FINANCIAL AND INSTITUTIONAL ANALYSIS AND TECHNICAL ASSISTANCE PLAN FOR THE GREATER AMMAN MUNICIPALITY FINANCIAL AND INSTITUTIONAL ANALYSIS AND TECHNICAL ASSISTANCE PLAN FOR THE GREATER AMMAN MUNICIPALITY 10th August 2017 Contents EXECUTIVE SUMMARY .................................................................................................................................................... 1 1. INTRODUCTION ........................................................................................................................................................ 5 2. FINANCIAL ANALYSIS ............................................................................................................................................. 7 2.1 Introduction to the GAM’s accounting and financial reporting ............................................................................ 7 2.2 Financial profile of GAM in 2017 ........................................................................................................................ 8 2.3 Financial history of GAM: operations ................................................................................................................. 8 2.4 Financial history of GAM: capital investments ................................................................................................. 10 2.5 Excessive debt burden .................................................................................................................................... 12 2.6 Classification of receipts and disbursements ................................................................................................... 13 2.7 Potentially unreliable medium- and long-term cash flow forecasts .................................................................. 14 3. INSTITUTIONAL ANALYSIS ................................................................................................................................... 16 3.1 Introduction: city administration and city strategy ............................................................................................ 16 3.2 City governance ............................................................................................................................................... 18 4. IMPLICATIONS OF THE PEFA ASSESSMENT ..................................................................................................... 20 4.1 Results of the PEFA assessment .................................................................................................................... 20 5. CONCLUSIONS AND RECOMMENDATIONS - FINANCIAL & INSTITUTIONAL STRATEGY ............................. 23 5.1 Strategic strengths, weaknesses, opportunities & threats (SWOT) ................................................................. 23 5.2 Recommendations for a GAM financial and institutional reform strategy ........................................................ 24 6. RECOMMENDATION - TECHNICAL ASSISTANCE PLAN .................................................................................... 25 6.1 Introduction ...................................................................................................................................................... 25 6.2 SUB-PROGRAMME 1: STRATEGY-LED PLANNING & BUDGETING ........................................................... 25 6.3 SUB-PROGRAMME 2: STRATEGY-LED ORGANISATIONAL DEVELOPMENT ........................................... 26 6.4 SUB-PROGRAMME 3: REPORTING ON STRATEGY & OUTCOMES .......................................................... 27 6.5 INDEPENDENT CREDIT RATING .................................................................................................................. 27 7. CONCLUSION ......................................................................................................................................................... 28 ANNEXURE 1: FINANCIAL & INSTITUTIONAL REFORM AND TECHNICAL ASSISTANCE PLAN ............................ 29 ANNEXURE 2: CASH INFLOWS AND OUTFLOWS 2014 - 2017 ................................................................................... 38 FINANCIAL AND INSTITUTIONAL ANALYSIS AND TECHNICAL ASSISTANCE PLAN FOR THE GREATER AMMAN MUNICIPALITY EXECUTIVE SUMMARY The Greater Amman Municipality (GAM) is a high-capacity municipality with many financial and institutional strengths. It is uniquely positioned within Jordan, has a relatively high institutional capacity (including having developed a five-year plan and a long-term financial forecast), generates significant annual operating surpluses, and has a very good relationship with its major banker. But GAM also faces significant challenges: the influx of refugees poses significant service delivery and financial risks; it is already over-borrowed; one-year, cash-flow based budgeting is a significant strategic weakness; it is not clear than the annual cash budget supports the five year plan; and the long-term financial forecast is not sufficiently central to annual budgeting, so that public transport and other investments can be undertaken without fully understanding of their financial implications. GAM has therefore embarked upon an exercise whose overarching objective is for GAM to become financially sustainable, and to be able to cost-effectively raise adequate resources to fund its capital investment plans. This requires that GAM obtain an investment-grade credit rating from international credit rating agencies. Whereas traditionally GAM has relied primarily on a Revenue Contribution to Capital Outlay (RCCO) to fund its capital expenditure, in future it will need to make greater use of debt financing. In order to prepare for this, GAM seeks to start work on a variety of initiatives which will improve its financial management and credit-worthiness. In due course it will seek a credit rating from an internationally-recognized rating agency and thereafter approach the capital markets to finance its capital investment programme (CIP). GAM has therefore obtained two separate but interlinked assessments: (a) A Public Expenditure and Financial Accountability (PEFA) Assessment, and (b) A Financial & Institutional (F&I) Analysis These assessments have been used to propose a Financial and Institutional Reform Plan for GAM, and also an appropriate programme of technical support. Public Expenditure & The purposes of this report are therefore Financial & Institutional Financial Accountability (F&I) analysis (PEFA) assessment i. to set out a financial and institutional analysis of the Greater Amman Municipality (GAM); ii. to summarise the main conclusions of the separate Public Expenditure and Financial GAM Financial and Accountability (PEFA) assessment which took Institutional Reform Plan place in late 2016 and early 2017; iii. to suggest an integrated Financial and Institutional Reform Plan for GAM, to deal with issues raised by both assessments; and Technical Assistance iv. to suggest an appropriate Technical Assistance Plan for GAM Plan, to support GAM to implement its Financial and Institutional Reform Plan. 1 The GAM PEFA assessment was conducted during late 2016 and early 2017. The rationale for such assessments is that effective institutions and systems of public financial management play a critical role in the implementation of policies concerning development and poverty reduction. In general GAM scores highly on many aspects of the PEFA scorecard, especially in areas over which GAM has the most direct control. However, there are also areas where GAM could improve its financial management performance, particularly in respect of the asset register (where an initiative is already underway); medium-term budgeting and strategic alignment; standard operating procedures across a number of areas; and some aspects of internal and external auditing and reporting. The main results of the financial and institutional assessment of GAM, which was conducted during early 2017, are: Strengths Weaknesses • Amman completely dominates the national • One-year, cash-flow based budgeting is a urban hierarchy, which accounts for the significant strategic weakness; special relationship that GAM has with the • It is not clear than the annual cash budget centre of national government, and also for supports medium-term (five-year) plan; its unusual governance arrangements; • the long-term financial forecast is not • Generally sound organizational sufficiently central to annual budgeting; arrangements and good professional capacity, a demonstrable history of restraint in personnel matters, and a sound approach to performance management; • A medium-term (five-year) plan, and a long- term financial forecast, are in place. Opportunities Threats • The financial structure allows for very large • General urbanisation exacerbated by the operating surpluses, from which GAM has refugee crisis requires rapid increases in tended to directly finance substantial capital service delivery capacity spending; • GAM is significantly over-borrowed by all • GAM has a close relationship with its major conventional measures; banker, from which apparently unlimited • The medium- and long-term financial loans can be obtained; implications of capital projects such as the • GAM has substantial fixed assets (although BRT are not well understood. these are not professionally valued). • Personnel costs are rising as a percentage of operating outlays The financial and institutional assessment therefore also showed generally good results, but unlike PEFA this assessment involved the development of specific recommendations to GAM (which also incorporated issues highlighted by the PEFA assessment). These recommendations have been discussed with senior management of GAM during three visits to the municipality in February, April and August 2017 before being included in this report. It is proposed that GAM embark upon a programme to further strengthen its financial and institutional performance. The over-rising purpose of the programme is to prepare GAM for an independent credit rating, which in turn would allow the municipality to transition to a sustainable, independently debt-financed, capital investment programme. This financial and institutional reform programme would consist of three sub-programmes: 1) Strategy-led planning & budgeting: to ensure that GAM has the ability to plan and budget to achieve intended outcomes, and to weather financial turbulence in future. 2 2) Strategy-led organisational development: to ensure that GAM has the organisational and human capacity necessary to achieve its objectives. 3) Reporting on strategy and outcomes: to improve GAMs financial, service delivery and sustainability reporting to the public. The intention of this programme, supported by appropriate technical assistance, is for GAM to address the findings of PEFA and FIA. The over-rising purpose is to prepare GAM for an independent credit rating. While an independent credit rating is usually obtained by the entity itself, as a preparation to this final step, it is proposed to support GAM to obtain a shadow credit rating. This is proposed as a separate, final activity, for which the above three sub-programmes prepare GAM: Shadow credit rating: to obtain a shadow credit rating from a recognized international rating agency. The shadow credit rating achieved by GAM will indicate the effectiveness of the financial and institutional reform programme and its associated technical assistance programme and will be a useful step prior to the actual credit rating process. The details of these proposed sub-programmes need to be developed further in terms of activities, timelines and budgets. This will be done after further detailed discussions with GAM. The following graphic provides further detail on the projects which make up each proposed sub- programme: 2. Strategy-led organisational 3. Reporting on strategy and 1. Strategy-led budgeting development outcomes 2.1 Review org structure, perf. 1.1 Introduce medium-term budgeting 3.1 Valuation of property assets management & personnel numbers 1.2 Improve the planning & budgeting 2.2 Manage changes to existing 3.2 Improve public access to key process arrangements fiscal information 1.3 Strengthen long-term financial 3.3 Prepare an environmental 2.3 Improve systems and procedures forecasting sustainability report 2.4 Prepare and adopt Standard 3.4 Improve auditing & reporting 1.4 Review implications of BRT Operating Procedures 2.5 Strengthen procurement & 1.5 Improve financial resilience contract management 1.6 Raise debt more competitively 3 The objectives of the sub-programmes and their constituent projects are tabulated below: Sub-Programme Sub-Programme Projects Project objective Objective 1. Strategy-led Ensure that GAM has 1.1 Medium-term budgeting Introduce medium-term cash-flow budgets planning & the ability to plan and 1.2 Long-term financial Strengthen the long term financial forecast budgeting budget to achieve forecast intended outcomes, 1.3 Planning & budgeting Improve the annual planning and budgeting and to weather process process financial turbulence in 1.4 Implications of BRT Review the long-term financial implications of the future BRT 1.5 Financial resilience Increase ability to withstand financial constraints 1.6 Competitive debt-raising Ensure lowest debt costs 2. Strategy-led Ensure that GAM has 2.1 Personnel, structure and Ensure GAM has the personnel, structure and organisational the organisational performance performance to achieve its objectives development and human capacity 2.2 Change management Smoothly manage the transition to new to achieve its organisational arrangements objectives 2.3 Systems & Procedures To improve various financial systems and Improvement procedures 2.4 Standard Operating Document and formalise financial standard Procedures operating procedures 2.5 Procurement & contract Strengthen GAMs procurement & contract management management capacity 3. Reporting on Improve GAMs 3.1 Valuation of property Independent valuation of property assets strategy and financial, service assets outcomes delivery and 3.2 Public access to fiscal To improve public access to key fiscal information sustainability information reporting to the public 3.3 Auditing & Reporting Modernise internal audit & processes to Improvement submitting reports for external audit 3.4 Environmental Prepare environmental sustainability report sustainability reporting Shadow credit To obtain a shadow 4.1 Obtain a shadow credit Good result, which would allow GAM to transition rating credit rating as a rating from an international to a sustainable, independently debt-financed, prelude to obtaining credit rating agency capital investment programme. an independent credit rating Despite the significant service delivery, debt management and governance challenges it faces, GAM is a municipality with institutional depth and leadership strengths, and appears to be well- positioned for success. A technical assistance programme of the scale suggested is therefore appropriate and likely to be a good investment. 4 FINANCIAL AND INSTITUTIONAL ANALYSIS AND TECHNICAL ASSISTANCE PLAN FOR THE GREATER AMMAN MUNICIPALITY 1. INTRODUCTION Greater Amman covers an area of 1,680 square kilometers and is home to approximately 2.2 million people excluding refugees, and possibly 4 million people including refugees. The city accounts for more than half the population of Jordan, as well as 55% of total employment and 80 percent of industrial activity. This demographic and economic dominance within the national urban hierarchy is furthermore increasing steadily, as a result of ongoing urbanization, and recently especially due to large numbers of refugees from Syria, Iraq and Palestine. Amman has been growing extremely rapidly for many years. The population of the Amman- Ruseifa-Zarqa conurbation has been growing at more than 4% per year since 1948, and apart from general urbanization has had to cope with two substantial waves of refugees: Palestinians after 1948 and Syrians now1. The land area for which the Greater Amman Municipality has been responsible has through amalgamation with smaller local governments grown steadily, from 72 km² in 1983, to 144 km² in 1994, 226 km² in 2005, and 700 km² in 20112. It has substantial service delivery responsibilities, notably roads, bridges and underpasses; street lighting and traffic management; refuse removal & disposal; public transport, agriculture; public markets, social and cultural services, and spatial planning, economic development and business licensing. It currently has a staff complement of some 22,000 people. His Majesty King Abdullah II, at the Leaders’ Summit on Refugees, on the margins of the 71st UN General Assembly in New York on 20 September 2016, powerfully described the challenge (and the solution), as follows3: For many years, our country’s security and stability and our citizens’ generous compassion have led desperate refugees to our doors. In the past five years the Syrian crisis has sent Jordan’s burden skyrocketing. Some 2.5 million Syrians have crossed into Jordan since 2011. ... Across my country, Jordanians are suffering. No one is justified in questioning our commitment and sacrifices. The economic and social impact has shocked every sector, every community; and it has set back the strides of our economy and has created tremendous problems in our development, job growth and debt reduction. As a collective effort, we must now adequately respond to the true expected need, the true broad impact, and the true duration of the crisis. To this end, Jordan has put forward an effective, sustainable, development-driven plan to support hosts and refugees alike. Our approach will build on international partnership, trade, and investment to create opportunities and income that both Jordanians and Syrians need. 1 ATLAS OF JORDAN, available at https://books.openedition.org/ifpo/5044?lang=de, pp 384 – 397, 2 Ibid. 3 Ministry of Planning & International Cooperation, Hashemite Kingdom of Jordan (2017): The Jordan Response Plan for the Syrian Crisis, Executive Summary, p3. 5 This growth requires the Greater Amman Municipality (GAM) to expand its municipal service delivery (to meet increased demands); to increase efficiency (since the resources available are not increasing as fast as the demand for services); and to increase accountability (as a means of ensuring effective and efficient use of resources to provide services). Whereas traditionally GAM has relied primarily on a Revenue Contribution to Capital Outlay (RCCO) to fund its capital expenditure, in future it will need to make greater use of debt financing. In order to prepare for this, GAM seeks to start work on a variety of initiatives which will improve its financial and institutional performance and lead to an investment-grade credit rating. GAM will thereafter approach the capital markets to finance its capital investment programme (CIP). The rationale for this approach include the following: (a) an annual credit rating by a reputable agency will obviate the need for repeated credit assessments by individual donors and lenders; (b) an annual credit rating by a reputable agency will allow GAM to tap new financial markets which might otherwise be deterred by the need to conduct their own credit assessments, such as the bond markets, including Islamic bonds; (c) although GAM appears to have a good relationship with its major banker, who appears to be happy to arrange syndicated loans on request, this is likely to be due to perception that GAM is `too big to fail’, due to its special position on Jordan. It is always wise to hold lenders at arms- length, and ensure that competitive pressures are brought to bear whenever new debt is raised. (d) an annual credit rating by a reputable agency provides important external and independent financial performance information to GAM, which would not otherwise be available. The credit rating process itself would be of value, and very different from a similar process conducted by a bank or donor which is seeking to extend a new loan. GAM has therefore obtained two separate but interlinked assessments: (a) A Public Expenditure and Financial Accountability (PEFA) Assessment, and (b) A Financial & Institutional (F&I) Analysis These assessments have been used to propose a Financial and Institutional Reform Plan for GAM, Public Expenditure & Financial & Institutional Financial Accountability and also an appropriate programme of technical (F&I) analysis (PEFA) assessment support. The purposes of this report are therefore i. to set out a financial and institutional analysis GAM Financial and of the Greater Amman Municipality (GAM); Institutional Reform Plan ii. to summarise the main conclusions of the separate Public Expenditure and Financial Accountability (PEFA) assessment which Technical Assistance took place in late 2016 and early 2017; Plan for GAM iii. to suggest an integrated Financial and Institutional Reform Plan for GAM, to deal with issues raised by both assessments; and 6 iv. to suggest an appropriate Technical Assistance Plan, to support GAM to implement its Financial and Institutional Reform Plan. This report is structured as follows: Section 2 provides the financial analysis of GAM; and Section 3 provides the associated Institutional assessment. Section 4 summarises the major results of the PEFA assessment. Section 5 suggests a GAM Financial and Institutional strategy, drawing on both the Financial & Institutional (F&I) analysis and the Public Expenditure & Financial Accountability (PEFA) assessment. Section 6 provides details of a Technical Assistance Plan which would support GAM in the suggested strategy. Finally, Section 7 offers some concluding remarks. 2. FINANCIAL ANALYSIS 2.1 Introduction to the GAM’s accounting and financial reporting GAM operates on an annual cash-flow budget, and every year prepares a comprehensive list of expected cash receipts and disbursements, as well as detailed statements of expected monthly cash receipts and cash disbursements. The annual budget is prepared using a spreadsheet, and is manually uploaded into the Oracle ERP system (which was introduced in 2012) through the General Ledger. GAM’s annual budget is submitted to the Council of Ministers for approval. The expenditure classification used in the budget and in financial reports is based on economic category only. There are two major revenue sources: property taxes, and levies and fines, which between them account for over 94% of GAM’s revenue. Similarly, financial statements are prepared on the basis of cash receipts and disbursements. Financial statements for the years 2011 to 2015 years are available and limited-scope audits have been conducted. GAM also prepares a long-term cash-flow forecast. This projects cash receipts and cash disbursements ten years into the future, i.e. to 2026. The spreadsheet in fact also contains a cash- flow history of GAM, back to 2007. Payment profiles for loans are calculated in detail over the term of the loans, and consolidated for inclusion into the long-term cash-flow forecast. GAM operates 32 bank accounts with three commercial banks; namely Housing Bank, Cities & Villages Development Bank (CVDB), and Societe Generale. All the bank accounts have internet banking facilities, which enables the GAM Treasury to determine closing bank balances and prepare daily and monthly liquidity reports. The daily liquidity report provides the closing bank balances of each account and is then summarised to reflect the net overall balance at close of business. Presently, GAM does not maintain a comprehensive fixed assets register. In-house asset management software is used to keep records of vehicles and office furniture. Assets with a purchase price of JD 300 or more are capitalised, while everything else is expensed. An initiative to obtain an independent valuation of GAM’s property assets is underway. While this information is not sufficient to permit a full financial analysis (on the basis of an income statement, a balance sheet and a cash flow statement), it does permit analysis sufficient to highlight important issues and identify certain risks. These will be outlined in the following sections. 7 2.2 Financial profile of GAM in 2017 Figure 1 provides a summary financial profile of GAM, based on budgeted operating and capital inflows and outflows for the 2017 financial year. Figure 1: Overview of budgeted operating and capital cash inflows and outlays for 2017 (JD m) OPERATING INFLOWS JD m % OPERATING OUTFLOWS JD m % Own operating revenues 275.8 93% Payroll & related 144.0 76% Operating grants 20.0 7% Operating expenses 18.8 10% TOTAL OPERATING INFLOWS 295.8 100% Other expenses 27.1 14% Operating surplus 105.8 36% TOTAL OPERATING OUTFLOWS 189.9 100% CAPITAL FINANCING JD m % CAPITAL OUTFLOWS JD m % Own capital revenues 82.6 27% Capital expenditure 224.0 73% RCCO (i.e. operating surplus) 105.8 35% Funded projects 52.5 17% Borrowing for capex 118.0 39% Expropriation of land 30.0 10% TOTAL CAPITAL FINANCING 306.5 100% TOTAL CAPITAL OUTFLOWS 306.5 100% GAM is currently conducting a valuation of its property assets: until that is complete, it will not be possible to provide an account of its balance sheets. The long-term liabilities of the municipality (all of which appear to be simple amortising loans) are as follows: • Loans and debt instruments from various domestic banks total JD 354.5 m. Most of these loans expire in 2026 (some smaller loans will however expire in 2018), and interest rates range from 4.85% up to 6.0% • Loans from international funders, such as the World Bank, Japan, AFD, and EBRD total JD 141.1 m, and will expire between 2024 and 2033. GAM also has overdraft facilities at the Housing Bank (on which an interest rate of 4.85% is charged) and at the Cities and Villages Development Bank (6.0%) 2.3 Financial history of GAM: operations The purpose of this sub-section is to offer a brief analysis of the financial history of GAM operations, to explore whether it this has any lessons for future strategic and financial planning. Figure 2 presents a summary history of operating inflows (revenues), outflows (expenditures), operating surpluses, and operating surpluses as a percentage of operating revenues (all figures expressed in current (i.e. not inflation-adjusted) millions of Jordanian dinars). A number of key analytical observations can be made: • The operating surplus is extraordinarily high by the standards applicable in many low- and middle-income countries, where municipalities typically struggle to generate any operating surplus at all. In South Africa, metropolitan municipalities are regarded as doing well to achieve operating surpluses in excess of 10%. Admittedly this comment depends upon the nature of the expenditure responsibilities and revenue sources available to municipalities in different countries. Nevertheless, the operating surpluses generated by GAM (around 58% higher than operating expenses in 2006) are very unusual. • GAM experienced a secular decline in operating surpluses between 2006 and 2012, accounted for by rapidly growing operating expenditures and a relative stagnation in operating revenues 8 (especially in 2009 and 2010). Operating surpluses were at a secular minimum of around 20% in 2011 and 2012, after which they again started to increase. Finance officials at GAM offered a number of plausible reasons for the decline in operating surplus to 2012, including the implications of the international financial crisis of 2008/9; of national government decisions on tax exemptions thereafter; and of the Arab Spring in 2011. Although requiring some elaboration, these are likely to be entirely valid: but they still do not account for the steep decline in operating surpluses between 2006 and 2008. Figure 2: GAM Financial history - operating revenues, expenditures and surpluses (current JD m) 350 70% 58% Total 300 60% operating revenue 250 50% Total 200 37% 40% operating 39% expenditure 150 30% Operating 100 20% surplus 20% 50 10% Operating surplus as % of 0 0% operating revenues • From 2013 onwards the operating surplus started to recover, reaching 37% in 2017. Medium- term projections (i.e. 2017 – 2021) suggest that no further substantial increases are expected. The operating surplus expected in future is therefore at best two-thirds of what GAM was able to achieve historically. The full implications of this episode - the decline and subsequent partial revival in operating surpluses - do not yet appear to have been thoroughly internalized by GAM. Although officials with institutional memory are able to offer general explanations for the financial trajectory followed, it will be important for GAM to properly understand the episode, to assist in future financial planning and management. For example, is it acceptable for GAM to plan for operating surpluses of around 40%, or should the municipality target surpluses at the level that were achieved a decade ago? If not the latter, why not? This is a matter which will have clear implications for strategic and financial planning in future. Whether or not a specific analysis of GAM’s financial history is undertaken, it would be wise for GAM to start to build up financial reserves against the possibility that financially difficult episodes will return again in future. When such episodes happen, it is far better to have one’s own resources to rely upon, rather than immediately to have to seek loans while in a weak financial position. A financial reserve would of course be invested and generate interest income; and the presence of such a reserve would in addition improve the credit-worthiness of the municipality, as well as strengthening GAM’s bargaining power when dealing with bankers. GAM should anyway seek to avoid reliance upon overdraft facilities: cash balances should never be allowed to fall below (say) 10 weeks-worth of cash requirements. The rules around the management of cash reserves should be set out in Standard Operating Procedures, and enforced. 9 Recommendation: GAM should take steps to improve its resilience for when financially difficult episodes happen again. Such steps would include avoiding habitual annual reliance upon overdraft facilities; never ordinarily allowing cash balances to drop below a pre-determined figure; and building up a cash reserve as provision for when GAM again becomes substantially financially constrained. BOX: “Rainy Dayâ€? Funds for Budget Stabilization Prudent financial management requires that budgets are sustainable over a period of time. Sustainability means that budgeting decisions do not commit a local government to uncontrollable future expenditures that will reduce the amounts available for spending priorities and may require that revenue be increased. To accommodate the uncertain duration of the economic cycle, the government should establish policies ensuring that reserve balances will be available in the short term (over the next one to three years) and long term to meet contingencies. Reserves are amounts that are held in general revenue accounts and can be spent in emergencies – when a spike in spending is required or drops in revenue are expected. State and Local Governments in the US create a reserve fund called “Rainy Dayâ€? Fund to mai ntain budgetary stability. A `Rainy Day’ Fund ensures that funds are available to meet emergencies. Establishing such a fund means that the government must set aside a portion of its revenues to be used in times of emergency, as when revenue drop because of a recession in the external environment. The rainy-day fund is itself a revenue account; it consists of within-government transfers to that account, and the timing and amounts of spending from the account are severely restricted. Reference: `Management Policies in Local Government Finance’; 6th edition. John R. Bartle; W. Bartley Hildreth, Justin Marlow (ed); ICMA press 2.4 Financial history of GAM: capital investments The financial history of GAM is dominated by its capital spending, which over the ten year period 2007 – 2016 totalled JD 1,610 m and accounted for 54.4% of GAM’s total spending (cash outflows). Figure 3: GAM financial history: capital expenditure (JD m) 250 221 218 207 196 200 169 150 140 124 125 111 99 100 50 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10 The largest capital expenditure categories included roads, asphalt, stairs, walls etc. (26%); expropriation of land (22%); special projects (bridges, etc.) (16%) and vehicles and machinery (12%): Between 2007 and 2010 GAM’s annual capital outlays averaged JD 210 m, but thereafter capital spending declined sharply, to JD 124 m in 2011 and JD 99 m in 2012. The decline clearly matches the decline in the operating surplus illustrated in Section 2.3 above. Although capital expenditure has been on a rising trend from 2013, it has yet to reach pre-crisis levels. Figure 4: Financing of GAM's capital expenditure (JD m) 240 Capital grants 220 Borrowing 200 Own capital revenues 180 Revenue contribution to capital outlays (RCCO) 160 140 120 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Overwhelmingly this capital expenditure was financed from `Revenue Contributions to Capital Outlays (RCCO), which amounted to JD 744.6 m over 10 years (46.3%); and own capital revenues (JD 486.9 m and 30.2%). Capital grants were sporadic and, although substantial in 2010, have ceased altogether since the financial crisis. Only 5.4% (JD 86.3 m) of total capital financing came this source. Borrowing was substantial in the 2007 – 2010 period, but ceased almost entirely between 2011 and 2013 (during which period existing debt was rescheduled). In 2014, GAMs major banker (Housing Bank) arranged the consolidation of existing debt from various domestic sources into a single syndicated loan. Borrowing has since resumed. Debt financing accounted for 18.1% (JD 486.9 m) of total capital financing over the ten year period. It will be seen that: • the major source of debt finance were domestic loans and bonds (JD 209 m or 71.6% of all borrowing); • bridging finance provided on the strength of cheques made out to GAM accounted for a further JD 61.6 m (21.1% of the total). • loans issued by international agencies (WB, EBRD and AFD) accounted for 7.3% of total borrowing. Figure 5 provides more detail on GAMs borrowing profile over the period: It will be seen that: 11 • the major source of debt finance were domestic loans and bonds (JD 209 m or 71.6% of all borrowing); • bridging finance provided on the strength of cheques made out to GAM accounted for a further JD 61.6 m (21.1% of the total). • loans issued by international agencies (WB, EBRD and AFD) accounted for 7.3% of total borrowing. Figure 5: Borrowing by GAM 2007 0 1026 (JD m) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total % Loan for gas recovery (WB & EBRD) - - - 2.2 - 0.2 0.4 3.4 0.5 3.2 10.0 3.4% Loan for BRT (AFD) - - - 1.1 - 0.4 - 0.2 2.8 7.0 11.5 3.9% Syndicated loan - JKB+AB - - 29.0 - - - - - - - 29.0 9.9% Development Bonds 60.0 - 80.0 - - - - - - - 140.0 47.9% Development Bank loan 12.0 - - - - - - - - - 12.0 4.1% Housing Bank loan - 28.0 - - - - - - - - 28.0 9.6% Checks under collection - - - 30.0 - - - 23.3 - 8.3 61.6 21.1% TOTALS 72.0 28.0 109.0 33.3 - 0.6 0.4 27.0 3.3 18.5 292.1 100.0% 2.5 Excessive debt burden Given that the overall purpose of this exercise is to assist GAM to implement a programme to improve its financial and institutional performance, obtain an investment-grade credit rating, and thereafter increase its borrowing, it is important to assess its current borrowing status. The following table is drawn from the long-term financial forecasting model. Considerable confidence can be placed on these figures, as debt service costs are very precisely calculated in the model. Two conventional benchmarks are used to assess GAMs stock of debt: • the total stock of debt is compared to own operating revenues; • interest costs are compared to total operating expenditures (i.e. `opex’) On both indicators GAM appears to be substantially over-borrowed (i.e. is carrying excessive debt): • Total debt is very high and rising, and projected to be 158% of annual operating revenues in 2018. It declines steadily thereafter, but GAM finance officials agreed that this is simply because planned new borrowing has not yet been incorporated in the long-term financial forecast model. • Interest costs at 14% of operating expenditure (`opex’) in 2016 is also very high, although the trend in the long-term financial forecast model is continuously downward. The decline to 11% in 2017 is partly due to the debt consolidation/syndication and restructuring arranged by the Housing Bank, but nevertheless remains high. The projections of comfortable interest costs from 2019 onwards cannot be relied upon given that GAM expects to incur new debt. Figure 6: Indicators of indebtedness - GAM 2014 - 2021 2014 2015 2016 2017 2018 2019 2020 2021 Stock of debt (JD m) 303.4 301.1 328.0 405.8 455.2 434.9 380.9 331.7 1 Debt as % of own operating revenues 139% 124% 124% 147% 158% 147% 125% 106% 12 Interest costs (JD m) 24.0 25.7 24.7 21.7 18.9 16.1 13.3 10.6 2 Debt service costs as % of own opex 15% 15% 14% 11% 10% 8% 7% 5% For comparison, South African metropolitan municipalities are considered to be in dangerous territory once total debt exceeds 45% of operating income and interest costs exceed 8% of operating expenditure. Of course, GAM has a different financial structure to South African city governments – mainly because its operating surpluses are so high - so the comparisons may not be directly applicable. Nevertheless there is no doubt that once credit rating agencies look at these indicators they will need to be persuaded that GAM can afford to take on more debt. This is likely to be one of the biggest hurdles to overcome. The key to dealing with this issue will be for GAM to demonstrate that it can in fact afford to service debt on the scale envisaged. This will require strengthening the long-term financial model (especially by incorporating the implications of new debt), carefully prioritising capital investments so that that the budget demonstrably supports its city strategy over the medium term, and demonstrating that its debt-raising plans are indeed affordable. Recommendation: That GAM further strengthens its long-term financial forecasting model by incorporating proposed borrowing, and ensures that the budget supports the city strategy over the medium term. 2.6 Classification of receipts and disbursements The starting point for any municipal financial analysis is to properly separate the operating revenues and expenditures from capital revenues and expenditures. On the expenditure side, operating expenditures (`opex’) are by definition recurring expenditures which happen every month or every year, and generally do not generate a fixed asset. Capital expenditures (`capex’) are `once off’ expenditures which should result in a fixed asset. On the revenue side, operating revenues are recurring revenues which accrue every month or every year; whereas capital revenues are `once-off’ revenues which ideally should be used to finance fixed assets. In the budget information and the long-term financial model provided by GAM, there are some confusions in the way that specific items are classified, especially with revenues (`receipts’). For example, road asphalt cost refunds (citizen contribution for costs for road tarring); sidewalks and walls cost refunds (citizen contribution for costs for sidewalks and walls); land disposition & betterment fees; and land sales (sale of small land parcels left over after road construction etc.) are treated as operating (recurrent) receipts, when they should be recognised as capital receipts. These four items accounted for 15% of what was described as operating expenditures in 2014 and 2015, so the misclassification is not insignificant. Officials at GAM recognised the inappropriate classifications described above, but stated that GAM is merely complying with law and regulations in presenting its budgets and financial statements in this manner. However, such misclassifications can lead to inappropriate management decisions regarding finance and financial strategy. Ideally, cash-flows should be divided into three categories: • Cash flows from operational activities (inflows and outflows): the inflows would arise from operating (current) revenues; and the outflows would relates to operating (current) expenses, 13 mainly payroll and related expenses, and other operating expenses. Cash flows from operational activities must be positive, in order to be able to finance capital investments. • Cash flows from investment activities (inflows and outflows): inflows could be from sale of land or other fixed assets, as well as from financial investments. Outflows would relate mainly to capital expenditures which create fixed assets. Net cash flows from investment activities will generally be negative if, like GAM, the municipality has a substantial capital investment programme; • Cash flows from financing activities (inflows and outflows): inflows would relate to new borrowing; and outflows would include debt repayments. Net cash flows from financing activities will be positive if the municipality is receiving loans on a substantial scale. The final part of a standard cash flow statement would be the net cash flows, the addition of the opening balance, and the calculation of the closing balance for the year. Recommendation: It is recommended that GAM reclassify the various items in its cash-flow budgets and financial statements, in order to improve managerial analysis, strategy and decision- making. 2.7 Potentially unreliable medium- and long-term cash flow forecasts The purpose of this sub-section is to explore whether the long-term cash flow model used by GAM is sufficiently reliable; and whether it occupies a sufficiently important role in strategic planning by GAM management and in the overall GAM budget process. The following tables were extracted from the long-term financial forecast model without making any adjustments: Figure 7: Historical and projected GAM operating expenditures (current JD m) OPERATING Actual Budget Forecast EXPENDITURE (JD m) 2013 2014 2015 2016 2017 2018 2019 2020 2021 Payroll & related 112.7 119.4 125.6 133.3 144.0 147.0 153.1 157.3 161.5 Operating expenses 23.9 22.1 22.4 22.7 18.8 17.4 16.8 17.3 17.7 Other expenses 21.3 22.2 27.5 21.7 27.1 28.9 27.9 25.0 22.2 TOTAL OPEX 157.9 163.7 175.5 177.8 189.9 193.3 197.8 199.5 201.5 Figure 8: Historical and projected GAM operating expenditures (%) OPEX (% change) Average annual % increase 2012 - 2016 2017 - 2021 Payroll & related 5.9% 2.9% Operating expenses 2.6% -1.5% Other expenses 7.3% -4.9% TOTAL OPEX 5.6% 1.5% The key points which can be derived from Figure 7 and Figure 8 are the following: 14 • Payroll related expenditures have increased by an average of 5.9% per year between 2013 and 2016, but the increase for the next four years is projected to be only 2.9% per year. • Operating expenses have increased by 2.6% per year between 2013 and 2016, but in the forthcoming period are expected to actually decline, by 1.5% per year on average. • For other expenses, this change in trajectory is even more extreme: the expected annual decline is 4.9% per year. • Total operating expenses are projected to increase by only 1.5% per year over the next four years, although they have a four year history of increasing at an average of 5.6% per year. Such apparent anomalies raise queries about the relevance of the long term financial forecasting model, but in fact GAM management had good rationales for the changes: • Payroll and related expenses will not increase as fast as previously because the arrangement in terms of which pensions are paid directly from the GAM payroll is coming to an end in 2017; • Operating expenses will decline because (i) electricity costs will decline as a result of the extensive programme of inserting LED lights in buildings and streetlights; and of making increasing use of renewable energy sources; and (ii) fleet costs will decline because vehicles are now being leased on a full maintenance basis; and also because there is increasing use of electric vehicles. • Other expenses will decline because of the projected decline in interest costs on loans, which are accurately calculated. However this will change when GAM takes out new loans. For analytical purposes, one further adjustment was made to the projections made in long-term cash flow forecast model provided by GAM, namely to remove the Bus Rapid Transit (BRT) revenues of JD 15 m projected annually from 2018 onwards, and instead to substitute a BRT subsidy of JD 3m, JD 4m and JD 5 m from 2019 onwards (the BRT system is expected to enhance the quality of traffic management in the city, and is financed through a loan from AFD). The rationale for this adjustment is that it is a very unusual BRT system whose fare revenue is able to cover direct (let alone indirect) operating costs: it is far more usual that BRT systems require operating subsidies. After making these adjustments, GAM’s overall cash position is very different from the projections in the model provided, as illustrated in Figure 9 below. 15 Figure 9: Year-end cash balance after adjusting projected BRT revenues and subsidies (JD m) 15 10 5 0 2014 2015 2016 2017 2018 2019 2020 2021 -5 -10 -15 -20 -25 On this issue officials at GAM had several important points to make: • The projected BRT revenue improvements were not related to projected fare revenues but to higher tax revenues to be generated from properties adjacent to BRT routes; • Nevertheless the long term financial projections associated with the BRT should be re- examined to ensure that GAM will not be unduly disadvantaged by the rollout of the service. • The national government has recently decided that the BRT system is a national responsibility, so that BRT costs and benefits would accrue to the Kingdom rather than to GAM; However: • 2018 is too soon for GAM to receive substantial additional revenues for properties adjacent to BRT routes, furthermore such revenues should increase over time rather than appear abruptly and thereafter remain unchanged; and the need for an operating subsidy (which did not appear in the long-term financial forecast) would of course remain. • The decision by the national government, while of course welcome, is very recent. Prior to this decision, GAM remained at financial risk from the rollout of the BRT, which risk was not fully appreciated and planned for by GAM management. Recommendation: That GAM review its understanding of the financial costs and benefits of the BRT system which is currently being implemented, and update its long-term financial forecasting model accordingly. There are evidently good reasons to have some confidence in the way that GAM’s long-term financial forecasting model has been put together and is being used. Nevertheless, there is also room to strengthen the model, bring it closer to the centre of GAM’s decision-making processes, and to make it more `official’. Recommendation: That GAM takes steps to strengthen its long-term financial forecasting model, and bring it closer to the centre of financial planning and management, by publishing an official version with the budget, and making greater use of it while the budget is being developed; whenever capital project proposals and borrowing proposals are being considered; and whenever financial performance is being reviewed. 16 3. INSTITUTIONAL ANALYSIS 3.1 Introduction: city administration and city strategy Amman is fortunate to have a strong top management team with a clear sense of what needs to be achieved over the next five years. GAM also has institutional depth, including a sound senior management team in budget and finance. Its long-term financial forecast model provides evidence of forward-looking and strategic perspectives. It’s governance arrangements, in terms of which the City Manager and the Mayor are appointed by and in the final analysis report to the Prime Minister, appear to have some advantages, including relative freedom from the short-term political considerations which often inhibit municipal strategy, and the space to drive through necessary changes. The absolute dominance of Amman within the national urban hierarchy, the nature of its relationship with the centre of national government, and its close relationship with its main banker, are substantial advantages. Inevitably GAM also faces several important challenges. From a conventional perspective the governance arrangements carry some risks. Municipal Councils should be accountable to local residents to ensure that they respond to legitimate service delivery requirements and concerns. Such accountability should extend to debate on and approval of municipal plans, budgets, and borrowing; and auditing and accountability (to the elected Council) for implementation of those plans, budgets and borrowing decisions. Any inadequate or inappropriate implementation should imply consequences for those responsible. Current arrangements at GAM do not appear to support the full accountability cycle. Much therefore depends upon the calibre of the Mayor and the City Manager appointed by the Prime Minister. Additional challenges include that (i) some aspects of national legislation (such as the requirement for no more than annual cash-flow budgets, prepared according to a deficient format) appear to inhibit strategic planning and budgeting; (ii) by conventional measures GAM is clearly over- borrowed, yet does not appear to operate within a hard budget constraint; and, most obviously of all, (iii) the arrival in recent years of large numbers of refugees is imposing additional service delivery burdens on the municipality, particularly in relation to waste collection and road construction. GAM has an approved city strategic plan in place. It was apparently developed with an eye on local community interests and demands, and informed by national strategic requirements and directives. Inevitably, it is constrained by financial and human capacity constraints. The GAM city strategy involves five pillars, namely: 1) Environment and health (Solid waste) 2) Planning & organization 3) Public works 4) Community services 5) City identity and character Administratively, GAM is organised as set out in Figure 10: Figure 10: GAM macro-organisation and personnel numbers Sector Sub-sector Employees Workers City Manager (Top management-related) 72 999 1.1 Control & regions 1. Environment & 1.2 Environment affairs 3 5 020 Regions 646 1.3 Vocational health control 17 1.4 Reconstruction 2.1 Engineering administration 2.2 Traffic & transport 1 2. Public Works 2.3 Public parks & facilities 087 2 713 2.4 Roads 2.5 Fleet 3.1 Grand parks administration 1 3. Agriculture Affairs 3.2 Agriculture administration 843 1 631 3.3 Public markets 4.1 Financial affairs administration 4. Finance & 4.2 Supply chain & investment 1 224 Administration 782 4.3 Administrative services 5.1 Admin of culture services 1 5. Social Development 5.2 Social Services 847 677 5.3 Support services 6. Economic 6.1 Planning administration Development & 6.2 Licensing administration 25 456 Planning 6.3 Economic development admin 11 Totals 10 362 660 Total staff 22 022 A total of 3,407 filled professional posts were reported (across all sectors), including 2,691 technical personnel, 489 engineers, and 227 professional agriculturalists. The key staff shortages are however among professionals. The organisational structure is described as supporting the five pillars of the city strategic plan. For each department, the goals in the plan are used to generate initiatives, projects and key performance indicators (KPIs). This is a sound approach. However it essential that the city budget supports the entire plan, and given that the budget is based on a one-year cash-flow, it is not at all clear that it does in fact do so. The number of personnel employed by GAM has been declining gradually over the last few years: apparently a total of around 24,000 employees were on the payroll five years ago, compared to around 22,000 currently. Staff costs as a percentage of total operating costs declined from 78% in 2011 to 72% in 2015 (see Figure 11). Under prevailing circumstances, GAM has done well to reduce the total number of personnel on its payroll. However personnel costs are again rising as a percentage to total operating costs, and by 2019 are projected to reach the levels that prevailed in 2011. If this can be justified in terms of the city strategic plan (for instance, because of the intention to increase the number of professionals on the payroll), then there is little reason for concern. If however the projections are not so well substantiated, there will be arguments to further improve the recruitment and management of personnel resources. 18 Figure 11: GAM payroll and related expenses as % of total operating costs 80% 79% 78% 78% 77% 77% 76% 75% 75% 74% 73% 72% 71% 72% 71% 70% 2011 2012 2013 2014 2015 2016 2017 2018 2019 Recommendation: That GAM further strengthens its long-term financial forecasting model and incorporating the implications of its personnel recruitment and management plans and approaches by conducting further analysis of its personnel capacity, organisation and costs. 3.2 City governance GAM has governance arrangements that are unique among Jordan’s municipalities, presumably reflecting the absolute dominance of Amman within the national urban hierarchy. Both the Mayor and the City Manager are appointed through the Prime Minister’s Office, for period which are at the discretion of the Prime Minister. These two critical officials are not, therefore, answerable to the elected GAM Council or the electorate of Amman. This arrangement may have some advantages. The leadership of GAM is probably relatively free from the short-term political considerations which often inhibit municipal strategy, and may accordingly have the space to drive through necessary changes which might otherwise founder. However, from a conventional perspective the governance arrangements also carry some risks. Municipal Councils should be accountable to local residents to ensure that they respond to legitimate service delivery requirements and concerns. Such accountability should extend to debate on and approval of municipal plans, budgets, and borrowing; and auditing and accountability (to the elected Council) for implementation of those plans, budgets and borrowing decisions. Any inadequate or inappropriate implementation should imply consequences for those responsible. Current arrangements at GAM do not appear to support the full accountability cycle. For example, audit reports are not considered by the GAM Council but by Parliament, as the Prime Minister’s Office of course reports to parliament rather than the GAM Council. Much therefore depends upon the calibre of the Mayor and the City Manager appointed by the Prime Minister. This situation may call for a number of special initiatives and efforts, such as • Communications to Parliament (GAMs achievements may not be known to Parliamentarians); 19 • Communications to residents and businesses in Amman (there may also be value in implementing special arrangements for obtaining feedback from residents and businesses on GAMs initiatives and services); • Arrangements to discuss the GAM chapter in the Audit Bureau's annual report in GAM Council meetings. GAM faces further governance challenges. Some aspects of national legislation appear to inhibit strategic planning and budgeting, such as the requirement to prepare annual cash-flow budgets according to a format which could be improved. However, nothing prevents GAM from preparing budgets and financial statements on a medium-term accrual basis, for example, and still generating the annual cash flow budgets that are legally required. A much more fundamental governance constraint is that, although by conventional measures GAM is clearly over-borrowed, it can apparently continue to raise any loans it may require. Officials at GAM and its main banker were explicit that all domestic banks would like to increase their exposure to GAM. In the final analysis GAM is `too big to fail’, and does not appear to operate within a hard budget constraint. This is a challenge for governance in the sense that there will always be short-term benefits to taking on further debt: but at some point in future the excessive costs of servicing the debt will result in a crisis. 20 4. IMPLICATIONS OF THE PEFA ASSESSMENT This section draws from the conclusions of the PEFA assessment that was conducted separately from but in parallel with the financial and institutional assessment. 4.1 Results of the PEFA assessment The PEFA ratings are summarised in the table below (see the PEFA report for definitions of the Performance Indicators, the methodology used, and rationales for the ratings given): Figure 12: Results of the GAM PEFA assessment Scoring Dimension Ratings Overall PFM Performance Indicator (PI) Method .1 .2 .3 .4 Rating Pillar I: Budget reliability PI-1 Aggregate expenditure outturn M1 B B PI-2 Expenditure composition outturn M1 D B A D+ PI-3 Revenue outturn M2 B D C Pillar II. Transparency of public finances PI-4 Budget classification M1 D D PI-5 Budget documentation M1 B B PI-6 Central government operations outside fiscal reports M2 B B A B PI-7 Transfers to subnational governments M2 NA NA NA PI-8 Performance information for service delivery M2 A B B A B+ PI-9 Public access to key fiscal information M1 D D Pillar III. Management of assets and liabilities PI-10 Fiscal risk reporting M2 NA NA NA NA PI-11 Public investment management M2 B B C C C+ PI-12 Public asset management M2 C D C D+ PI-13 Debt management M2 C B D C Pillar IV. Policy-based fiscal strategy and budgeting PI-14 Macroeconomic and fiscal forecasting M2 D D D D PI-15 Fiscal Strategy M2 D D D D PI-16 Medium-term perspective in expenditure budgeting M2 D D D NA D PI-17 Budget preparation process M2 B D C C PI-18 Legislative scrutiny of budgets M1 C C A B C+ Pillar V. Predictability and control in budget execution PI-19 Revenue administration M2 A D D C C PI-20 Accounting for revenues M1 A A A A PI-21 Predictability of in-year resource allocation M2 A C D C C+ PI-22 Expenditure arrears M1 A C C+ PI-23 Payroll controls M1 B B A C C+ PI-24 Procurement M2 B A B D B PI-25 Internal controls on non-salary expenditure M2 C C C C PI-26 Internal audit M1 A C C C C+ Pillar VI. Accounting and Reporting PI-27 Financial data integrity M2 B A B B B+ PI-28 In-year budget reports M1 A A C C+ PI-29 Annual financial reports M1 C D C D+ Pillar VII. External Scrutiny and Audit PI-30 External audit M1 D D* D* D D PI-31 Legislative scrutiny of audit reports M2 D* D* D* D* D 21 In many areas of the PEFA assessment, GAM achieves high rating scores (A & B). This applies especially in area over which GAM has most control (such as parts of Pillars I, II and especially VI). There are also areas where GAM’s scores could be improved (from C or D). The PEFA assessment itself makes no recommendations on what GAM should do to improve its public financial management. However, from the perspective of this report, there are good reasons to address some of the areas where the PEFA assessment has highlighted weaknesses. This is of course not for the sake of the scores themselves. There are three major reasons for GAM to improve its overall public financial management (which is what the PEFA assessment measures), namely to: (a) improve GAMs ability to fund its overall city strategy (Pillars 2 & 4) Pillars 2 and 4 of the PEFA assessment deal with matters which, if addressed, would enhance GAM’s ability to fund its overall city strategy. Any city strategy must be funded by the city budget and implemented by city personnel (the city budget should be seen as the city strategy expressed in numbers). Medium-term budgeting (PI-16) should be introduced because a medium-term perspective makes it possible to sequence projects according to priority, to take account of the operational consequences of capital spending, to show that that the budget supports the city strategy; and to confirm that that the city strategy is realistic. Most capital projects are anyway implemented over more than one year. Furthermore GAM should start budgeting on a functional basis (i.e. according to objective/purpose) as well as economic basis (PI-4). This will improve the link between the city strategy and the budget, because the reason for budget allocations will become clearer. Budgets should also include a macroeconomic & fiscal forecast (PI-14) and a fiscal strategy (PI-15), again because this will improve the link to city strategy. Recommendation: that GAM should start budgeting on a functional as well as an economic basis (PI-4) over the medium term (PI-16). Budgets should include a macroeconomic & fiscal forecast (PI-14) and a fiscal strategy (PI-15). (b) increase GAMs operational effectiveness by improving its management of its assets, operations and liabilities (Pillars 3 & 5) Pillars 3 and 5 of the PEFA assessment deal with matters which, if addressed, would improve GAM’s management of its assets, operations and liabilities. GAM has already taken steps to obtain an independent valuation of its major property assets (PI-12). This will strengthen its bargaining power with potential lenders and improve its credit-worthiness. Property assets are also a potentially very important means of financing a city strategy. Recommendation: GAM should continue its initiative to obtain an independent valuation of its major property assets (PI-12). GAM should prepare a medium-term debt management strategy (PI-13). This would allow it to manage its total debt burden more effectively, reduce its costs of debt; and re-inforce GAM’s overall budget constraint. Such a strategy would both incorporate information from and provide information to GAMs long-term financial forecast model. Recommendation: that GAM should prepare a medium term debt-management strategy (PI-13) Pillars 5 of the PEFA assessment suggests the need to improve systems and procedures in order to strengthen performance in revenue administration (PI-19); predictability of in-year 22 resource allocation (PI-21); expenditure arrears (PI-22); payroll controls (PI-23); procurement (PI-24), and internal controls on non-salary expenditure (PI-25) Recommendation: that GAM should improve internal systems and procedures to strengthen performance in a variety of areas relating to predictability and control in budget execution. (c) improve GAMs accounting, reporting and accountability to external scrutiny (Pillars 6 & 7) Pillars 6 and 7 of the PEFA assessment deal with matters which, if addressed, would enhance GAM’s accounting, reporting and accountability to external scrutiny. Recommendation: that GAM should seek to subject itself to more rigorous external oversight (PI-30 and PI-31). Care should be taken not to attempt to reform all areas at once. Experience suggests that attempts at such a comprehensive programme could easily lead to limited progress in any area. Since there is clearly an appetite for reform within GAM, matched by capacity and resources, it should be possible to develop an action plan that would address a number of the weaknesses identified – and hence improve future PEFA ratings – over a reasonable period of time, without running the risk of being too ambitious. 23 5. CONCLUSIONS AND RECOMMENDATIONS - FINANCIAL & INSTITUTIONAL STRATEGY 5.1 Strategic strengths, weaknesses, opportunities & threats (SWOT) The following simple SWOT analysis is offered as a way of summarising the strategic conclusions of the financial and institutional analysis presented in Sections 3 and 4, supplemented by the PEFA assessment presented in Section 5: Strengths Weaknesses • Amman completely dominates the national • One-year, cash-flow based budgeting is a urban hierarchy, which accounts for the significant strategic weakness; special relationship that GAM has with the • It is not clear than the annual cash budget centre of national government, and also for supports medium-term (five-year) plan; its unusual governance arrangements; • the long-term financial forecast is not • Generally sound organizational sufficiently central to annual budgeting; arrangements and good professional capacity, a demonstrable history of restraint in personnel matters, and a sound approach to performance management; • A medium-term (five-year) plan, and a long- term financial forecast, are in place. Opportunities Threats • The financial structure allows for very large • General urbanisation exacerbated by the operating surpluses, from which GAM has refugee crisis requires rapid increases in tended to directly finance substantial capital service delivery capacity spending (RCCO); • GAM is significantly over-borrowed by all • GAM has a close relationship with its major conventional measures; banker, from which apparently unlimited • The medium- and long-term financial loans can be obtained; implications of capital projects such as the • GAM has substantial fixed assets (although BRT are not well understood. these are not yet professionally valued). • Personnel costs are rising as a percentage of operating outlays For GAM to properly respond to these strengths, weaknesses, opportunities and threats requires that a coherent financial and institutional reform strategy be developed and implemented, with appropriate support as required. The following recommendations would, if properly sequenced and resourced, together constitute an overall financial and institutional reform strategy. The objectives of this strategy for GAM include improving its ability to fund its overall city strategy; increasing its operational effectiveness; increasing its financial resilience; and improving its accounting, reporting and external accountability. It should be stressed that of course GAM should make its own decisions regarding its financial and institutional reform strategy. Sequencing and timeframes will of course depend on GAMs own assessment of its existing internal capacities and specifically its capacity to manage multiple reform programmes. 24 5.2 Recommendations for a GAM financial and institutional reform strategy It is proposed that GAM embark upon a programme to further strengthen its financial and institutional performance. The over-rising purpose of the programme is to prepare GAM for an independent credit rating, which in turn would allow the municipality to transition to a sustainable, independently debt-financed, capital investment programme. This financial and institutional reform programme would consist of three sub-programmes: 1) Strategy-led planning & budgeting: to ensure that GAM has the ability to plan and budget to achieve intended outcomes, and to weather financial turbulence in future 2) Strategy-led organisational development: to ensure that GAM has the organisational and human capacity necessary to achieve its objectives 3) Reporting on strategy and outcomes: to improve GAMs financial, service delivery and sustainability reporting to the public 2. Strategy-led organisational 3. Reporting on strategy and 1. Strategy-led budgeting development outcomes 2.1 Review org structure, perf. 1.1 Introduce medium-term budgeting 3.1 Valuation of property assets management & personnel numbers 1.2 Improve the planning & budgeting 2.2 Manage changes to existing 3.2 Improve public access to key process arrangements fiscal information 1.3 Strengthen long-term financial 3.3 Prepare an environmental 2.3 Improve systems and procedures forecasting sustainability report 2.4 Prepare and adopt Standard 3.4 Improve auditing & reporting 1.4 Review implications of BRT Operating Procedures 2.5 Strengthen procurement & 1.5 Improve financial resilience contract management 1.6 Raise debt more competitively The objectives of the sub-programmes and their constituent projects are tabulated below: Sub-Programme Sub-Programme Projects Project objective Objective 4. Strategy-led Ensure that GAM has 1.1 Medium-term budgeting Introduce medium-term cash-flow budgets planning & the ability to plan and 1.2 Long-term financial Strengthen the long term financial forecast budgeting budget to achieve forecast intended outcomes, 1.3 Planning & budgeting Improve the annual planning and budgeting and to weather process process financial turbulence in 1.4 Implications of BRT Review the long-term financial implications of the future BRT 1.5 Financial resilience Increase ability to withstand financial constraints 1.6 Competitive debt-raising Ensure lowest debt costs 25 Sub-Programme Sub-Programme Projects Project objective Objective 5. Strategy-led Ensure that GAM has 2.1 Personnel, structure and Ensure GAM has the personnel, structure and organisational the organisational performance performance to achieve its objectives development and human capacity 2.2 Change management Smoothly manage the transition to new to achieve its organisational arrangements objectives 2.3 Systems & Procedures To improve various financial systems and Improvement procedures 2.4 Standard Operating Document and formalise financial standard Procedures operating procedures 2.5 Procurement & contract Strengthen GAMs procurement & contract management management capacity 6. Reporting on Improve GAMs 3.1 Valuation of property Independent valuation of property assets strategy and financial, service assets outcomes delivery and 3.2 Public access to fiscal To improve public access to key fiscal information sustainability information reporting to the public 3.3 Auditing & Reporting Modernise internal audit & processes to Improvement submitting reports for external audit 3.4 Environmental Prepare environmental sustainability report sustainability reporting Shadow credit To obtain a shadow 4.1 Obtain a shadow credit Good result, which would allow GAM to transition rating credit rating as a rating from an international to a sustainable, independently debt-financed, prelude to obtaining credit rating agency capital investment programme. Independent credit rating 6. RECOMMENDATION - TECHNICAL ASSISTANCE PLAN 6.1 Introduction It is envisaged that GAM will discuss the recommendations made in the previous section and arrive at its own decisions regarding its preferred financial and institutional reform strategy. A technical assistance plan, to support the implementation of the financial and institutional reform strategy, can then be devised. Since the recommendations made in the previous section have already been discussed with GAM, it is possible to sketch the outline of a technical assistance plan, on the understanding that this will need revision and elaboration after GAM has made final decisions on its preferred financial and institutional reform strategy. Against this background, the technical assistance plan which is recommended for GAM is set out below: 6.2 SUB-PROGRAMME 1: STRATEGY-LED PLANNING & BUDGETING OBJECTIVE: TO ENSURE THAT GAM HAS THE ABILITY TO PLAN AND BUDGET TO ACHIEVE INTENDED OUTCOMES AND TO WEATHER FINANCIAL TURBULENCE 26 No. Projects Recommended support 1 Medium-term Technical assistance: budgeting • Review what needs to be done and the system changes necessary (for three way cash flow statements, functional classifications, fiscal data, fiscal risk info, departmental manuals, etc.) • Develop a work plan with GAM officials • Assist and oversee progress during implementation • Prepare training manual for departments • Support GAM officials in departmental training sessions 2 Long-term Technical Assistance: financial • Review how and when the model is currently being used, how and when it is updated and forecast maintained, and with what capacity. • Review what needs to be done to strengthen the model and its use • Work with GAM officials to suggest procedures and capacities needed to strengthen the role of the model. • Assist and oversee progress during implementation • Prepare a procedural guideline on the use of the model • Present the procedural guideline for adoption 3 Planning & Technical Assistance: budgeting • Review the current planning & budgeting process and highlight discrepancies between plan process & budget; • Research best practices applied elsewhere • Work with GAM officials to develop enhanced procedures to eliminate discrepancies • Prepare guidelines for an enhanced planning & budgeting process • Support the implementation of an enhanced process • Review outcomes and suggest improvements for the next cycle 4 Implications of Technical assistance: BRT • Review and update the feasibility study commissioned by GAM • Assess long-term financial implications of BRT for GAM. 5 Competitive Technical assistance: debt-raising None: it is not clear that any support is required here. 6 Financial Technical assistance: resilience • None: it is not clear that any support is required here • (possibly legal advice on how to budget to set aside cash resources?) 6.3 SUB-PROGRAMME 2: STRATEGY-LED ORGANISATIONAL DEVELOPMENT OBJECTIVE: ENSURE THAT GAM HAS THE ORGANISATIONAL & HUMAN CAPACITY TO ACHIEVE ITS OBJECTIVES No. Projects Recommended support 1 Personnel, Technical assistance: structure and • Personnel numbers and costs: detailed analysis of personnel numbers and costs; performance benchmarking against appropriate comparators; and recommendations for personnel cost control • Organisational development: review of organisational structures and arrangements; review of performance and productivity management procedures; and recommendations on organizational arrangements and procedures to improve performance and efficiency 2 Change Technical assistance management • Review the proposed transition plan, develop an appropriate change management plan, and discuss with GAM management • Support the implementation of agreed change management plan 3 Systems and Technical assistance: Procedures • Review the present status and clarify what needs to be done Improvement • Work with the GAM officials to develop a reform plan. • Provide occasional support as required • Oversee testing and suggest adjustments as necessary. • Prepare an operational manual • Provide training to staff • Oversee the introduction of the new system and procedures. 27 No. Projects Recommended support 4 Standard Technical assistance: Operating • Review which procedures need SOPs to be prepared; Procedures • Collect existing documents; • Prepare draft SOPs; • Review with process owners to clarify ambiguities and confirm correctness; • Prepare final standard-format SOP for adoption and submit. 5 Procurement & Technical assistance: contract • Review the present status regarding procurement and contract management and clarify management what needs to be done • Work with GAM officials to develop a reform plan. • Provide occasional support as required during implementation • Oversee testing and suggest adjustments as necessary. • Prepare an operational manual • Provide training to staff • Oversee the introduction of new procedures. 6.4 SUB-PROGRAMME 3: REPORTING ON STRATEGY & OUTCOMES OBJECTIVE: IMPROVE GAM’S REPORTING TO THE PUBLIC ON FINANCIAL, SERVICE DELIVERY AND SUSTAINABILITY MATTERS No. Projects Recommended support 1 Valuation of Technical assistance: property assets • None: it is not clear that any support is required here. 2 Public access to Technical assistance: fiscal information None: it is not clear that any support is required here. 3 Auditing & Technical assistance: Reporting • Review the present status and clarify what needs to be done Improvement • Work with the GAM officials to develop a reform plan. • Provide occasional support as required • Oversee testing and suggest adjustments as necessary. • Prepare an operational manual • Provide training to staff • Oversee the introduction of the new system and procedures. 4 Environmental Technical assistance: sustainability • Review the data available and determine what additional data will need to be collected reporting • Work with the GAM officials on programme to collect the data and compile into a Sustainability Report • Provide occasional support as required 6.5 SHADOW CREDIT RATING OBJECTIVE: TO OBTAIN A SHADOW CREDIT RATING FROM AN INDEPENDENT CREDIT RATING AGENCY No. Projects Recommended support 1 Shadow credit Technical assistance: rating • Explain the credit rating methodology and process to GAM senior management • Conduct a `shadow rating’ and review the results with GAM senior management • Decide on GAM’s readiness for an independent rating • Provide training on documents to prepare, how to manage the process, etc. (NB: This is not a separate sub-programme, but the medium term objective of the overall programme. In due course, when judged to be ready, GAM will be prepared for an independent credit rating, which in turn would allow the municipality to transition to a sustainable, independently debt-financed, capital investment programme). Further details of each proposed project, its rationale, existing GAM capacity, and recommendations for support, are provided in the Annexure. 28 7. CONCLUSION GAM is a municipality which faces significant challenges in service delivery, debt management and governance. However, it is also a municipality with considerable institutional capacity and leadership strengths, and appears to be well-positioned for success. A technical assistance programme of the scale suggested would therefore appear to be appropriate and likely to be a good investment. 29 ANNEXURE 1: FINANCIAL & INSTITUTIONAL REFORM AND TECHNICAL ASSISTANCE PLAN 1. INTRODUCTION It is proposed that GAM embark upon a programme to further strengthen its financial and institutional performance. The intention of this programme, supported by appropriate technical assistance, is for GAM to address the findings of PEFA and FIA. The over-rising purpose is to prepare GAM for an independent credit rating, which in turn would allow the municipality to transition to a sustainable, independently debt-financed, capital investment programme. This financial and institutional reform programme would consist of three sub-programmes: 1) Strategy-led planning & budgeting: to ensure that GAM has the ability to plan and budget to achieve intended outcomes, and to weather financial turbulence in future 2) Strategy-led organisational development: to ensure that GAM has the organisational and human capacity necessary to achieve its objectives 3) Reporting on strategy and outcomes: to improve GAMs financial, service delivery and sustainability reporting to the public In due course, to fulfil to overarching objective, GAM will seek to obtain a credit rating from a recognized international agency. This is proposed as a separate, final activity, for which the above three sub-programmes prepare GAM: Independent credit rating: to obtain a credit rating from a recognized international rating agency. The credit rating achieved by GAM will be indicate the effectiveness of the financial and institutional reform programme and its associated technical assistance programme. The details of these proposed sub-programmes need to be developed further in terms of activities, timelines and budgets. This will be done after further detailed discussions with GAM. 30 2. SUB-PROGRAMME 1: STRATEGY-LED PLANNING & BUDGETING OBJECTIVE: TO ENSURE THAT GAM HAS THE ABILITY TO PLAN AND BUDGET TO ACHIEVE INTENDED OUTCOMES AND TO WEATHER FINANCIAL TURBULENCE No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 1 Medium-term Introduce GAM should introduce medium- • Medium-term budgeting GAM has the technical Technical assistance: budgeting medium-term term cash flow budgeting makes it easier to foresee capacity to make this • Review what needs to be done cash-flow • Producing a MTEF & MTEB impending budget pressures change, and appears and the system changes budgets (PIs 14, 15 & 16, all currently and opportunities; to eager to do so. necessary (for three way cash rated ‘D’); sequence projects according flow statements, functional • Adopting a functional to priority (most capital (NB: Could this project classifications, fiscal data, fiscal classification in the budget projects anyway take place be run during 2018, risk info, departmental manuals, (PI-4 also ‘D’); over more than one year); to i.e. could the first etc.) • Publishing fiscal data (PI-9, take account of the • Develop a work plan with GAM MTEF be for the 2019 also ‘D’); operational consequences of officials – 2021?) • Publishing fiscal risk capital spending; to • Assist and oversee progress information (PI-10.3, also ‘D’). demonstrate that the budget during implementation • Improving guidance to supports the city strategy; and • Prepare training manual for departments on budget to confirm that that the city departments preparation (PI-17.2, rated strategy is affordable. • Support GAM officials in ‘D’); • Budgeting on a functional departmental training sessions basis (i.e. according to NB1: It is proposed that the objective/purpose) as well as cash flow budget be prepared economic basis (PI-4) along lines, with a three-way demonstrates the reason for division into operational, budget allocations, and investment and financing cash therefore improves the link flows. between the city strategy and the budget NB2: The medium-term budget • Improving guidance to would be published as a departments on how budgets supporting document alongside should be prepared (PI-17.2) the prescribed one-year cash will also enhance budgetary budget. realism. 31 No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 2 Long-term Strengthen GAM should strengthen its long- The value of GAM’s existing GAM has the technical Technical Assistance: financial the long term term financial forecasting model long-term financial forecast capacity to make these • Review how and when the model forecast financial and bring it closer to the centre model could be greatly changes. is currently being used, how and forecast of financial planning and enhanced by when it is updated and management • using it in decision-making (NB: Could this project maintained, and with what more systematically (for be run during 2018, capacity. example, whenever a capital i.e. could the first • Review what needs to be done to project is decided upon, or strengthen the model and its use MTEF be for the 2019 new debt arrangements are • Work with GAM officials to entered into); – 2021?) suggest procedures and • as a framework for the capacities needed to strengthen medium-term budget (thus the role of the model. ensuring that the budget • Assist and oversee progress supports the city strategy). during implementation • to guide tariff-setting and • Prepare a procedural guideline personnel recruitment; on the use of the model • Transparency would be • Present the procedural guideline enhanced if an official version for adoption was published with the budget each year. • Budgetary realism would be enhanced by systematically comparing budgetary outcomes with projections. 32 No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 3 Planning & Improve the GAM should strengthen its Discrepancies between the city Several of these Technical Assistance: budgeting annual annual planning and budgeting plan and the city budget, while preconditions already • Review the current planning & process planning and process to ensure that the city very common, involves exist, so that the budgeting process and highlight budgeting strategy and plan and medium- substantial risks, to challenge mainly discrepancies between plan & process term budget support each other, administrative effectiveness, relates to the budget; and in fact become a coherent service delivery outputs, and processes which • Research best practices applied single plan to achieve the political stability. should be elsewhere objectives of the municipality. A planning and budgeting implemented to ensure • Work with GAM officials to process which ensures that the that they are mutually develop enhanced procedures to budget is `the plan written in supporting: eliminate discrepancies numbers’ allows for improved • An overall city • Prepare guidelines for an strategic decision-making, strategy and plan; enhanced planning & budgeting enhanced service delivery, and • A long-term financial process reduced financial and political forecasting model • Support the implementation of an risks • A medium-term enhanced process budget and capital • Review outcomes and suggest investment plan improvements for the next cycle • Overall target setting and performance management 4 Implications Review the GAM should review its • The BRT has potentially very GAM commissioned a Technical assistance: of BRT long-term understanding of the financial significant operational cost feasibility study on the • Review and update the feasibility financial costs and benefits of the BRT implications for GAM BRT several years study commissioned by GAM implications system which is currently being • The Kingdom will apparently ago, but an • Assess long-term financial of the BRT implemented, and update its take over some operations independent review implications of BRT for GAM. long-term financial forecasting and costs, but GAM would be should be conducted model accordingly. well advised to fully understand what the remaining implications will be. • This review would also be a lesson in assessing long-term operating costs implications of any capital project 33 No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 5 Competitive Ensure GAM should establish a formal Such a practise will allow GAM GAM already applies Technical assistance: debt-raising lowest debt practise of using a competitive to market-test all new capital this practise, although None: it is not clear that any costs process for obtaining all loans financing (to ensure that the not formally and support is required here. best pricing is obtained); it apparently not would also increase GAMs absolutely autonomy from its major banker; consistently. It has the and provide a enhance necessary capacity to transparency in capital make this change financing. 6 Financial Increase GAM should take steps to • It is expensive to habitually GAM has the technical Technical assistance: resilience ability to improve its financial resilience, rely on an overdraft facility capacity to make these • None: it is not clear that any withstand including avoiding habitual • The financial crisis of 2010 – changes, which support is required here financial annual reliance upon overdraft 2012 affected operational and amount to developing • (possibly legal advice on how to constraints facilities, never ordinarily capital spending, and and implementing a budget to set aside cash allowing cash balances to drop suggests the need to improve plan to set aside cash resources?) below a pre-determined figure; GAM’s financial resilience. resources over several and building up a cash reserve years as provision for when GAM again becomes substantially financially constrained. 34 3. SUB-PROGRAMME 2: STRATEGY-LED ORGANISATIONAL DEVELOPMENT OBJECTIVE: ENSURE THAT GAM HAS THE ORGANISATIONAL AND HUMAN CAPACITY TO ACHIEVE ITS OBJECTIVES No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 1 Personnel, Ensure GAM GAM should review the • Personnel costs are GAM has already Technical assistance: structure and has the implications of its rising as a share of total undertaken some • Personnel numbers and costs: detailed performance personnel, personnel recruitment and opex, which constitutes restructuring, and has analysis of personnel numbers and costs; structure and management plans and a potential financial risk the capacity to benchmarking against appropriate performance approaches by for the future. undertake further comparators; and recommendations for to achieve its conducting further • The amalgamation of work. personnel cost control objectives analysis of its personnel nine municipalities into • Organisational development: review of capacity, organisation and the GAM may have left organisational structures and arrangements; costs. sub-optimal review of performance and productivity organisational legacies management procedures; and which may be worth recommendations on organizational addressing. arrangements and procedures to improve performance and efficiency 2 Change Smoothly Careful change Careful change GAM has the technical Technical assistance management manage the management of any management is essential capacity to manage • Review the proposed transition plan, develop transition to transition from the current for a smooth transition change, but would an appropriate change management plan, and new to a future organisational benefit from discuss with GAM management organisational structure, staffing, and independent • Support the implementation of agreed change arrangements performance and assistance. management plan productivity management arrangements 3 Systems and To improve • Recording and reporting These would enhance GAM has the technical Technical assistance: Procedures various debts (PI-13.1, rated GAMs overall financial capacity to make • Review the present status and clarify what Improvement financial ‘C’); management and these changes, but needs to be done systems and • Monitoring revenue performance. would benefit from • Work with the GAM officials to develop a procedures arrears (PI-19.4, rated independent reform plan. ‘C’); assistance. • Provide occasional support as required • Improving the • Oversee testing and suggest adjustments as management of necessary. procurement complaints • Prepare an operational manual (PI- 24.4, rated ‘D’); • Provide training to staff • Oversee the introduction of the new system and procedures. 35 No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 4 Standard Document GAM should document • Documented SOPs are Many of these Technical assistance: Operating and formalise Standard Operating essential for procedures are well • Review which procedures need SOPs to be Procedures financial Procedures (SOPs) for: formalisation and known though not prepared; standard • Release of payments: institutionalisation of the necessarily • Collect existing documents; operating • Collection of revenue: administrative documented and • Prepare draft SOPs; procedures • Management of cash: procedures. formally adopted. The • Review with process owners to clarify • Controls over the • They are useful for `owner’ of each ambiguities and confirm correctness; payroll: training new staff; for process and • Prepare final standard-format SOP for • Management of debt providing guidance if procedure will need to adoption and submit. (PI-11.3, rated ‘D’); uncertain; for protecting work with a writer who • Monitoring of staff from inappropriate will prepare the formal expenditure arrears on interference; for SOP. a quarterly basis (PI- managing staff 22.2, rated ‘C’); and, performance; and to • Other essential increase staff procedures. accountability. • The preparation of SOPs should also highlight any contradictions and ambiguities; and lay the basis for future process improvements and automations 5 Procurement Strengthen Procedural reforms and GAM envisages GAM has existing Technical assistance: & contract GAMs capacity-building to increasing its large-scale technical capacity in • Review the present status regarding management procurement improve GAMs capital investment procurement and procurement and contract management and & contract procurement & contract projects, and for good contract management, clarify what needs to be done. management management capacity results this will require but would benefit from • Work with GAM officials to develop a reform capacity this will require excellent an independent review plan. procurement and contract and advice on how to • Provide occasional support as required during management. This is a strengthen these implementation very common area of functions. • Oversee testing and suggest adjustments as weakness among city necessary. governments • Prepare an operational manual • Provide training to staff • Oversee the introduction of new procedures. 36 4. SUB-PROGRAMME 3: REPORTING ON STRATEGY & OUTCOMES OBJECTIVE: IMPROVE GAM’S REPORTING TO THE PUBLIC ON FINANCIAL, SERVICE DELIVERY AND SUSTAINABILITY MATTERS No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 1 Valuation of Independent GAM should continue its This would strengthen its GAM has already Technical assistance: property valuation of initiative to obtain an bargaining power with taken steps to modify • None: it is not clear that any support is assets property independent valuation of potential lenders and its software to required here. assets its major property assets improve its credit- accommodate asset (PI-11.2, rated `D’). worthiness. Property values; and has assets are also a tendered for an potentially very important independent property means of financing a city valuer. strategy. 2 Public access To improve GAM should publish key Including and publishing GAM has the technical Technical assistance: to fiscal public access fiscal information macro-economic & fiscal capacity to do this None: it is not clear that any support is required information to key fiscal • Publishing fiscal data forecasts (PI-14) and a here. information (PI-9, also ‘D’); fiscal strategy (PI-15), • Publishing fiscal risk with the budget increases information (PI-10.3, transparency and also also ‘D’). strengthens the link to the city strategy. 3 Auditing & Modernise • Modernising Internal These would enhance GAM has the technical Technical assistance: Reporting internal audit Audit (PI-26.1, 2 & 3, all GAMs overall financial capacity to make • Review the present status and clarify what Improvement & processes rated ‘C’) management and these changes, but needs to be done to submitting • Submitting financial performance. would benefit from • Work with the GAM officials to develop a reports for reports for External independent reform plan. external audit Audit (PI-27.2, rated assistance. • Provide occasional support as required ‘NA’). • Oversee testing and suggest adjustments as necessary. • Prepare an operational manual • Provide training to staff • Oversee the introduction of the new system and procedures. 37 No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 4 Environmental Prepare Prepare a sustainability As a member C-40 global ? Technical assistance: sustainability environmental report for GAM group of cities which • Review the data available and determine reporting sustainability champion of environment what additional data will need to be collected report sustainability, GAM • Work with the GAM officials on programme to aspires to lead on collect the data and compile into a Climate Change and Sustainability Report Sustainability. • Provide occasional support as required INDEPENDENT CREDIT RATING OBJECTIVE: TO OBTAIN AN INDEPENDENT CREDIT RATING No. Projects Project Reforms Rationale GAM capacity Recommended support objective requirements 1 Shadow credit To prepare GAM should prepare An annual credit rating by a reputable GAM has the technical Technical assistance: rating GAM to obtain for and then agency: capacity to obtain an • Explain the credit rating an independent institutionalise a • obviates the need for repeated credit independent credit methodology and process credit rating practise of obtaining assessments by individual donors and rating, but to ensure to GAM senior an independent credit lenders; that the first rating is management rating each year. • allows GAM to tap new financial as good as possible, it • Conduct a `shadow rating’ markets (such as the bond markets, would be wise to get a and review the results with including Islamic bonds); who might be shadow credit rating to GAM senior management deterred by the need to conduct a credit prepare GAM for the • Decide on GAM’s review themselves; independent credit readiness for an • provides important external and rating independent rating independent financial performance • Provide training on information to GAM; documents to prepare, how • would be valuable to GAM as a process to manage the process, (very different from the process etc. conducted by a bank or donor seeking to extend a new loan); • would allow GAM to hold its main banker and other lenders at arms- length; (NB: This is not a separate sub-programme, but the medium term objective of overall programme. In due course, when judged to be ready, GAM will be prepared for an independent credit rating, which in turn would allow the municipality to transition to a sustainable, independently debt-financed, capital investment programme.) 38 ANNEXURE 2: CASH INFLOWS AND OUTFLOWS 2014 - 2017 This data is drawn from the GAM long term financial model. Some items have been re- categorised. OPERATING INFLOWS ‫االيرادات الذاتية‬ Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Own operating revenues 218.321 243.250 264.478 275.780 Property, Land & Building Tax ‫ المسقÙ?ات‬/‫ضريبة االبنية واالراضي‬ 69.392 82.566 88.727 88.000 Building Permit Fees ‫رسوم رخص البناء‬ 20.933 22.075 23.831 23.000 Tenancy Contracts Fees ‫رسوم عقود االيجار‬ 0.338 0.450 0.371 0.350 Parking Fees ‫رسوم مواقÙ? السيارات‬ 0.329 0.340 0.330 0.200 Vocations Permit Fees ‫رسوم رخص المهن‬ 7.446 8.284 8.062 9.000 Signs & Billboards Fees ‫رسوم اللوحات واالعالنات‬ 8.054 9.447 11.021 14.000 Handcrafts Metiers permits fees ‫رسوم رخص الحرÙ? والصناعات‬ 1.675 1.748 1.726 2.000 Vocations Garbage fees ‫رسوم Ù†Ù?ايات المهن‬ 2.142 2.262 2.219 2.700 Domestic Garbage fees ‫رسوم Ù†Ù?ايات المنازل‬ 16.789 17.878 20.275 20.000 Sale of Supplies ‫بيع اللوازم‬ 0.312 0.044 0.140 0.500 Traffic Fines ‫مخالÙ?ات السير‬ 37.079 41.459 47.000 46.000 Health labs revenue ‫ايرادات مختبرات الصحة‬ 1.140 1.422 1.150 1.600 Graveyards (cemetery ) revenue ‫أثمان المقابر‬ 0.774 0.707 0.785 0.800 Gardens and parks rev. )‫ مرورية‬/ ‫ايرادات الحدائق (طيور‬ 0.164 0.196 0.194 0.180 Landfill fees ‫رسوم منع المكاره والمكبات‬ 3.069 7.262 7.449 8.000 Various ‫رسوم متنوعة‬ 14.989 8.528 9.407 9.000 Restaurant & cafes fees ‫رسوم المقاهي والمطاعم‬ 2.230 2.242 1.970 2.700 Penalties ‫الغرامات‬ 2.069 2.179 2.967 3.000 Confiscations ‫المصادرات‬ 3.079 2.553 4.650 3.000 Vegetables central market fees ‫رسوم السوق المركزي‬ 12.995 13.983 13.793 15.000 Slaughter House Fees ‫رسوم المسالخ‬ 6.024 6.362 6.065 6.000 Auction Fees ‫رسوم الدلالله والمزاد‬ 0.359 0.281 0.171 0.150 Retirement returns ‫عائدات التقاعد‬ 0.415 0.402 0.376 0.400 Zoning fees for Area C (high density area) ) C ‫عوائد تنظيم خاصة (منطقة‬ - - - 10.000 Network & Communications Installation ‫ االتصاالت‬/‫تمديدات الشبكات‬ 0.332 0.588 0.345 2.000 fees Fees from planned parking project ‫عدادات مواقÙ? السيارات‬ - - - 0.500 Public Transportation Revenues (licence ‫ايرادات النقل العام‬ 2.788 4.230 7.959 4.500 fees) Bldg Rent Fees ‫عوائد ايجارات االبنية‬ 1.944 3.541 2.568 3.000 Shares Investment dividends ‫عوائد استثمار االسهم والشركات وبيع االسهم‬ 0.539 0.717 0.194 0.200 Aljubaiha Entertainment Park Revenues ‫ايرادات مدينة الجبيهه الترويحية‬ 0.920 1.503 0.731 - Operating grants 19.500 15.000 15.500 20.000 Fuel Proceeds ‫عوائد المحروقات‬ 14.000 15.000 14.500 15.000 Government support iro separate ‫الدعم الحكومي بدل Ù?صل البلديات‬ 5.500 - 1.000 5.000 municipalities TOTAL OPERATING INFLOWS 237.821 258.250 279.978 295.780 39 CAPITAL INFLOWS Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Own capital revenues ‫مشاريع استثمارية‬ 48.191 53.957 49.275 74.000 Road Asphalt Cost Refunds ‫استرداد تكاليÙ? التعبيد والتزÙ?يت‬ 37.781 37.958 32.542 35.000 Land sale )‫بيع االراضي(الÙ?ضالت‬ 5.410 5.371 5.052 6.000 ‫بيع اراضي غير مستغله وال يمكن االستÙ?اده منها‬ Sale of unused lands - 3.128 8.681 - ‫لمشاريع االمانه‬ Venture tape ‫الشريط االستثماري‬ - - - 15.000 Investments sporadic ‫استثمارات متÙ?رقة‬ - - - 10.000 Instead of owning refundable (Abdali) )‫استمالكات مسترده(مشروع العبدلي‬ 5.000 3.500 - 5.000 GOVT repayment for GAM-implemented ‫استمالكات حدائق الملك عبدهللا الثاني‬ - 4.000 3.000 3.000 projects Capital grants - - - 8.427 EBRD grant Cell 5 )‫منحة إنشاء الخلية الخامسة(البنك االوروبي‬ - - - 5.250 Royal Court Grant ‫مبادرات ملكيه‬ - - - 3.177 Borrowing for capital expenditure 47.759 3.317 18.542 117.993 WB loan - Gas Recovery Project )‫قرض البنك الدولي (مشاريع الغباوي‬ 3.393 - - - EBRD loan - Gas Recovery Project ‫تكملة مشاريع الغباوي‬ - 0.511 3.224 7.000 EBRD loan - Cell 5 )‫قرض إنشاء الخلية الخامسة(البنك االوروبي‬ - - - 5.250 EBRD loan - Transfer Station ‫مساهمة االمانة Ù?ÙŠ إنشاء المحطة التحويلية‬ - - - 5.000 Syndicated loan - Fleet ‫تأجير تمويلي آليات ومركبات ومعدات‬ - - - 35.743 Loan - land expropriation ‫قرض تسديد االستمالكات‬ - - - 30.000 AFD loan - BRT )BRT( ‫قروض تمويل النقل العام‬ 0.228 2.806 7.019 35.000 Bridging finance - cheques under ‫تسييل شيكات برسم التحصيل‬ 23.335 - 8.300 - collection Syndicated loan - consolidation ‫توحيد قروض امانة عمان الكبرى‬ 20.803 - - - TOTAL CAPITAL INFLOWS 95.950 57.274 67.817 200.420 TOTAL INFLOWS Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Cash inflows Total operating inflows 237.821 258.250 279.978 295.780 Total capital inflows 95.950 57.274 67.817 200.420 TOTAL INFLOWS 333.771 315.524 347.795 496.200 40 OPERATING OUTFLOWS Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Payroll & Related Exp. ‫الرواتب واالجور‬ 119.414 125.577 133.311 144.000 Classified employees ‫رواتب اساسية للموظÙ?ين المصنÙ?ين‬ 3.406 2.833 2.837 2.600 Unclassified employees ‫رواتب اساسية للموظÙ?ين غير المصنÙ?ين‬ 11.302 13.819 15.573 17.300 Contract employees ‫رواتب الموظÙ?ين بعقود‬ 0.283 0.451 0.355 1.000 Retired employees/Pension ‫رواتب المتقاعدين‬ 5.656 6.032 6.834 9.000 Laborers fees ‫اجور عمال‬ 25.561 25.720 25.682 28.500 Personal cost-of-living Allowance ‫عالوة غالء المعيشة الشخصية‬ 23.131 24.282 24.969 26.500 Family cost-of-living Allowance ‫عالوة غالء المعيشة العائلية‬ 2.230 2.346 2.440 3.000 Overtime Allowance ‫عالوة العمل االضاÙ?ي‬ 4.309 4.002 4.997 4.000 Other allowances ‫عالوات أخرى‬ 20.630 21.718 22.915 23.000 Transportation allowance ‫عالوة النقل‬ 0.318 0.381 0.396 0.300 Car Allowance ‫بدل التنقالت‬ 0.323 0.347 0.320 0.300 Reward profession ‫مكاÙ?أة المهنة‬ 10.683 10.976 11.998 13.500 Other Rewards & Bonuses ‫مكأÙ?آت الموظÙ?ين‬ 1.895 1.895 1.997 2.000 Social security ‫مساهمة االمانة Ù?ÙŠ الضمان االجتماعي‬ 9.687 10.776 11.997 13.000 Operating expenses ‫النÙ?قات التشغيلية‬ 22.051 22.433 22.742 18.820 Rents ‫اإليجارات‬ 0.498 0.399 0.294 0.300 Post & Telecommunication ‫أجور برق وبريد وهاتÙ? وتلكس‬ 0.157 0.279 0.244 0.250 Water ‫أثمان المياه‬ 0.800 0.948 0.991 1.000 Electricity ‫أثمان الكهرباء‬ 10.485 13.267 12.352 10.000 Fuel ‫أثمان المحروقات‬ 1.041 0.030 0.175 0.183 Machinery & Vehicles Maintenance ‫صيانة السيارات واالالت ولوازمه‬ 4.307 1.585 2.496 0.570 Stationary & Printed Materials ‫القرطاسية والمطبوعات‬ 0.417 - - - Detergents ‫تنظيÙ?ات ولوازمها‬ 0.082 - - - Vehicles Insurance & License Renewal ‫تأمين وترخيص المركبات‬ 1.996 2.800 2.992 3.500 ‫(مواد مستودعية) شراء لوازم واثاث Ùˆ اجهزه مختلÙ?ه‬ Supplies 0.728 1.695 1.731 1.500 ‫و مالبس وقرطاسيه وتنظيÙ?ات ولوازمها‬ Other expenses ‫نÙ?قات آخرى‬ 1.522 1.398 1.397 1.467 Travel & Accommodation Exp )‫عالوة سÙ?ر (مياومات مهمات رسمية‬ 0.019 0.031 0.070 0.050 Other expenses ‫النÙ?قات االخرى‬ 22.219 27.535 21.701 27.125 Participations & Donations ‫المساهمات‬ 0.191 0.417 0.455 0.500 Contribute to support of separated ‫المساهمه Ù?ÙŠ دعم البلديات المÙ?صوله‬ 0.343 - - - municipalities Donations by GAM ‫المنتدى العربي‬ - - - 0.005 Educational Scholarships ‫البعثات العلمية والدورات الخارجية‬ 0.042 0.049 0.063 0.500 Social Supports & grants ‫االعانات واالعانات الدراسية‬ 0.005 0.018 0.020 0.020 Non Employees Rewards ‫المكأÙ?ات لغير الموظÙ?ين‬ 1.109 1.052 0.881 1.100 Previous Years Revenue Reversals ‫الرديات من ايرادات سنوات سابقة‬ 0.600 0.700 0.988 1.000 Loan interest ‫Ù?وائد القروض‬ 19.929 25.299 19.294 24.000 TOTAL OPERATING OUTFLOWS 163.685 175.545 177.754 189.945 41 CAPITAL OUTFLOWS Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Capital Expenditure ‫النÙ?قات الراسمالية‬ 83.712 106.989 128.809 224.005 Consultations & studies ‫دراسات واستشارات واشراÙ?‬ 0.594 0.330 0.310 2.500 New Roads, Asphalt, stairs, walls & ‫وضع خلطة اسÙ?لتية وصيانة الشوارع البنيه‬ 34.265 45.014 37.444 72.636 maintenance ‫التحتيه‬ Machinery & Vehicles Purchase, Fuel, Maint ‫شراء اليات واجهزتها وصيانتها ومحروقاتها‬ 20.989 20.736 16.324 53.619 Traffic & Lightening Enhancements ‫تحسين المرور واالنارة‬ 1.309 1.517 3.382 9.491 Construction materials ‫شراء مواد اوليه وصيانة مباني وانشاءات مختلÙ?ه‬ 2.193 1.391 2.526 3.950 Parks & Landscape development ‫تطوير الحدائق والمتنزهات‬ 0.864 0.189 1.023 3.450 Libraries & cultural projects Development ‫تطوير المكتبات ومشاريع ثقاÙ?ية‬ 0.586 0.686 0.803 1.695 Environmental projects ‫مشاريع بيئة والمحاÙ?ظة عليها‬ 0.378 0.269 0.420 0.745 Slaughter house & veg. market development ‫تطوير المسالخ وتطوير السوق المركزي‬ 0.191 0.109 0.126 - Computers & IT Supplies ‫مستلزمات الكمبيوتر واجهزة مختلÙ?ة‬ 1.917 1.929 3.102 5.620 Repayments of loans dating back to 2012 ‫تسديد اقساط القروض‬ 8.612 9.177 29.026 10.500 Special Projects ‫مشاريع خاصة ومخصصاتها‬ 5.517 22.995 32.923 51.448 ‫مساهمة االمانة Ù?ÙŠ مشروع الغباوي الممولة‬ GAM contribution Ghabawi project 6.195 2.640 1.400 - ‫بقروض البنك الدولي‬ Transfer station ‫مساهمة االمانة Ù?ÙŠ إنشاء المحطة التحويلية‬ - - - 5.000 Enhancing public transport - BRT ‫تطوير النقل العام‬ 0.100 0.006 - 3.350 Expropriation of land 37.849 30.837 29.283 30.000 Compensation for land expropriation ‫تعويض استمالك‬ 37.849 30.837 29.283 30.000 Funded projects ‫المشاريع الممولة‬ 3.393 1.962 11.122 52.500 Ghabawi project funded by WB loans ‫مشروع الغباوي الممول بقرض البنك الدولي‬ 3.393 - - - Gas recovery project - Funded by EBRD loan ‫تكملة مشاريع الغباوي‬ - 0.511 2.799 7.000 CELL 5 - Funded by EBRD grant )‫منحة إنشاء الخلية الخامسة(البنك االوروبي‬ - - - 5.250 CELL 5 - Funded by EBRD loan )‫قرض إنشاء الخلية الخامسة(البنك االوروبي‬ - - - 5.250 BRT - Funded by AFD ‫) Ù†Ù?قات‬BRT(‫تطوير النقل العام‬ - 1.451 8.324 35.000 TOTAL CAPITAL OUTFLOWS 124.954 139.788 169.215 306.505 TOTAL OUTFLOWS Actual Actual Actual Forecast Description ‫الوصÙ?‬ 2014 2015 2016 2017 Cash outflows Total operating outflows 163.685 175.545 177.754 189.945` Total capital outflows 124.954 139.788 169.215 306.505 TOTAL OUTFLOWS 288.639 315.332 346.969 496.450 42