as information is on hand. Any delays often lead to delayed payments. iii. Data sharing between municipalities and other user departments. iv. Supplier information can be shared across municipalities v. Payment history analysis. vi. Blacklisting of slow and non-payers. vii. Payments by staff, councillors, provincial and national employees can be monitored and checked against the HR database. f. Data integrity i. Data analysis is reliant on quality information and control processes should ensure accurate, complete and timely information. ii. Property information should be accurately and timely updated to ensure accurate rates accounts and valuations. iii. Debtor information should continuously be validated in terms of ownership, addresses and changes to infrastructure and usage. iv. Service usage should be accurately captured and timely distributed to prevent any delayed payments. Variances in usage over time should be measured and questioned. v. Automation reduces the time differential between registration of building plans, approval, ownership changes and invoicing of consumers, and eventually improves the speed of cash flows. vi. Suspense account transactions are eliminated and/or limit to exceptions only. g. Double the service at half the cost i. Increase the number of buyers by auditing the indigent register; ii. Improve spending by applying the principles of economic and efficient procurement; iii. Local economic development needs to be financed through conditional grants and not the payroll. This will create able buyers that will increase revenue stream; and iv. Economic and GDP growth should be the focus of any revenue improvement program. h. Efficiencies 4

i. Automation reduces time differences; ii. Efficiency allows for the linking of systems across databases, which in turn allows for faster decision making on real time information. It allows for one information source; and iii. Water losses should not be financed through transfers. i. Client relations i. Knowledgeable staff members can deal with issues quicker, resolve them and improve the cash collection process; ii. One point of interaction will allow consumers to resolve their issues faster; and iii. Modern infrastructure will allow for real-time information, professional service delivery and information on hand. j. Consequence management is critical and some suggestions included:- i. Dashboard of the MM should include specific indicators on revenue management; ii. Liquidity ratios, including the current ratio and the creditors payment ratios; iii. Debt collection ratios against a predetermined standard approved by the Municipal Council; iv. Debt written off and the size of the debt impairment; v. Performance management should be applied against these indicators and performance bonuses should be adjusted accordingly; and vi. Accountability should be applied in terms of under-performance. These issues remain important and were again highlighted during the discussions. 4. Effective revenue management The importance of evidence-based decision making was stressed in various presentations. It is important to note the following basic approaches, namely: Revenue management is a fundamental and routine financial management function of the municipality s revenue generating business that encompasses billing and collection activities in respect of trading services and property rates levied. The Municipal Budget is the most important policy instrument of the municipality as it gives effect to the development plans. Fiscal policy is the use of government revenue collection and expenditure to influence the economy. Risk management is a valuable management tool which increases a municipality s prospects of success through minimising negative outcomes and optimising opportunities. It is therefore important that each municipality should understand its 5

risk profile and develop an effective risk management strategy. If this is implemented, it will lead to better informed decision-making and more sustainable and reliable delivery of services and thus also impacts the financial sustainability. Other key outcomes of effective risk management are: Innovation; Reduced waste; Prevention of fraud and corruption, unauthorised, fruitless and irregular expenditure; Better value for money through more efficient and effective use of resources; and Better outputs and outcomes through improved project and program management. In view of the continuously changing governance environment, risk assessment cannot be a once-off exercise but has to be done on a regular basis in order to assist the municipal council and top management. Understanding the governance and economic context within which local government functions is important, and it also suggests the consideration of socioeconomic factors in policy-making and enhancing of effective revenue management. Source: MIU A guide to enhancing municipal revenue Revenue forecasting is important to support financial sustainability. 6

Updated policies and by-laws in line with current legislation and the latest court judgements are crucial elements of an effective revenue management approach in any municipality. Municipalities should also regularly review their property rates policies and ensure a regular property valuation is done. Knysna is one example of a municipality that utilised it effectively to provide a steady growth in own revenue. In the City of Cape Town various initiatives have been implemented to enhance effective revenue management, including optimising the use of technology in enhancing revenue collection, automated debt management processes, and an automated rates clearance process. In enhancing effective revenue management a multi-pronged approach should be used to ensure financial sustainability. Municipalities should also take cognisance of the changing landscape in energy production, distribution and use. There should be a focus on enhancing renewable energy and energy efficiency in each municipality, which will have an impact on the revenue collection from energy distribution. This is however a reality that requires innovative approaches relating to the financing of energy and the potential revenue from energy sales. Municipalities should also explore alternative sources of revenue, e.g. utilising the establishment of fibre IT infrastructure to create connected communities. Effective debt management strategies could include: weekly monitoring of monthly collection, verifiable accurate metering systems, standardised processes, a focused debt collection approach, promoting a culture of payment, and maintaining the property value chain and relevant data. 5. Expenditure control A critical step in establishing good expenditure control measures is to have proper costing of each service in place. Effective expenditure control goes hand in hand with good revenue management practices and contributes to financial sustainability of a municipality. Lessons can be learned from the recovery process in Oudtshoorn, which previously experienced a period of bad financial governance and was in need of change to put it 7

again on a road of good financial governance. From the case study of Oudtshoorn which was presented, the following key points were made: A comprehensive recovery plan with clear targets and time frames was developed and managed. The political will at both provincial and local level was confirmed to ensure that the recovery process is managed well. Focus on repayment of municipal debt. Develop and implement a revenue enhancement strategy and improve liquidity. Ensure effective use of technology in the recovery cycle. Multi-year action plans are important to strengthen financial viability. Dedicated management and staff are necessary to ensure good financial governance. 6. A road map in support of good financial governance The Western Cape Minister of Finance, Dr Ivan Meyer, has signed a Good Financial Governance Charter earlier in 2017 and has committed the Western Cape Government to implementing the principles and practices included under the theme of good financial governance. Municipalities should adopt a similar approach and express their commitment to good financial governance, which includes good revenue management. In order to assist municipalities, a guide to promote effective integrated revenue management is provided: Political leadership is necessary to implement effective integrated revenue management. Management and administration: o Focus on both revenue and expenditure o Revenue strengthen revenue collection, explore new sources of revenue o Expenditure ensure proper costing of services Systems and processes: o Innovate and automate where possible. Make effective use of technology, which includes updated software, data management systems and use of geographical information systems. Focus on effective service delivery. Risk management adopt a comprehensive risk management strategy and ensure regular risk assessments are done. The municipal council and the top management should show the municipality s commitment to good financial governance. Share best practices with practitioners in other municipalities. 8

Reporting: a statement about the implementation of effective integrated revenue management practices should be included in the annual and sixmonthly reports of the municipality to the Provincial Treasury. 7. Conclusion The Revenue Management Master Class focused on critical issues, innovation and best practices that can assist all municipalities in improving the quality of financial governance on a continued basis. It confirmed the importance of a comprehensive approach to revenue management as a key component of good financial governance. Dr D J Brand Extraordinary Senior Lecturer School of Public Leadership Stellenbosch University 30 November 2017 9

Annexure A 2017 Master Class program 15 November Session 1: Opening Mr Z Hoosain, HOD: Provincial Treasury Welcome Adv G Van Deventer, Mayor of Stellenbosch Key note address Minister Dr Ivan Meyer, Western Cape Minister of Finance Current fiscal and economic context Mr H Malilla, Deputy Director General, Provincial Treasury Evidence based revenue management Ms Marcia Korsten, Provincial Treasury Session 2 Reflection Ten-point plan Dr D J Brand, SPL Game Changers Mr S Ramjathan, National Treasury Energy and Water Efficiency Ms CR Wicht, Western Cape Department of Environmental Affairs and Development Planning Revenue Management Ms S Bashe, City of Cape Town Session 3 State of the Economy Mr M Ackerman, Citadel Functional Integration Mr T Blake, City of Cape Town Integrated processes towards financial recovery Mr F Lötter, Oudtshoorn Session 4 PANEL DISCUSSION: Getting the Basic Right for Integrated Revenue Management Moderator - Mr A Dyakala Mr F Lötter (Oudtshoorn), Ms S Bashe (CoCT), Mr A Treurnicht (Stellenbosch) 16 November Session 5 Reflections on day 1 Case study: Property Valuations Political Oversight Managing Municipal Revenue Risk SPL Dr Dirk Brand, SPL Mr M Memani, Knysna Cllr Leon Van Wyk, SALGA Deon van der Westhuizen, Session 6 10

Road Map for effective revenue management Dr D J Brand, SPL Closing & recognition Mr A Dyakala, Provincial Treasury Online test 11