Asset and Liability Management
in Local Government
Presented By Alan Yorke,
Deloitte
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 debtor’s 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
Lender’s 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
©2004 Deloitte & Touche