REVENUE, EXPENDITURE & CASH MANAGEMENT CRITERIA

MUNICIPAL GOVERNANCE REVIEW & OUTLOOK –

FINANCIAL MUNICIPAL CAPABILITY MATURITY MODEL

15 August 2014

INTRODUCTION

• The Municipal Financial Governance Review and Outlook (MGR&O) 2012 is a Provincial Treasury (PT) initiative in collaboration with the Department: Local Government that provides an independent assessment of the governance level of municipalities.

• The intention of the MGR&O is to assess the municipality in terms of the adopted assessment model and to provide recommendations to management on how to take the financial management capability of the municipality to level 3 and higher.

• The Government (Corporate) Governance Framework includes and builds on initiatives set by the Provincial Government, in collaboration with and support of all Municipalities, to improve general governance, financial management, internal audit, risk management, internal controls, and resource utilisation.

Three objectives of the budget process

Fiscal sustainabilityAchieving an appropriate balance between revenue and expenditure, the debt level and other fiscal aggregates in a manner that promotes economic stability over the economic cycle and ensures a sustainable fiscal position in the medium to long term.

Allocative efficiencyAchieving an allocation of resources that reflects the priorities of government on the basis of evidence of programme effectiveness.

Value for moneyPromoting the provision of public services through a process that contributes to achieving economy, efficiency and effectiveness, while being cognisant of the quality and accessibility of services.

Value for money

Dimensions of value-for-money:– Efficiency: Achieving more output from

the same input, while maintaining quality– Economy: Reducing the cost of

resources used as inputs– Effectiveness: Achieving better

outcomes by changing the nature of outputs.

Programmes not covered on the budget can be financed by reallocating spending from non-performing programmes.

Cost containment instructions: shifting resources from non-core goods and services budgets towards key service delivery requirements.

MGR&O criteria and ratings

Ratings Description Levels

Start-up level Level 1

Development level Level 2

Control level Level 3

Information level Level 4

Management level Level 5

Optimising level Level 6

Financial Management Capability Maturity Model

FMCMM

The Financial Management Capability Maturity Model (FMCMM) is a tool to assess municipalities’ level of maturity and capabilities in financial management.

A framework that describes the key elements of effective financial management and sets out a path that a municipality can follow to progressively develop more sophisticated financial management practices.

The FMCMM was initially developed for assessment of financial maturity in provincial and national departments; it has now been adapted for municipalities.

A Presidential Outcome 12 Deliverable.

PURPOSE

To provide a tool that can be used to:

Measure the financial management capability within municipalities.

Identify gaps within the municipality’s financial systems and processes.

Assist leadership with support in financial management & enhance accountability.

Provide a tool that helps management to assess skills & structure requirements.

Provide management with pointers on Financial Systems of Delegations.

Provide an early-warning mechanism for municipalities.

Assist municipalities close on AG findings through detailed activity checks.

Priorities, enhance and monitor National and Provincial Treasury initiatives.

Inform governance & oversight structures on significant of specific operations.

Determine the impact of key non-financial processes on financial management.

FMCMM - Levels of Maturity

FMCMM - Levels of Maturity

There are six levels in the model, most municipalities are expected to be operating between level 1 and 3, however this will be confirmed with first roll out to all municipalities once results are tabulated. The model allows for progression to levels 4 to 6 - future development.

Level 1:The Start-up levelInternal Control framework is inadequate with systems, processes and procedures not defined or followed.

Level 2: The Developmental levelFinancial management systems, processes and procedures are basic and are being developed.

Level 3: The Control levelFinancial management systems, processes and procedures are functional and able to support the organisation

FMCMM - Levels of Maturity

There are six levels in the model, most municipalities are expected to be operating between level 1 and 3, however this will be confirmed with first roll out to all municipalities once results are tabulated. The model allows for progression to levels 4 to 6 - future development.

Level 1:The Start-up levelInternal Control framework is inadequate with systems, processes and procedures not defined or followed.

Level 2: The Developmental levelFinancial management systems, processes and procedures are basic and are being developed.

Level 3: The Control levelFinancial management systems, processes and procedures are functional and able to support the organisation

FMCMM - Levels of Maturity

Level 4: Information levelThe economic utilisation of resources is managed, measured and reflected in reliable financial and performance information.

Level 5: Management levelCapability is measured and monitored with procedures which are constantly being reviewed and improved.

Level 6: Optimisation levelMature policies, practices, procedures and systems are implemented for effective and efficient operations.

Structure of Model

Currently Model is MS Excel based. We are exploring alternative electronic applications.Model includes:

- Index, instructions sheet and summary score sheet- Accounting Officer/ CFO’s letter confirming review of completed

modelEach module contains:

-Questions, Reference to Questions, Associated Risks and Associated ControlsScoring Mechanism

Yes = 3Partial = 2No = 1Not applicable = does not affect scoring

* Next step to generate level 4-6 questionsModules can also be completed independently, taking into account specific financial management disciplines.

Modules

1. Reporting 12. Expenditure Management

2. Annual Financial Statements 13. Liability Management

3. Annual Reports 14. Borrowing

4. Budget Management 15. Supply Chain Management

5. Budget and Treasury Office 16. Information Technology

6. Bank, Cash and Investments 17. Human Resources

7. Asset Management 18. Capacity Building

8. Risk Management 19. Compensation of Employees

9. Internal Audit 20. Management of Entities

10.Revenue Management 21. Public Private Partnerships

11.Transfers and Grants

Characteristics of the FMCMM

Descriptive Suggest what would be needed to achieve a certain level of

capability Assist in mapping out a strategic plan required for improving financial

management at each level Reflect specific attributes or financial capabilities that a municipality

at a particular would exhibit Building blocks to establish effective financial management Provide guidance for continuous improvements

MFCMM – LEVELS 4-6

MFCMM do not have questions On this level,

Statistics and trends suggest most municipalities fall between levels 1 and 3 Therefor the MFCMM questions focus more in compliance, however guidance are provided on the following levels:

LEVEL 4

INFORMATION

• Internal Control framework will support the organisation to cope effectively in challenging times & focuses on measuring how resources are used

• The economic utilisation of resources is managed, measured and reflected in reliable financial and performance information.

LEVEL 5

MANAGEME

NT

• Determines the utilisation of resources with effective results• Monitor and measure compliance with procedures and to take necessary action, if and when

required, • Procedures are constantly reviewed, improved and provides good practice

LEVEL 6

OPTIMISATION

• Changing and challenging situations are addressed and anticipated• This is the highest level maturity• System and procedures have been refined to a level of best practice and excellence• Information technology is used in an integrated way to automate the workflow, providing

tools to improve quality, effectiveness and efficiency

FMCMM – LEVEL 4

MFCMM do not have questions On this level, however the following Guidelines are given:

• At the Information level, operational managers have a broader understanding of their financial management responsibilities. They also recognize their responsibility to contribute to the municipality's financial management capabilities.

• At the Information level, municipal standards for all processes and activities have been established to allow for measurement and comparison between similar business units across the municipality. These standard financial management practices can be tailored to the respective unit's nature and unique risks.

• One of the key processes at the Information level is to provide consistent and comparable financial and operational (non-financial) information and reports that meet the needs of managers. This information provides a basis for developing performance indicators, cost and quality measures and monitoring performance, to ensure that intended results are being achieved and to demonstrate accountability.

• Critical to achieving this level of capability is a climate that institutionalizes financial management practices throughout the municipality's culture

FMCMM - LEVEL 5

MFCMM do not have questions On this level, however the following Guidelines are given:

• Uses the information developed to balance two competing objectives: using its resources economically and efficiently, and producing cost-effective results - for example, goods or services of acceptable quality. The municipality understands the financial implications of the choices and trade-offs it makes between these objectives. Such information also allows the municipality to better account for the way that it uses the resources entrusted to it;

• Can better manage its financial and operational performance because it has - and uses - the "right" information. It has information and analyses on the relative costs of different approaches to achieving its objectives;

• Possess mechanisms for measuring the impact of variables such as cost, quality, productivity and degree of success in achieving its stated objectives. This capability flows from a history of having measured and managed municipality performance, which includes, for example:

• managing the municipality's information and knowledge resources as assets, so that information needed to make informed decisions is available (for example, by using simulations, historical trends and manipulating variables to see how they affect results); etc.

MGRO INFORMATION LEVEL 6

MFCMM do not have questions On this level, however the following Guidelines are given:• A municipality at the Optimizing Level uses information from inside and

outside the organization to set and achieve strategic targets or objectives for improvement. Achieving these targets enables the municipality to increase the value of its services or products to clients or consumers. The focus is on continuous improvement. The municipality uses what it has learned from past experience to identify areas for future improvement.

• This involves: developing prospective information to anticipate both internal and external changes and

making the necessary strategic or tactical decisions to manage their effects; measuring the organization's performance against that of others in the same industry finding best practices and learning from other municipalities (benchmarking); and minimize costs and maximize revenues, improve the quantity and quality of outputs, by

introducing new technology or improving existing processes.

• The key question that an organization at the Optimizing Level asks itself is: • "How & where can the organization improve its performance?"

GOING FORWARD

COMPARISON

MFCMM/MGRO MFCMM MGROSIMILARITIES

Refers to level 1-6 maturity levels1 Addresses levels 1-3 Adressess levels 1-62 Focus on compliance disciplines Focus on compliance, management and

optimisation3 140 Questions listed 31 Criteria listed (22%)4 Results in a summary and final score

to determine maturity levelMaturity level determined by the number of positive (yes) outcomes

5 Questions are categorised and assessed in terms of : property, Services, Other Revenue, Debtors and credit control, and admistration

Criteria are categorised in terms of maturity levels, e.g Startup, Developmental, Control, Information, Management, Optimising

6 Reference column refers to applicable legislation, law or regulation.

Reference column refers to thnumber order of the criteria, e.g 1.2

7 Addresses Associated Risks Addresses possible root causes8 Adressess associated controls Do not address control

Responses are indicated as numeric such as: 1= yes, 2=partial, 3=no and N/a

Responses are indicated as Yes/No

Adressess evaluation on MPRA ( Municipal Property Rates Act)

Do not address MPRA

DIFFERENCES

REVENUE MANAGEMENT (eg.)

MGRO Criteria

Municipal self assessment

LEVELS 1 – 3 , replaced by FMCMM questions

LEVELS 4 – 6, existing MGRO criteria, reviewed , guided by FMCMM (draft)

PT to validate and assess maturity level

Copy only “Response and Comments” (not Score) using “Merge conditional formatting”

At municipalities

• The model consist of 21 modules and can be completed individually or

together,

• FOCUS: Revenue, Expenditure, Bank, cash and Investment,

• Each module consist of a list of self-assessment questions,

• After each question a response is required from a “Drop down box”

under Response column.

• Select appropriate response: ( levels 1-3)• YES = score 3 points• PARTIAL = score 2 points• NO = score 1point• N/A will not affect the scoring

• Each module computes an average score between 1-3,• The average score ( summary score) determines the level of maturity,• “Comments” to be completed for “Partial & No” responses

Example

MGRO Self Assessment: Revenue Management -MFCMM vs MGRO\Muncde_FMCMM_2014 Revenue Management LGF.xlsx

MGRO Self Assessment: Expenditure Management - MFCMM vs MGRO\FMCMM expenditure team (TB).xlsx

MGRO Self Assessment: Bank, Cash & Investment Management - MFCMM vs MGRO\2014 MGRO Criteria Rev_Exp_Bank cash & Investment.xlsx

Thank you