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SCoAG Presentation Analysis of Funding Model18 September 2009

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Reputation promise/mission

The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

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Content

1. Background2. Analysis of revenue3. Analysis of key cost drivers4. Self-funding model5. Presentation made to SCoAG on 12 June 20086. Issue7. Key financial indicators8. Drivers of funding deficit9. Compounding factors10. Options considered11. Global benchmarking12. Options considered13. Evaluation of options14. Recommendations15. Way forward16. Impact of new funding model17. New funding model18. Working capital management19. Conclusion

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1. Background

– AGSA is mandated to provide audit services to the public sector.

– AGSA has 866 auditees which can be divided into the following categories:

• National government – 175 auditees

• Provincial government – 209 auditees

• Local government - 334 auditees

• Statutory entities – 47 auditees

• Other – 101 auditees (Trust Funds, Funds, Pension Funds, etc.)

– Fees are based on time spent on engagements.

– The AGSA staff complement is as follows:

2008/09 2009/10

Audit Staff 2107 1874Support Staff 222 422

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Background continued

– The increase in heads is a deliberate strategy by the AGSA to reduce our vacancy rate. We have created more centres within the audit business units.

– Due to the high vacancies (15% for audit staff in 2008-09), the AGSA is unable to perform all the required audits and therefore contracts out part of its audits to independent audit firms (referred to as CWCs). This also enables the AGSA to fulfill its mandate of contributing to the transformation of the audit profession (by allocating work to CWCs).

– Historical vacancies.

2007/08 2008/09Audit Business Units 393 401Corporate Services 62 70

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2. Analysis of revenue

Budget06'07 07'08 08'09 09'10R'000 R'000 R'000 R'000

Total Revenue 859,515 1,073,944 1,323,322 1,631,961 Own hours 559,643 656,197 771,701 1,124,529 Contract work 299,872 417,747 551,621 507,432

Actual

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3. Analysis of key cost drivers

In order to fulfill its mandate, the AGSA has a budget of R1,7 billion for 2009-10. The primary cost driver atthe AGSA is staff cost. An analysis of this in relation to own hours revenue is as follows:

Budget06'07 07'08 08'09 09'10R'000 R'000 R'000 R'000

Total Revenue 859,515 1,073,944 1,323,322 1,631,961 Own hours 559,643 656,197 771,701 1,124,529 Contract work 299,872 417,747 551,621 507,432

Own hours billed 2,012,113 2,071,254 2,221,462 2,476,333

Staff cost (446,286) (532,903) (663,642) (744,809) Own hours (316,166) (370,658) (464,644) (546,792) Support staff (130,120) (162,245) (198,998) (198,017)

56% 56% 60% 49%

23% 25% 26% 18%

Total staff 1,775 2,140 2,329 2,296 Audit staff 1,606 1,978 2,107 1,874 Support staff 169 162 222 422

Actual

Audit staff as % of Own hours revenue

Support staff as % of Own hours revenue

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3.1 Analysis of key cost drivers as per Budget 2009-10

Staff cost66%

Depreciation3%

Technological services3%

Other personnel expenditure3%

Contract work irrecoverable2%

Accommodation4%

Professional assistance7%

Recruitment costs1%

Other operating costs4%

S&T Recoverable 7%

S&T Recoverable

Professional assistance

Accommodation

Depreciation

Technological services

Other personnel expenditure

Contract work irrecoverable

Recruitment costs

Other operating costs

Staff cost

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3.2 Analysis of other key cost drivers (cont.)

The other key cost drivers in relation to revenue are as follows:

Budget

06'07 07'08 08'09 09'10R'000 R'000 R'000 R'000

S&T Recoverable (42,098) (41,897) (53,403) (74,815) Professional assistance (34,613) (45,397) (58,227) (79,737) Accommodation (29,926) (37,068) (51,907) (47,970) Depreciation (15,928) (21,011) (20,564) (28,131) Technological services (13,282) (14,364) (21,814) (32,616) Other personnel expenditure (13,799) (22,650) (14,403) (35,521) Contract work irrecoverable (6,374) (16,525) (12,062) (18,120) Recruitment costs (5,277) (7,759) (10,208) (6,991) Other operating costs (37,210) (37,264) (52,054) (46,802) Total Expenditure (198,507) (243,935) (294,642) (370,703)

Revenue 893,750 1,108,899 1,375,925 1,706,776

Other total expenditure as a % of Revenue 22% 22% 21% 22%

Actual

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3.3 Contract work creditors

– AGSA allocates work to contract work creditors (CWCs) which enables it to fulfill its audit obligations.

– There is no mark-up on contract work allocated, i.e. the auditee is charged the equivalent amount that the AGSA is charged by the contract work creditor.

– While this enables the AGSA to fulfill its audit obligations and make a contribution to the transformation of the audit profession in the country, it impacts the AGSA’s bottom line due to a sacrifice of contribution to overheads (no mark-up).

– The AGSA is committed to reducing vacancies, which is evident in the decrease in CWCs in relation to total income as per the table below:

Budget06'07 07'08 08'09 09'10R'000 R'000 R'000 R'000

Revenue 893,750 1,108,899 1,375,925 1,706,776

Contract work revenue 299,872 417,747 551,621 507,432

Contract work revenue as a % of revenue 34% 38% 40% 30%

Actual

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4. Self-funding model

– The AGSA is self-funded through fees charged to auditees.– The self-funding model is the funding model adopted by the AGSA.– Funds are required by the AGSA for:

• financing fixed assets• financing working capital.

– In order to achieve the above, the AGSA needs to make a surplus of between 4% and 6%. However, due to the inherent limitations of the old funding model, the AGSA could only budget for a 0,6% surplus for 2008-09.

– As a result, the AGSA has reported recurring deficits for the past few years as follows:• 2006-07 (R1 778 000)• 2007-08 (R8 301 000)• 2008-9 (R16 097 000) (However, after adjusting for the National Treasury

grant [R33,5 million] and performance bonus written back to income [R9 million], the deficit increases to R58,613 million)

– If this trend were to continue, the effect would eventually have been bankruptcy.– Management therefore commenced with investigations regarding a funding model.– This resulted in a presentation to SCoAG on 12 June 2008. – This presentation has been updated with current information and is now presented to

you.

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5. Presentation made to SCoAG on 12 June 2008

Background:• The AGSA is mandated to provide audit services to the public sector.• The AGSA is almost completely self-funded by fees secured from auditees. • Fees are based on time spent on engagements calculated at tariffs linked to

staff levels and rates of pay.• A range of factors have led to a current suboptimal funding situation.

The problem:• An increasing proportion of income is linked to a capped 4% p.a. increase,

whereby CPIX is 10,4%.• The working capital model compounds the impact of funding restrictions.• Actual fee-earning staff numbers who enable overhead recoveries have been

lower than budgeted.• Debtor collections are deteriorating.

The impact:• The AGSA has reported recurring deficits.• Cash resources are deteriorating – reserves are being used to fund ongoing

operations.• Operating and capital expenditure has been curtailed in response.• The AGSA’s ability to deliver on its mandate and achieve its strategic

objectives may become threatened.

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The process followed:• Defined the problem and its associated causes.• Benchmarked the AGSA against other Supreme Audit Institutions (SAIs).• Evaluated alternative funding options.• Consulted internally and externally.• Selected a preferred option.

The preferred option: Retain the current method of fee recovery from auditees with market-related annual tariff increases.

• Remove constraints on tariff model and re-introduce a mark-up factor based on direct costs.

• Allow a “catch-up” tariff increase in 2009-10.• Allow market-related increases based on direct cost increases.• Continuously re-evaluate the mark-up factor based on the relationship between direct

and overhead costs.• Increase the allowable surplus to between 4% and 6%.

Motivation:• Retains and ensures the AGSA’s independence.• Ensures business sustainability by:

• generating of adequate surpluses for capital expenditure and strategic initiatives.

• enabling funding of vacancy contingencies• supporting the working capital model• enabling funding of self-initiated projects• Cross-subsidising non-paying debtors.

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6. Issue

The AGSA is currently experiencing a decline in its funding position for the following reasons:

• In an effort to minimise the national cost of auditing, limitations were placed on tariff increases applied to a range of senior staffing bands. This has resulted in a “capping” of certain tariff increases to 4% while the current CPIX is 10,4%. As salaries adjust upwards, an increasing portion of revenue falls within the “capped” tariff ranges.

• Difficulties are experienced in collecting fees from financially strapped local authorities, resulting in increases in bad debts and a growing arrears debtors book.

• The scarcity of appropriately qualified audit resources generally has resulted in higher-than-anticipated vacancies and a consequent outflow of work to external audit firms from which no contribution to fixed costs is recovered.

• The surplus margin is insufficient to cover ongoing working capital and capital expenditure requirements.

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7. Key financial indicators – Performance vs. budget

Actual BudgetBudget Actual Budget Actual Budget

Revenue 893,750 875,466 1,108,899 1,013,230 1,375,925 1,292,642

Own hours 559,643 63% 578,348 66% 656,197 59% 700,722 69% 771,701 56% 857,097 66% Note 1Contract work 299,872 34% 248,046 28% 417,747 38% 250,525 25% 551,621 40% 368,302 28%Subsistence and travel 34,235 3% 49,072 6% 34,955 3% 61,983 6% 52,603 4% 67,243 5%

Direct audit cost (658,136) 74% (603,724) 69% (829,829) 75% (802,688) 79% (1,069,668) 78% (901,273) 70%

Own hours (316,166) 35% (306,606) 35% (370,658) 33% (483,082) 48% (464,644) 34% (465,421) 36%Contract work (299,872) 34% (248,046) 28% (417,274) 38% (250,525) 25% (551,621) 40% (368,302) 29%Subsistence and travel (42,098) 5% (49,072) 6% (41,897) 4% (69,081) 6% (53,403) 4% (67,550) 5%

Gross Profit 235,614 26% 271,742 31% 279,070 25% 210,542 21% 306,257 22% 391,369 30%

Own hours GP 243,477 44% 271,742 47% 285,539 43% 217,640 32% 307,057 40% 391,676 46%

Other Income 12,168 1% 10,278 1% 14,020 1% 7,036 1% 54,277 4% 8,344 1%

Overheads (249,560) 26% (249,809) 27% (301,391) 25% (203,419) 20% (376,631) 27% (391,354) 30%

Net (Deficit)/Surplus for the year (1,778) 0% 32,211 4% (8,301) -1% 14,159 1% (16,097) -1% 8,359 1%

Note 2

Note 2 R'000 Note 1 R'000Deficit for the year (16,097) The negative variance is explained as follows;

Adjustment for non - recurring items: (134,396) Other income - National Treasury (33,516) 35,000Performance bonus (9,000) Favourable volume 4,000

Adjusted deficit (58,613) 10,000(85,396)

Favourable rate

Adjustment (non audit staff)

2008-092007-08

Unfavourable vacancy

2006-07Audited R'000

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Closing cash balances – The AGSA’s funding position has been deteriorating annually until March 2009. The improvement in the year 2008-09 was due to a grant of R90 million received from National Treasury. During 2009-10, the cash balance is expected to improve due to the new funding model introduced in April 2009.

7.1. Key financial indicators – Movement in cash & cash equivalents

Opening (R'000)

Closing (R'000)

Change (R'000) %

2004 / 05 147,232 156,508 9,276 6%2005 / 06 156,598 165,431 8,833 6%2006 / 07 165,431 138,594 (26,837) -16%2007 / 08 138,594 117,318 (21,276) -15%2008 / 09 117,318 180,838 63,520 54%2009/10 180,838 228,058 47,220 26%

Cash & cash equivalentsFinancial

year

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8. Drivers – “Capping” of tariffs

In the financial year 2008-09, 44% of own hours income will be subject to a year-on-year increase of only 4% (CPIX = 10,4%) due to the application of tariff capping.This has contributed to the decline in

budgeted surplus margin to 0,6%.

Number of staff

impacted

Own Hours budget

impacted (R'000)

% Own hours inome

2004 / 05 22 16,240 4%2005 / 06 27 21,574 4%2006 / 07 106 99,094 17%2007 / 08 220 197,739 28%2008 / 09 397 381,408 44%

Financial year

Capping Impact

Financial year

Total audit income R'000

Own hours income R'000

Own hours as % of total

Surplus / (Deficit) R'000

Surplus ratio (audit income)

Surplus ratio (Own hours)

2004 / 05 624,275 456,647 73% 36,900 5.9% 8.1%2005 / 06 712,308 510,925 72% 43,764 6.1% 8.6%2006 / 07 893,750 559,643 63% (1,778) -0.2% -0.3%2007 / 08 1,108,899 656,197 59% (8,301) -0.7% -1.3%2008 / 09 1,375,925 771,701 56% (16,097) -1.2% -2.1%2009-10 (Budget) 1,706,776 1,124,529 66% 65,984 3.9% 5.9%

Budget

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8.1 Drivers – Demonstration of incremental impact of tariff capping

The table below sets out a hypothetical example demonstrating the annual impact of the current application of the tariff determination mechanism. The limitations which have been applied are as follows:

• No new upper levels created

• Tariff increases limited to 4% per annum.

All staff on Level A only increase revenue at 4%. The impact is cushioned by staffing progressing up levels until such time as the upper level is reached.

YearBand & Level Package

No of Staff

Std recoverable

Hours Tariff Revenue

Revenue %

increaseYear 1 A 30 + 2 100 100.00 20,000

B 20 -30 3 100 90.00 27,000C 10 - 20 4 100 80.00 32,000

79,000

Year 2 A 30 + 5 100 104.00 52,000B 20 -30 2 100 93.60 18,720C 10 - 20 2 100 83.20 16,640

87,360 10.6%

Year 3 A 30 + 6 100 108.16 64,896B 20 -30 3 100 97.34 29,203C 10 - 20 0 100 86.53 0

94,099 7.7%

Year 4 A 30 + 9 100 112.49 101,238B 20 -30 0 100 101.24 0C 10 - 20 0 100 89.99 0

101,238 7.6%

Year 5 A 30 + 9 100 116.99 105,287B 20 -30 0 100 105.29 0C 10 - 20 0 100 93.59 0

105,287 4.0%

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8.2 Drivers – Negative cash flow profile

AG Cash flow profile 2008-09

Salaries-651

Interest8

Creditors-228 Contractors

-368

Capex-50

Audit Income1,294

-1,500

-1,000

-500

0

500

1,000

1,500

-15 0 15 30 45 60 69

Days from month end

R M

illio

m

Fifty percent of working capital outflows occur 84 days prior to debtor receipts. The extended duration of debtor collections negatively impacts working capital.

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9. Compounding factor - Vacancies

Vacancies in the 2007-08 year have exceeded budget by 180%.

A vacancy rate of 14% in 2008-09 would equate to a negative bottom line impact of R21,8 million due to the under-recovery of fixed overheads.

The breakeven vacancy rate for 2008-09 is 10,5%.

Budget Actual2007-08 5% 14%2008-09 8.3% 15.1%

Vacancy PercentageFinancial year

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9.2 Compounding factor – Debtors and bad debts

Financial year

Trade Debtors R'000

2004 / 05 624,275 124,249 11,899 1.9% 552005 / 06 712,308 149,281 13,582 1.9% 502006 / 07 893,750 184,005 13,520 1.5% 552007 / 08 1,108,899 225,204 20,290 1.8% 692008 / 09 1,375,925 323,305 25,000 1.8% 862009/10 - Budget 1,695,922 355,636 28,000 1.7% 40

Total audit income R'000

Bad debts provision (R'000)

Provision as % of total audit income

Average debtors days

Local authorities 32% 111 104 -6% 75 -28%Provincial government 26% 34 37 9% 35 -5%National government 20% 10 18 80% 15 -17%Statutory entities 22% 58 38 -34% 35 -8%Total 100% 69 86 25% 40 -53%

2009 /10

Debtors Days

% Change

% ChangeDebtor Group

% of Debtors Value 2007 / 08 2008 / 09

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9.3 Comparison of debtor ageing over past four financial years

Local Authorities Statutory EntitiesTotal 30 days 60 days over 120 days Total 30 days 60 days over 120 daysR'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000

2005/2006 50,809 27,922 12,923 9,964 2005/2006 20,038 14,055 2,183 3,800 2006/2007 72,829 37,679 17,204 17,946 2006/2007 31,344 22,256 2,475 6,613 2007/2008 100,696 47,483 25,740 27,473 2007/2008 35,281 26,258 5,182 3,841 2008/2009 104,651 45,123 36,514 23,014 2008/2009 40,943 28,054 6,596 6,293

Provincial Government OtherTotal 30 days 60 days over 120 days Total 30 days 60 days over 120 daysR'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000

2005/2006 33,378 31,572 3,298 (1,492) 2005/2006 4,854 (14,973) 4,043 15,784 2006/2007 38,693 33,550 3,914 1,229 2006/2007 3,225 (5,738) (431) 9,394 2007/2008 68,002 48,761 11,754 7,487 2007/2008 1,535 (1,518) 1,883 1,170 2008/2009 82,895 70,472 4,996 7,427 2008/2009 30,174 25,285 1,850 3,039

National GovernmentTotal 30 days 60 days over 120 daysR'000 R'000 R'000 R'000

2005/2006 40,202 39,845 52 305 2006/2007 37,915 30,951 6,927 37 2007/2008 49,690 45,748 1,836 2,106 2008/2009 64,642 52,235 11,114 1,293

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10. Options – Process to date

The following process has been followed regarding the analysis of the problem and the evaluation of alternative options:

• Brought funding problem to the attention of SCoAG on 1 October 2007 and the initiative to evaluate the way forward was endorsed.

• Analysed current tariff model and identified limitations and compounding factors.

• Identified probable options to resolve the funding problem.• Reviewed options with AGSA special interest group.• Minister of Finance and Accountant-General briefed in principle as to the

purpose of the initiative.• Engaged with selective management of National Treasury to understand

applicability of options.• Presented preliminary funding model considerations to SCoAG.• Benchmarked global SAI funding models.• Finalised document and one-off non-refundable grant request.• Received AGSA Exco approval.

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Basis of Funding Country Treasury approval Implied assessment of independence

No auditee charging USA No High

Netherlands Yes Moderate (1)

Japan No Moderate (2)

Morocco Yes Low (3)

Parliamentary apportionment with minor charging

Canada Yes Moderate (4)

Norway No High

Australia No High

Ghana ? Moderate ? (5)

Parliamentary approval with more significant charging

United Kingdom No High

New Zealand No High

11. Global benchmarking

(1) Initiated discussions to ensure that the AG has direct access to Parliament in terms of motivating budget submissions and not only directly through the treasury.

(2) If Cabinet reduces estimated expenditure of Diet, mechanism exists for Diet to correct the amount of expenditure pertaining to Board of Audit.

(3) Indicated need for change from funding and reporting via treasury to funding and reporting directly to parliament. Preliminary agreement reached overturned due to “political crisis”

(4) Completing a 2 year pilot in 2008 in terms of establishing a parliamentary oversight committee to arbitrate between the AG and its treasury

(5) Pending constitutional instrument to provide for a fee-charging regime to be used by AG.

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11.1 Global benchmarking

Conclusion

The analysis highlights a common theme throughout the majority of democracies of the need to ensure and improve financial independence. The analysis also supports the funding model options of obtaining funding from parliament, charging auditees directly and combinations thereof.

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12. Options considered

Four options were considered in detail. These are:

1. Retain the current method of fee recovery from auditees with market related annual tariff increases.

2. AG budget included within Parliament’s budget vote3. Recover audit fees from relevant Treasury or Department of Provincial and

Local Government.4. Recover direct cost fees from auditees and fund indirect costs via a

Parliamentary allocation.

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The results of the process are summarised in the following table*:

Decision Criteria

No DetailCharge auditee Parliament

Charge & Treasury collection

Charge/ Parliament hybrid

1 Assures financial viability of the AG

2 Simplicity of the solution and its operation

3 Assures the independence of the AG

4 Transparency of costs for ext stakeholders

5Flexibility to dynamically manage changes in demand and supply.

6 Promotes efficiencies in the cost of auditing

7Promotion of rational economic behavior within both the AG and its auditees.

8 Minimisation of cross subsidization

Average

Option alignment to criteria

Note – * shaded area reflects degree of alignment with the criteria. Each complete quadrant represents 25%.

13. Evaluation of options

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14. Recommendations

Based on the criteria, it is our opinion that, commencing 1 April 2009, Option 1 (Retain the current method of fee recovery from auditees) should be adopted subject to the following:

1. Tariffs should be recalculated to:

• remove tariff caps

• re-introduce symmetry

• factor in reasonable vacancies

• adjust budgeted recoverable hours

2. Market related tariff increases should be introduced in subsequent years.

3. An unconditional grant should be made available to relieve the funding position of the AG until the introduction of these recommendations.

4. The permissible budget surplus should be increased from 3 percent to between 4% and 6%

Should these principles not be accepted then the recommendation would be for Option 2 - AG budget included within Parliament’s budget vote

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May 2008

Detail Total NPVDiscount

rate2005/06

Uncollectable debtors 2005/06 2,207,805 2,695,785 10.50%

2006/07Uncollectable debtors 2006/07 8,384,230 9,264,574 10.50%

2007/08

2007/08 actual (unaudited) operating cash flow shortfall21,276,000

Reserves for future liabilities 25,274,273Uncollectable debtors 2007/08 14,938,190Capital expenditure postponement to aleviate funding position 4,545,320Total for 2007/08 66,033,782 66,033,782

2008/092008/09 forecast operating cash flow shortfall after adjustment for timing of component cash flows. 15,067,537Reserves for future liabilities 27,004,180Uncollectable debtors 2008/09 12,939,810Capital expenditure postponement to aleviate funding position 4,073,212Total for 2008/09 59,084,739 56,137,519 5.25%

Contingency (2008/09)Anticipated loss of contribution due to anticipated vacancy rateexceeding budgeted vanancy rate (assumed 14% vacancy - average for 2007/08) 21,765,462 20,679,774 5.25%

157,476,018 154,811,434

Note 1

Note 2The discount rate is the weighted average PIC investment rate of return

Revised request for unconditional grant required to address known and committed or estimated future expenditure not funded within the current funding model

Includes increased provision for leave pay and post retirement medical aid and provision for the INCOSAI conference to be hosted by the Auditor General (R45 million provided over 5 years)

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15. Way forward

The preferred funding option will be recommended after completing the following:

• Interact with National Treasury at DG level• Interact with Minister of Finance• Finalize document and presentation to SCoAG – 12 June 2008

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16. Impact of new funding model

• The new funding model was approved by SCoAG for implementation on the 1 April 2009.

1. Capping removed and charge out rates are now based on direct salary cost marked up by agreed factor.

2. A once-off non-refundable grant of R154 million to address working capital and Capex requirements (actual amount received was R90 million in January 2009).

3. Once-off tariff increase of between 25.9% and 30.9%.

4. The impact of the above changes is a 4% budgeted surplus for 2009/10.

5. The 4% surplus will contribute about 91% to the Capex requirement for the 2009-10 financial year (surplus R52 million; Capex R57 million). However, expenditure on capital expenditure would be subject to cash flow availability.

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17. New funding model

2009 - 10 2009-10

Budget Forecast

Revenue 603,688 1,706,776 1,695,922

Own hours 439,616 73% 1,124,529 66% 1,134,249 67%Contract work 147,815 24% 507,432 30% 489,552 29%Subsistence and travel 16,257 3% 74,815 4% 72,121 4%

Direct audit cost (344,076) 57% (1,129,040) 66% (1,121,053) 66%

Own hours (179,923) 30% (546,793) 32% (559,164) 33%Contract work (147,815) 24% (507,432) 30% (489,552) 29%Subsistence and travel (16,338) 3% (74,815) 4% (72,337) 4%

Gross Profit 259,612 43% 577,736 34% 574,869 34%

Own hours GP 259,693 59% 577,736 51% 575,085 51%

Other Income 2,223 0% 10,284 1% 13,808 1%

Overheads (120,873) 20% (522,036) 31% (503,633) 30%

Net (Deficit)/Surplus for the year 140,962 23% 65,984 4% 85,044 5%

ACTUAL YTD JULY 2009-10

New Funding Model - Unaudited R'000Unaudited R'000

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18. Working capital management (way forward)

• Negative working capital is driven by - Historical deficits and poor cash collections

• Cash collections - Challenges have been experienced in cash collections especially with local government and statutory auditees. - We have introduced the following interventions to overcome these challenges:

• Billing will be done twice a month to improve frequency of collections in the foreseeable future with effect from October 2009.• Three debt collectors have been employed to pursue collections on a full-time basis.• Interest will be charged on all overdue accounts (accounts older than 31 days) using prime interest rate as from September 2009.• Executive management are in discussions with National Treasury on a workable arrangement to ensure fees are paid on time.• Project Clean Audit 2014 which has been launched by the Department of Cooperative Governance and Traditional Affairs to ensure that all municipalities achieve unqualified audit opinions on their annual financial statements will hopefully ensure that payment of AGSA accounts will be taken seriously.

- We expect the above interventions to have the desired impact and this is evident in our cash-flow budget for 2009/10.

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19. Conclusion

• Based on the budget 2009-10 and the actual results for the period April 2009 to July 2009, there is evidence indicating that the new funding model would have the desired financial impact.

• We are of the view that with the current cost control measures in place, the AGSA will maintain its cost ratio to revenue and is therefore expected to achieve the budget surplus of R65,984 million for 2009-10.

• The AGSA will have to monitor the direct cost/indirect cost relationship going forward, as the funding model calculates revenue based on direct cost marked up by an agreed factor. Any significant deviation in the relationship between direct cost and indirect cost will require the AGSA to revisit the mark-up factor.