Bitou Local Municipality Independent Financial Assessment Against the background of the Municipality‟s Demographic, Economic & Household Infrastructure Situation FINAL REPORT Prepared by INCA Portfolio Managers First Draft to Management on 5 May 2014 Final Report to Council on 21 May 2014 Independent Financial Assessment 2012/13 Bitou Local Municipality Contents Page 1. Introduction 3 2. Key Perspectives Related to the Demography of Bitou 5 3. A Snapshot of the Local Economy 9 4. Household Infrastructure Service Delivery 15 5. Historical Financial Overview 25 6. Cash Flow Forecast 38 7. Synopsis of the Preliminary Findings 44 8. Background of INCA Portfolio Managers 46 9. Disclaimer 46 Abbreviations GRAP: Generally Recognised Accounting Practice IPM: INCA Portfolio Managers Model: IPM‟s Credit and Cash Flow Forecast Model MTREF: Medium Term Revenue and Expenditure Framework Bitou: Bitou Local Municipality Information assessed Economic data extracted from IHS Global Insight ReX Version 2.5n The audited financial statements for the years ending 30 June 2003 to 30 June 2013 The MTREF Concept Budget for 2014/15 to 2016/17 (The Budget 2014/15) Prepared by INCA Portfolio Managers Page 2 Independent Financial Assessment 2012/13 Bitou Local Municipality 1. Introduction INCA Portfolio Managers (“IPM”) has been appointed by Bitou Local Municipality to conduct an Independent Macro Financial Assessment in consultation with the Council as a basis of the development of a 10-year Long-Term Financial Plan. The methodology that will be followed to conclude this assignment will consist of the following modules that will be contained within this report for adoption by Council: . Module 1: Key Perspectives related to Demography A detailed analysis of the Population is conducted. Key indicators used are: Total Population Population Density Annual per Capita Income Number of Households per Income Category Economically Active Population Economically Active Population as a percentage of Population Number of Unemployed People Population pyramid against other local municipalities in the district . Module 2: A Snapshot of the Local Economy A further analysis of the Local Economy formation is conducted. Highlighted key factors include: Gross Value Added by the nine Economic sub-sectors Sector Share of Regional Total Concentration within Primary, Secondary & Tertiary Aggregates The role of tourism within the Municipality Total tourism spend as a percentage of GDP Contribution made by each economic sub-sector over the past 10 years . Module 3: Household Infrastructure Service Delivery This section covers service delivery and infrastructure backlogs related to the Municipality in its provincial context. The overview is as follows: Household Infrastructure Overview in the Province Household Infrastructure Overview in the Municipality Number of households with “above” and “below” RDP service level of infrastructure in the Province, the District Municipality and the Municipality Households with income above the Equitable Share bracket in correlation with households that have access to a level of service higher than the RDP standard Infrastructure diamond – summary of the provision of the following four infrastructure services: Electricity, Water, Sanitation and Refuse Removal Non-Revenue Water in the Province and in the Municipality Dwelling Typology from 1996 to 2011 Growth in Household formation in the Province and in the Municipality Percentage of households per Water Infrastructure Percentage of households per Sanitation Infrastructure Percentage of households per Electricity Infrastructure Percentage of households per Refuse Removal Infrastructure Prepared by INCA Portfolio Managers Page 3 Independent Financial Assessment 2012/13 Bitou Local Municipality . Module 4: Historical Financial Overview To determine a reasonable foundation from where to start assessing the financial capacity of Bitou, a detailed overview of the historical financial performance of Bitou will be performed for a period of 11-years from 2002/03 to 2012/13. The historical data provides a basis for reflection on financial trends and ratios in the past to plot the likely outcome of future financial trends. All of the data will be verified in conjunction with Bitou. Based on the historic performance of Bitou, the Model will derive a credit score for the Municipality in relation to both its peer performance and absolute norms and standards set by IPM as criteria in the Model. This score can be compared to that of an official rating agency and therefore will provide Bitou with an indication of the financial markets‟ perception of the credit risk to invest in the Municipality. Module 5: Cash Flow Forecast of the Concept Budget for 2014/15 From this base, the anticipated future cash flow performance Bitou will be modeled for the next 3 financial years using the assumptions made in the latest Budget for 2014/15 to 2016/17 that will be approved by Council by 31 May 2014. From this it will be ascertained to which extent financial planning and budgeting for operational and capital expenses will impact on Bitou‟s current financial position. This assessment, will verify the reasonability of the assumptions made in the Concept Budget based on a comparison with Bitou‟s past financial performance and serve as an input into MTREF process. It will also serve as the foundation for projecting a sound longer term financial strategy. From this assessment, the level of external funding that can be absorbed by Bitou without negatively impacting on its financial position is determined for the medium term. This information will strategically assist Bitou to determine the most optimal mix of funding sources to be utilized for investment in capital infrastructure, whilst maintaining adequate cash reserves and liquidity levels. Module 6: Synopsis of the Preliminary Findings From the first 5 modules the most important findings will be highlighted for consideration in developing a longer term financial plan. Prepared by INCA Portfolio Managers Page 4 Independent Financial Assessment 2012/13 Bitou Local Municipality 2. Key Perspectives Related to the Demography of Bitou POPULATION GRAPH 1: TOTAL POPULATION: EDEN Bitou has a total population of 50 250 000 377 (2012) people which represents 9% of the population living in the 200 000 Eden DM. This is the second lowest population figure of the seven 150 000 municipalities in the district. 100 000 Bitou‟s current population growth rate of 3.3% is the highest of all 50 000 municipalities in the Eden District (Kannaland: 0.2%; Oudtshoorn: 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1.2%; Hessequa: 1.4%; Mossel Bay: 1.6%; George: 0.9% and Kannaland Hessequa Mossel Bay George Knysna: 1.7%), and also greater Oudtshoorn Bitou Knysna than the Western Cape‟s 1.5% and the National growth rate of 1.3%. The historical population figures are reflected in Table 1. The 2013 figures are shown for indicative purposes only, and await verification. TABLE 1: TOTAL POPULATION: BITOU 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Bitou 36 470 38 555 40 502 42 031 43 336 44 581 46 288 48 304 50 377 52 370 GRAPH 2: POPULATION DENSITY (NUMBER OF PEOPLE PER KM²): EDEN Bitou LM covers an area of 992 km2 100 and has the third highest densely 90 populated area with a population 80 density of 50.8 people/km2 70 (Kannaland: 5.1; Hessequa: 9.2; 60 50 Mossel Bay: 44.4; George: 90.7; 40 Oudtshoorn: 14.6; and Knysna: 30 66.8 people/km2). 20 10 0 2003 2012 The table below shows the proportion of the consolidated age groups, viz. children, learners and young people (00 – 24), working age (25 – 64) and post retirement age (65+) for the 7 municipalities. TABLE 2: AGE GROUP OF POPULATION Age Group Kannaland Hessequa Mossel Bay George Oudtshoorn Bitou Knysna 00 - 24 45.6% 38.6% 37.7% 42.7% 46.2% 39.8% 39.7% 25 - 64 46.3% 49.9% 51.6% 50.4% 46.5% 53.5% 51.6% 65 + 8.1% 11.5% 10.7% 6.9% 7.3% 6.7% 8.7% Prepared by INCA Portfolio Managers Page 5 Independent Financial Assessment 2012/13 Bitou Local Municipality The younger population, preschool and learner age are proportionally higher in the more rural municipalities, viz. Kannaland (45.6%) and Oudtshoorn (46.2%). The working age population is proportionally largest in Bitou (53.5%) followed by Mossel Bay (51.6%) and George (50.4%). Proportionally more retired people reside in Hessequa (11.5%) and Mossel Bay (10.7%), while Bitou only has proportionally 6.7% in the 65+ age group. GRAPH 3: POPULATION PYRAMID OF BITOU LOCAL MUNICIPALITY Population Pyramid, Total, 2012 A population pyramid illustrates the H047 Bitou Male Female age composition of society and provides an indication of the size of 75+ 70-74 the economically active population 65-69 60-64 in society or the job seekers on the 55-59 50-54 one hand and the potential for new 45-49 household formations and 40-44 35-39 associated demands on household 30-34 25-29 service delivery such as housing, 20-24 15-19 water, electricity and refuse 10-14 removal on the other. 05-09 00-04 3 000 2 000 1 000 0 1 000 2 000 3 000 In Bitou the highest percentage of the age composition falls within the Source: IHS Global Insight Regional eXplorer version 708 30 to 34 year age bracket, for both Male and Female, together amounting to 10% of the Total Population. The pyramid also illustrates the finding that Bitou has the highest proportion of the population in the working age group and relatively fewer people in the younger and retired age groups. INCOME GRAPH 4: ANNUAL PER CAPITA INCOME (RAND, CURRENT PRICES): EDEN Bitou‟s current annual per capita 90 000 income is R 48 179 which is the 80 000 third lowest of the seven 70 000 municipalities within the jurisdiction 60 000 of Eden DM (Mossel Bay: R 80 491; 50 000 Knysna: R 70 129; Hessequa: R 59 40 000 515; George: R 54 038; Kannaland: 30 000 R 41 483 and Oudtshoorn: R 37 20 000 308) but is higher than the national 10 000 per capita income of R 41 925.