Sinking Fund confirms quality of City’s Financial Management

The City of Johannesburg on Wednesday July 31 released a report compiled by management consultants, KMPG, on the state of the City’s sinking fund.
This underlines the City’s commitment to transparency and the right of residents and investors to have access to information about Johannesburg’s finances.
It should be noted, at the outset, that the City has the right, in terms of the Protection of Access to Information Act (PAIA) not to release operational or management reports. The decision taken to release this particular report should, therefore, not be regarded as a precedence, where all operational or management reports will in future be published, irrespective of their public interest status.

In December 2004 the City of Johannesburg expressed its intention to establish a sinking fund. Bidding process was undertaken in June 2005. The main objective was to enhance the City’s Risk Management processes; and specifically, the management of the credit default risk that might arise from the City’s liability book.
The CoJ was the first South African municipality to register a Domestic Medium Term Note (DMTN) programme and list bonds. Therefore, there was no reliable benchmark to which the market could utilize against the City’s credit. It was necessary that CoJ provides some credit enhancement on its debt. This credit enhancement was also envisaged to enable CoJ to raise longer dated bonds at relatively fair prices.
The sinking fund is, therefore, a programme to set aside funds that shall be used to redeem the City’s possible debt obligations. The fund is comprised of the following components: Fund Assets, Fund Liability and Future Contributions. The redemption fund should be understood within the context that it seeks to match assets and contributions with the fund’s liabilities.
During 2009, the Auditor-General (AG) appointed KPMG to perform an audit of the City of Johannesburg’s Treasury (COJT) in accordance with agreed upon procedures, which included:
 Ascertain the existence, accuracy and valuation of COJT trial balance, and
 Evaluate the design, implementation and operating effectiveness of the treasury environment.

In addition to this mandate, the COJT requested KPMG Financial Engineering Group (FEG) to include an independent valuation of the fund, audit and assess the investment vehicle and all associated risks. The specific instructions from the COJT were to:
 Perform a fund audit for the periods ended 30 June 2006/07/08 and 09;
 Address different valuation methodologies of the financial instruments;
 Recommend strategies regarding the management of the fund, and
 Comment on the fee structure.
The City maintains that it is well within its rights to refuse release of this report. Section 44(1) of PAIA states that an information officer may refuse a request for information if the record contains “an opinion, advice, report or recommendation obtained or prepared for the purpose of assisting to formulate a policy or take a decision in the exercise of a power or performance of a duty conferred or imposed”.
Since the KPMG mandate was to advise management on its oversight functions of the fund and inform the City about the fund’s operations, it would have been in line with the provisions of PAIA and best practice in financial management not to release the report.
However, a decision was taken to release this summary in line with the City’s commitment to transparency and to facilitate a greater understanding of the City’s finances among the public and investors. The KMPG report raised the following issues in terms of its mandate to advise the City on ways to improve its fund oversight:

 Failure to pay contributions to the fund by the CoJ in 2008 – It is a well-established fact that the City, as well as many other organisations, was experiencing liquidity constraints during the height of the global economic downturn in 2008. This resulted in City prioritising other urgent service delivery obligations and delaying its fund contributions during this period. Since then, the City has been in sound financial position and contributes to the fund regularly.
 Valuation of CLNs (Credit Linked Notes) – The fund manager used BESA- quoted prices to value this class of instruments. KPMG cited a limitation of this method as it does not account for credit spread movements overtime. The Fund, however, no longer invests in these instruments.
 Fund Fee Structure – KPMG recommended that the City should consider calculating the period out performance (POP) on a rolling basis, to ensure claw back to under-performance. These recommendations were set to take course with the new contract negotiations.
 Benchmarking – the contract was silent on the possible inability of the fund to redeem its liabilities. KPMG recommended that, although proper measures are in place to avoid such occurrence, it still need to be incorporated in the contract.

The City prides itself on the quality of its financial risk innovation – through the Liability Redemption Fund. It has, thus far, managed to redeem CoJ01 and CoJ03 with a total of R1, 7 billion from the fund. The fund, as at 30 June 2013 was valued at R 2, 6 billion. It should also be emphasised that, at no stage, have there been any unaccounted for monies from the fund. The release of this report confirms Johannesburg’s commitment to transparent governance and strengthen the confidence of the public and investor community in the City’s leadership and financial management.
The report will show that the assertion by the Democratic Alliance (DA) that R1 billion has been siphoned off from the fund since 2006, the year in which Regiments took over the fund is unfounded. The onus is now on the DA to produce proof to these unfounded and damaging allegations.

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