Asset and Liability Management in Local Government

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Asset and Liability Management in Local Government

• Presented By Alan Yorke, Deloitte

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Definitions

• Asset
• Tangible
• Intangible
• Liability
• Current
• Current and non-current component
• Assets Liabilities Community Wealth
• Asset and liability management impacts on wealth

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Asset Management

• Property, plant and equipment
• Decision to invest
• Return on assets
• Non-income generating assets
• Maintenance of PPE
• Deferred maintenance
• Trade off between expanding versus maintenance
• Fleet management
• Productivity of PPE
• Land and Buildings
• Pooling of vehicles
• Making PPE sweat
• Risk management

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Receivables

• Significant asset
• Consumer debtors
• Biggest challenge
• Consequences if not managed
• Opportunity cost
• Working capital
• Factoring and selling debtors books
• Adequate provisioning for realistic values of
  receivables
• Risk management policies

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Inventory

• Small investment
• Secret stores
• Management of inventory is compromised
• Minimising investment in inventory
• Flexible supplier delivery agreements
• Safeguarding of inventory
• Internal controls
• Risk management techniques

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Cash Flow and Investments

• Management of current accounts
• Lack of cash flow planning
• Projection
• Timing of capex and major purchases
• Matching cash inflows and cash outflows
• Risk management considerations
• Reforms by National Treasury

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Liiability Management

• Non-current liabilities
• Long-term debt
• Provisions for employee benefits
• Current liabilities
• Trade creditors
• Liability provisions
• Bank Overdrafts

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Long-Term Debt

• Important financing source
• Long-term debt instruments
• Becoming more sophisticated
• Debt have to be serviced
• Impact on cash flows
• Cost of debt
• Interest rate management
• Refinance for lower interest
• Improve creditworthiness of municipality
• Profiling of debt
• New debt
• Rescheduling of old debt

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Long-Term Debt

• Use of bridging finance
• Use operating cash flows for capex
• Implications from risk perspective
• Lenders perception cause higher interest rate
• Requirements of MFMA
• Link debt to items of PPE
• Loan period not to exceed economic life
• Continual rolling over of debt prohibited
• Ratios as benchmarks
• Debt to income 30 35
• Debt servicing 15 18 of total expenditure
• New ratios to develop post-GAMAP

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Trade Creditors

• Creditor system
• Payment on invoice
• Limits ability to manage creditors optimally
• Within the principle and legislated period of 30
  days
• Negotiate terms to improve cash flows

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Employee Related Provisions

• Leave pay
• Post retirement liabilities
• Management of these liabilities
• Enforce leave policies
• Consider employee pension benefits
• Defined contribution versus defined benefit
• Handling current employees

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MFMA Considerations

• Accounting Officer responsible for
• Assets
• Safeguarding
• Maintenance
• Liabilities
• Management, Accounting and Info System
• Valuation in line with GRAP
• System of internal control of assets and
  liabilities
• Asset and liability register

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Other Considerations

• Balance sheet identifies all assets and
  liabilities that have financial value
• Accounting practices assist in determining values
  and nature
• Financial planning
• Credit rating ratios

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Concluding Comments

• Asset and liability management not only debt
  collection and controlling bank overdrafts
• Managing assets and liabilities means influencing
  the financial position of the municipality
• It improves operations as resources are released
  from non-performing asset or are not committed to
  settle unnecessary liabilities
• Managing assets and liabilities now a statutory
  requirement