FINANCIAL SUSTAINABILITY USING A LONG-TERM FINANCIAL MODEL

IPM has developed and used its long-term financial model (LTFM) at 6 of the metropolitan municipalities, and more than 30 other local municipalities since 2013.

 

A predictive approach enabling real scenario modeling

The LTFM has specifically been developed to model the impact of several socio economic and other variables, and specific policy choices, on the financial performance, position, and cash flow of a Municipality. It does not merely extrapolate (with CPI or another metric) the past performance or other metrics. It provides for scenario modeling of longer-term financial performance, cash flow and financial position derived from several socio-economic and financial variables, policy choices, capex, and funding mixes.

 

Enabling sustainable finances based on real scenario projected cash flows

The LTFM’s processing logic has also been developed with a cash flow management theory in mind, to determine, inter alia, a sustainable capital investment envelope that can be sustainably financed over the longer term. 

 

As a key output the LTFM provides a full set of projected financial statements over a period of 10 years, i.e., Statement of Financial Performance, Statement of Financial Position and Cash Flow. A ratio analysis of the projected financials is presented, which will aid in the decision making and inform the funding plan and financing options. To this end, the ratios and norms developed by National Treasury are applied to the extent that they are relevant and applicable for forecasts. Various graphs that illustrate the financial and operational performance are delivered, allowing the users to draft a long-term financial plan.

 

New architecture

 

The LTFM is available as a web-application using a SQL database on a private cloud (alternatively, a deployment at additional cost as on-premises application). Essentially this will enable multiple users to securely work in unison on the LTFM, based on data held in a SQL database and able to be integrated to relevant systems of the municipality. The processing logic embedded in the LTFM model is maintained by IPM and can easily be enhanced in the future as needed without difficult, costly, and time-consuming programming.

 

System integrations

 

Existing data integrations include MSCOA compliant financial system data (received via the National Treasury municipal data base) and MTREF Table A4 data, and external data sources such as IHS Global Insight ReX Version 20.25. Other data input and outputs in the LTFM can be mapped to municipal systems in consultation with the municipal team, to determine relevant data integrations that must be established, and cost-effectively automated as need be. This includes, for example, capital project / programme related data.

Benefits

 

  • The LTFM supports decision making that will promote financial sustainability and resilience. It has the capability to model the impact of policy choices (such as rates and tariff increases and liquidity) and changes in key socio-economic and other variables (such as indigent households, and collection and payment rates) on operating profitability, cash generation and cash utilization, and calculates an affordable capital investment envelope and funding mix that can be sustainably financed over the longer-term. It is an integrated model and demonstrates the impacts on financial performance (revenue and expenses), financial position, and cash flow of a municipality over at least a period of 10 years.

  • The LTFM allows for the inclusion of specifically identified projects that exhibit any of the following features, viz. large infrastructure projects, catalytic projects that promote spatial transformation or unique projects that contribute towards the overall goals of the Integrated Development Plan (IDP).

  • It enables institutionalization and integration of long-term financial planning into the key strategic processes of the municipality, providing comfort to lenders that the municipality has applied a long-term view of financial sustainability, and can monitor the journey and make corrections at key points of intervention, such as MTREFs.

  • Get staff to collaborate and reliably model the financial implications of changes in revenue and cost drivers (with reference to the socio-economic context), strategic plans, policy choices, and capex and funding plans.

  • The impact of various policy choices on Household Bills can be illustrated.

  • It is user friendly, understandable, and provides objective, factual and reliable outputs.

                      For more information:     Tel: 011-202-2200 / Charl Bouwer