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MODULE: Financial Strategies
FACILITATOR: Prof Dave Flynn
DUE DATE: 25 September 2012
NUMBER OF PAGES: 39
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2. REPORT AND RECOMMENDATIONS
PREPARED FOR CONSIDERATION BY THE EXECUTIVE MANAGEMENT COMMITTEE:
WESTERN CAPE DEPARTMENT OF HEALTH
[WCDOH]
25 SEPTEMBER 2012
IMPROVING FINANCIAL EFFICIENCIES, SERVICE DELIVERY AND PATIENT-CENTRICITY BY
CONSIDERING ALTERNATIVE FINANCE STRATEGIES, CAPITAL STRUCTURE POLICY, GREEN
PROCUREMENT POLICY AND TRIPLE-BOTTOM LINE PARTNERSHIPS
AN ANALYSIS OF THE RISKS AND REWARDS OF INNOVATING TO STRETCH THE HEALTH RAND
PREPARED BY:
AMANDA BRINKMANN
ADVISER TO THE MINISTER OF HEALTH: WESTERN CAPE GOVERNMENT
HEAD OF STRATEGIC PARTNERSHIPS: WESTERN CAPE GOVERNMENT
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3. TABLE OF CONTENT
1. Executive Summary
1.1 Agreement, Implications and Considerations
1.2 Decisions Required
1.3 Acknowledgements
2. Problem Statement
3. Objectives
4. Methodology and Approach
5. Existing Financial Strategy, Procurement Policy and Operational Realities: WCDOH
6. Finance Strategy and Procurement Policy Alternatives and Opportunities: Discussion
6.1 Zero-based and Activity-based Budgeting
6.2 Finance Decisions and Optimal Capital Structure
6.2.1 Gearing or Leverage
6.2.2 Financial Instruments
6.2.3 Establishing the full value of assets
6.3 Upfront purchase of Maintenance Contracts
6.4 Green Procurement
7. Operating Lease
7.1 General Advantages of an Operating Lease
7.2 Key Benefits of Operating Leasing to WCDOH
7.2.1 Financial Evaluation and Benefits of Operating Leasing
7.2.2 Proposed Structure of Operating Leasing Agreements
7.2.3 Cost Reductions, Benefits, Savings: Accruing to WCDOH
8. Conclusions
9. Recommendations
10. References
11. Glossary of Terms and Annexures
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4. 1. EXECUTIVE SUMMARY
This document summarises the potential risks and rewards to the WCDOH, of procuring high-
value assets by using operating leases instead of by way of once-off cash procurement as is
currently standard policy. Alternative finance strategies and procurement policy is proposed
for consideration, including the incorporation of Green Procurement policy. Operating leasing
is situated within the context of the range of provincial objectives and includes considerations
of Extended Producer Responsibility, Life-cycle costing and usage analysis and eventual
disposal management.
The report furthermore deals with Corporate Social Investment [CSI], Triple Bottom Line
strategic partnerships as an extension to this procurement option and the potential added
value that could accrue to the WCDOH, its employees and patients, over time.
1.1 Agreements, implications and considerations
1.1.1 An asset/equipment backlog exists generally within the WCDOH, but specifically at the
three [3] Tertiary, Central Hospitals: Groote Schuur Hospital, Tygerberg Hospital and
Red Cross Hospital.
1.1.2 Some, or all, of the facilities managed by the WCDOH have a shortage of equipment
and/or ageing or obsolete equipment that need to be upgraded or replaced.
1.1.3 There are real costs, financial and non-financial, associated with the lack of necessary
equipment in certain facilities.
1.1.4 The budget allocated by Treasury to the WCDOH is currently not sufficient to meet
the annual equipment demands of all facilities, and by inference, insufficient to reduce
and/or eliminate the existing backlog. [ Annexure C. Botha, T. 26 March 2012]
1.1.5 Strategic Partnerships, efficiency, innovation, stretching the healthcare rand and
patient-centricity are all at the very heart of achieving the objectives of the WCDOH.
[ Annexure C. Botha, T. 26 March 2012]
1.1.6 The WCDOH only wishes to consider operating leases and NOT finance leases.
1.1.7 Possible assets which could be leased, if this route were followed, would be limited to:
a) High-value, high redundancy, high maintenance, high technology assets, required
at the three Central [Tertiary, Educational] Hospitals and other facilities
b) Transversal IT systems of hardware and or networks or systems which would
support the WCDOH Information Management data capabilities.
1.1.8 The process must adhere to all of the relevant regulatory frameworks and the
WCDOH‟s existing procurement process must be enhanced.
1.1.9 The “Essential Equipment List” for Central, Regional and District Hospitals and clinics
is also considered, as well as the transversal IT requirements. This would imply that
such asset planning should extend beyond the Medium Term Expenditure Framework
[MTEF].[ www-personal.umich.edu]
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5. 1.2 DECISIONS REQUIRED
1.2.1 Principle agreement to pursue alternative finance strategy, procurement policy and
operating leasing along with triple bottom line partnerships within WCDOH.
1.2.2 Principle agreement to allow for individualized projects and case studies to be
conducted, under empirical conditions and within regulatory and policy frameworks,
so as to evaluate the qualitative, quantitative, tangible as well as intangible benefits of
operating leasing and alternative finance and procurement strategy over time.
1.3 ACKNOWLEDGEMENTS
This document is the culmination of a year-long investigative process that has involved
interrogation of data, research, interviews, robust debates, lobbying and hard work, dedication
and passion from a great many people. In no specific order, I wish to acknowledge the following
people:
 Minister of Health, Mr Theuns Botha and Head of Department: WCDOH, Prof Househam,
for having the vision and foresight to provide the mandate for the exploratory process.
 Mr Mike Loverock: Independent Financial Analyst – for assisting with the creation of the
financial models and scenarios.
 Mr Isaac Smith: Head of Procurement: WCDOH – for bringing his experience, knowledge,
skills and wisdom to bear whenever required.
 Messrs Van Niekerk, Jooste and Manning: Financial Management team: WCDOH – for their
openness to engage with new, innovative and different ideas and concepts.
 Manufacturers and suppliers of medical and other high technology equipment – for their
inputs regarding mechanisms that would add value to the procurement and life-cycle of
assets.
 Various officials, managers, role players and staff within Level 2 and 3 health facilities as
well as senior officials and management within WCDOH Head Office, too many to mention
by name - for their input in terms of desirability, feasibility and viability.
The intent remains for this to be a living document as we move towards becoming the Learning
Organisation [Liao, S. H., Chang, W. J., Wu, C. C., & Katrichis, J. M. 2011]. The hope is to arrive at
a policy solution which would deliver against the range of objectives of the WCDOH, whilst
mitigating any potential future financial and environmental risks. The report and recommendations
if adopted in its entirety will lead to the more effective use of capital, reduction in costs and
increases in available budget or free cash flow to WCDOH.
AMANDA BRINKMANN
Special Adviser to the Minister of Health & Leader of Government Business
HOD: Strategic Partnerships: Western Cape Government
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6. 2. PROBLEM STATEMENT
2.1 An asset/equipment backlog exists generally within the WCDOH, but specifically at the
three Tertiary, Central Hospitals.
2.2 Some, or all, of the facilities managed by the WCDOH have a shortage of equipment
and/or ageing or obsolete equipment that need to be upgraded or replaced.
2.3 There is particular need, as evidenced by the attached proposal titled: Strengthening
of the Surgical Platform: Western Cape Department of Health. [Brinkmann, A.
November 2011] for surgical theatres, suites and training facilities to be upgraded.
2.4 There are real costs, financial and non-financial, associated with the lack of necessary
equipment or the presence of ageing, inefficient, sub-optimal equipment in certain
facilities.
2.5 The budget allocated by Treasury to the WCDOH is currently not sufficient to meet the
annual equipment demands from all facilities, and by inference, insufficient to reduce
and/or eliminate the existing backlog. [ Annexure C. Botha, T. 26 March 2012]
2.6 National Treasury has issued a notice indicating a tightening of the budgetary
envelope. The estimated time horizon is anticipated to be three to five years. [National
Treasury Department: South Africa. August 2012]
2.7 Notwithstanding the above, negative impact on service delivery is not an option as is
evidenced by the Strategic Objective Four of the WCDOH as set out within the Annual
Performance Plan 2012/13[Annexure D: Western Cape Department of Health. March
2012] as well as with the spirit, content and objectives of Vision 2020 [Annexure B:
WCDOH. November 2011]. This is reiterated within the content of the WCDOH Budget
Speech 2012. [Annexure C. Botha, T. 26 March 2012]
2.8 There is an acute shortage of doctors and nurses in South Africa and Minister Aaron
Motsoaledi, National Minster of Health, has committed to the training of additional
clinical staff and the upgrade of facilities [Child, K. 11 Oct 2011].
3. OBJECTIVES
Through innovation in financial, procurement and strategic partnership strategies and policies,
within severe budgetary constraints, ensure improved delivery of the various strategic objectives
and service delivery outcomes of WCDOH as well as those of the Western Cape Government
[WCG] as a whole, without compromising either the present or future delivery of such services.
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7. 4. METHODOLOGY AND APPROACH
4.1 The existing capital structure [Flynn, D.2009. Chapter 13-3] and capital budgeting
structure [Flynn, D. 2009. Chapter 14-3] of WCDOH was interrogated and evaluated in
respect of efficiency and effectiveness.
4.2 The Five Principles of Financial Viability [Flynn, D. EDP 2012. Slide 26] were borne in
mind, adjusted for governmental circumstances.
4.3 The existing „Essential Equipment List‟ was assessed against what is required in reality
and adapted accordingly.
4.4 The benefits of new assets as well as replacement assets have been sufficiently
quantified for comparison against the opportunity cost of incurring finance costs.
4.5 Various pieces of legislation, policies, regulations, practice notes, strategies and plans,
as referenced within and annexed to this report were interrogated and reviewed.
5. EXISTING FINANCIAL STRATEGY, PROCUREMENT POLICY and OPERATIONAL
REALITIES: WCDOH
In summary, WCDOH currently employs the following financial strategies and policies:
5.1 Historic, Incremental Budgeting or Capped Budgeting
5.2 Working Capital Structure allows for the purchase of fixed assets mainly via outright
cash purchase
5.3 Valuation and Value are not quantified on the principles of risk and return in finance
5.4 Useful life of assets and operational maintenance are not adequately planned and
budgeted for
5.5 Budget priorities are not necessarily reflective of changing service delivery needs and
requirements
6. FINANCE STRATEGY AND PROCUREMENT POLICY ALTERNATIVES and
OPPORTUNIES: DISCUSSION
6.1 ZERO-BASED & ACTIVITY BASED BUDGETING
A hybridized version of a zero-based and activity based budgeting approach would allow for the
budget to be built around what is needed to deliver on the objectives of WCDOH.
6.2 FINANCE DECISIONS AND OPTIMAL CAPITAL STRUCTURES
6.2.1 Gearing or Leverage
An optimal capital structure strikes a delicate balance between cash funding and funding from
debt. An element of gearing or leverage, at a moderate level, could have the ability of bringing
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8. future procurement into the present. Long-term assets should ideally be procured via long-term
finance. Benefits and use are realized over time. [Flynn, D. 2009]
6.2.2 Financial instruments
Operational Leasing could fast-track the procurement of high technology, high maintenance, high
redundancy and high value equipment. Innovative contractual agreements between WCDOH,
Lessors and suppliers of assets could provide considerable added value.
6.2.3 Establishing the full value of assets
New techniques to establish the value of assets should be agreed based on the principles of risk
and return in finance.
6.3 UPFRONT PURCHASE OF MAINTENANCE CONTRACTS
WCDOH could purchase maintenance contracts up-front. This could lead to savings of up to 25%.
[Lipsitz, N. 6 October 2011]
6.4 GREEN PROCUREMENT
The White Paper on Greening the Procurement of Goods and Services within the Western Cape
Government [The Department of Environmental Affairs and Development Planning: Western Cape
Government. 21 June 2011] provides as follows:
6.4.1 Life-cycle analysis, costing, planning, sustainability and resource efficiency so as to
prolong the useful life of assets and re-use as long as possible.
7. OPERATING LEASE
In general, leasing is based on the concept that for the purpose of production / service delivery,
the determining factor is not the ownership of the assets to be acquired, but rather their
availability for use. [National Treasury.1 April 2000]
7.1 GENERAL ADVANTAGES OF AN OPERATING LEASE
7.1.1 Creating free cash flows within a budgetary constrained environment
7.1.2 Spreading the Cost by initially paying for use, thereby matching the costs of an asset
against the asset‟s future economic service potential
7.1.3 Complete Finance
7.1.4 Flexibility to add to or upgrade the asset base when required
7.1.5 Vendor Independence
7.1.6 Acceleration of service delivery projects via gearing
7.1.7 Transparency in contracting which improves governance
[www.fao.org. Accessed August 2012]
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9. 7.2 KEY BENEFITS OF OPERATING LEASING TO WCDOH
7.2.1 FINANCIAL EVALUATION and BENEFITS OF OPERATING LEASING
Annexure F: TABLE ONE: OPERATING LEASING BENCHMARK SCENARIO MODEL REFERS
The financial model was built on the following assumptions:
 WCDOH CAPEX budget for equipment is set at R200 million per annum.
 Budget growth: 5% per fiscal, which effectively neutralises inflation.
 Of the R200 million 2011/2012 budget, 50% [R100 million] is allocated to the procurement
of high value assets.
 WCDOH determines to acquire equipment to the value of R75 million via operating leasing
and the balance of R25 million via outright cash purchase.
 The equipment identified as appropriate for rental has an estimated minimum useful life
of seven years. To ensure the highest level of healthcare delivery, such equipment will
be replaced at the end of year five, but will continue in use at a separate / tier
two facility for its remaining economic life.
 All rates used in the cash flow evaluation are at market rates as at April 2011.
Western Cape - Department of Health
Capital Expenditure Budget 2011 – 2016
Annual increase 5% 2011/2012
1. Allocation for low-value equipment and other assets 100 000 000
2. Allocation for big-ticket assets * 100 000 000
Budgeted Expenditure 200 000 000
Cash Flows
Annual Budget 2011/2012 100 000 000
Cumulative 0
Rental Cash Flows 2011/2012 (17 601 918)
Cumulative 0
Cash Differential Current Year 82 398 082
Cumulative 0
Less: (assets not rented) Current Year (25 000 000)
Available Cash: Current Year 57 398 082
Cumulative 82 398 082
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10. The table and its summary above are interpreted as follows:
7.2.1.1 From the rental cash flow in 2011/2012 costs of only R17.6 million is incurred.
7.2.1.2 This creates a potential for gearing, at an applied factor of 4.5 (75 million / 17.6
million.
7.2.1.3 This form of acceleration may be imprudent on an annual basis, because of the
cumulative effect of rental payments on succeeding years‟ budgets.
7.2.1.4 Acceleration in the 2011/2012 and again in the 2014/2015 budget years have been
assumed, with the cash flow effects thereof running through until the 2018/2019
budget year.
7.2.1.5 Consistent with the analysis for the 2011/2012 year, a surplus cash position of
approximately R50 million is reflected for the 2014/2015 year, which in turn
creates the ability for WCDOH to once more accelerate the procurement of
equipment.
7.2.1.6 A financing strategy of this nature could be regarded as a moderate approach to
asset procurement, within which there are countless permutations.
7.2.1.7 A vital component in the strategic decision-making process in general, but
specifically in this regard, is the potential cost savings that accrue to the WCDOH.
7.2.2 PROPOSED STRUCTURE OF OPERATING LEASING AGREEMENTS
 The Lessor [who is vendor-independent] will purchase the assets from the supplier/s
selected by WCDOH at the best possible price, and
 The Lessor will negotiate a discounted up-front maintenance/service contract,
 The Lessor will include Extended Producer Responsibility into the contract,
 The Lessor and Vendor agree to redeploy assets into lower-tier health facilities at their
cost, which costs shall include transport, installation, full maintenance and training of
clinical staff, where relevant
 The Lessor will lease such assets to WCDOH at a fixed rate and over an agreed term, and
 The Lessor, through a separate corporate social investment agreement with The Health
Foundation, donates leased assets to the WCDOH, at the end of the agreed lease period.
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11. 7.2.3 COST REDUCTIONS, BENEFITS, SAVINGS: ACCRUING TO WCDOH
From a purely [and very limited] financial perspective, I would suggest that the acid test here is to
obtain comfort that the cost savings and benefits that accrue, at least exceed the costs of finance.
7.2.3.1 Ability to purchase up to four times more equipment by gearing moderately in
specific budgetary period
7.2.3.2 Creating free cash flows within the specific period so as to assist with service
delivery within financially constrained circumstances
7.2.3.3 By having state-of-the-art equipment at teaching hospitals, the ability to attract,
train and retain the best possible clinical talent in the province and country
7.2.3.4 By upgrading the surgical platform alone, it is anticipated that vast savings in
respect of patient experience, recovery, reduction in bed days, post-operative
morbidity and mortality would be achieved
7.2.3.5 The value of bringing future delivery into the present via sound finance and
procurement policies
7.2.3.6 Over time, replace obsolete and ageing equipment with sustainable, energy-efficient
assets
7.2.3.7 Inclusion of Extended Producer Responsibility into contractual agreements ensures
that the useful life the asset is extended as far as possible and that the cost of
disposal is vested in the producer
7.2.3.8 By planning for the acquisition of assets over the MTEF, a five, seven and ten year
horizon can be constructed; planning for the redeployment of assets to lower-
tiered facilities could be included into such planning
7.2.3.9 The cost of relocation, installation and training of staff related to assets will be
borne by the producer
7.2.3.10 Lower-tiered facilities will, over time, be able to diagnose and treat patients in situ,
thereby improving prognosis and overall patient outcomes, potentially saving the
health system considerable costs attached the late detection and treatment of
certain conditions
7.2.3.11 Savings related to the reduction in the maintenance division and budget of the
WCDOH over time as well as savings related to the up-front procurement of
maintenance contract, acting to mitigate finance costs over the term
7.2.3.12 Savings in transport of patients via Health Net – fuel, driver, support staff salaries
and consumables used en route
7.2.3.13 Hospitalisation costs at the facility to which the patients would have been taken,
which may include more bed days than would otherwise have been necessary
7.2.3.14 Savings in loss of man days [ and the costs thereof] related to providing at
treatment at facilities that are remote from the patient‟s home
7.2.3.15 General improvement of the patient experience and a complete move towards the
stated goal of patient-centricity by equipping the health network with improved
capacity and diagnostic abilities closer to where the patient is
7.2.3.16 Demand management, Disposal Management, Extended Producer Responsibility,
Full-life cycle assessment, costing and planning and contractual innovations
would optimize capital expenditure and asset acquisition
7.2.3.17 Improved staff morale and motivation over time
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12. 8. CONCLUSIONS
8.1 The existing planning, finance strategy and procurement policies within WCDOH are
not optimised to deliver against the changing service delivery needs of patients as well
as clinicians.
8.2 The very constrained budgetary environment necessitates looking at new and
innovative capital and finance structuring methodologies.
8.3 To achieve societal outcomes, there is a shift towards partnering via the sustainability
platform as is evidenced by the findings attached to the establishment of The Health
Foundation [ Ernst & Young. 9 February 2012. Annexure A] as well as the outcomes of
the UN Global Compact/Accenture CEO survey[Lacy, P; Cooper, T; Hayward, R;
Neuberger, L. June 2010].
8.4 Green procurement policy and principles provide significant additional opportunities to
save costs and improve efficiencies. [DEADP. 21 June 2011]
8.5 There is a compelling case to be made for the use of Operating Leasing and the
proposed contractual structure so as to accelerate service delivery and reduce the
existing equipment/asset backlog.
8.6 Such policy has the potential to benefit other departments within WCGOV. Department
of Education and the acquisition and renewal of ICT infrastructure spring to mind.
8.7 The proposed gearing factor of 4.5 could in essence accelerate asset procurement by
more than 100% every 3 years.
8.8 By implementing a prudent and moderate operating leasing procurement strategy,
significant long term savings and benefits could accrue to the WCDOH, its patients and
employees.
8.9 The proposed upgrade of the Surgical Platform in the province, with further reference
to the acquisition of equipment and training in Laparoscopy or Minimally Invasive
Surgeries [Heisler, J. January 2012.] could lead to significant cost-savings to the health
system as well as improved patient outcomes. This is evidenced by the outcomes of a
range of global studies.[Braga, M. et al. Dec 2005]; [Rodriguez, A et al. January
2011.];[Maslekar, S. et al.March 2007.]; [Roumm, AR. Pizzi, L et al. March 2009.];
[Goldsmith, H. Herman, L. January 2002.]
8.10 It goes without saying that any form of funding [bond, loan, finance lease, operating
lease] carries a financing cost. The WCDOH budget, which is allocated from Treasury,
of course does not carry such a cost, at least not to the WCDOH.
8.11 If the only analysis undertaken is to compare the allocated cash [per the WCDOH
budget] to any form of debt financing, and the end objective of the analysis is the
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13. quantum of assets that can be acquired over time, by definition cash will always
prevail, by virtue of the financing costs of debt.
8.12 Additional assets made possible through the use of alternate finance strategies, whilst
not generating income, could have a material impact on reducing costs.
8.13 Examples of these costs are dealt with in the main document, and should be identified
within the operating budget, and quantified. These could correctly be considered hard
cash savings that accrue to the WCDOH, and a tangible benefit.
8.14 A meaningful and correct analysis in comparing a cash purchase to an operating lease
solution is then to include a line in the budget in which these cost savings are
recorded.
8.15 Properly managed financing costs can be seen as the price that the WCDOH pays for
the ability to bring the procurement of essential medical equipment from future years
into the now. Coupled to this ability, is the concomitant reduction in associated
expenses.
8.16 We have to shy away from a purely rands and cents analysis when considering the
cost benefits of employing a moderate operating leasing strategy.
8.17 Whilst an operational lease is subject to compound interest over the lease period, this
cost should ideally be weighed up against the short-to mid-term benefits as described
within this report.
8.18 Although difficult, it would be useful to compare the full, actual cost of assets procured
by cash over the complete useful life of the asset.
8.19 Assets are generally „sweated‟ for as long as possible, but the cost of running an
operational maintenance unit is not factored in, accounted or budgeted for adequately.
[Gartner Group. 2003]. The complete cost of ownership of state assets is therefore
not known.
8.20 The proposed new standard for leases moves away from the current „risk and returns‟
basis to a „right of use‟ basis. This adjustment would make accounting for leases
more congruent with the Conceptual Framework for Financial Reporting 2010, as
drafted by the International Accounting Standard Board. [IASB.2010]
8.21 By continuing on a „ business-as-usual‟ path, the backlogs in equipment will not be
addressed and this would have material impact on the ability of WCDOH to achieve its
strategic objectives.
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14. 9. RECOMMENDATIONS
Given the constrained budgetary environment, the range of strategic objectives as iterated by the
WCDOH as well as Western Cape Government in general and the need to innovate so as to stretch
the health rand, the following recommendations are made for consideration by the Committee:
9.1 Zero-based and activity based budgeting to establish the real needs as required to
deliver against the objectives of WCDOH, specifically as those deliverables would up
operational efficiences, save costs in the longer term, improve quality and access to
services and be focused entirely on patient-centricity.
9.2 Based on the latter activity, develop a phased, rolling 10-year asset procurement plan,
that would seek to address the most immediate priorities over time.
9.3 These priorities would, in the main, be related to high technology, high redundancy,
high maintenance and high value assets. This should include ICT and management
information infrastructure.
9.4 Explicit rules need to be established which define the potential assets which would be
considered.
9.5 Key priority requirements should be projectised.
9.6 Such projects and case studies would be decided based on the necessity of the
procurement of such equipment so that such procurement aligns with delivery of the
Strategic Objective Four [ 4] of the WCDOH as set out within the Annual Performance
Plan 2012/13[Annexure D:Western Cape Department of Health. March 2012] as well as
with the spirit, content and objectives of Vision 2020 [Annexure B: WCDOH. November
2011]. Such projects would furthermore be guided by the content, intent and spirit of
the WCDOH Budget Speech 2012. [ Annexure C. Botha, T. 26 March 2012]
9.7 Certain projects, such as for instance the upgrading of the Surgical Platform in the
province, could be managed by the Strategic Partnerships portfolio in collaboration
with The Health Foundation. This recommendation is based upon the fact that a
significant number of suppliers, manufacturers and donor partners have already
indicated their support for such a project. The balance of funds which are not
secured via such partnerships and donations could be financed by WCDOH.
9.8 Operating Leasing, used in a moderate and pragmatic manner should be adopted as
part of the WCDOH‟s finance and procurement policy and strategy.
9.9 The proposed structure of the Operating Leasing agreement, as proposed within this
report should be adopted and all contracts negotiated on this basis so that the full
added value benefits to WCDOH and its patients are realised over time.
9.10 The benefits of new as well as replacement assets must be quantified in order to
assess this cost against the opportunity cost of incurring finance costs.
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15. 9.11 Factors, including: Net Present Value calculation should include, amongst others: *
Value of the asset * Funds being paid * Maintenance costs * Administration costs*
Potential staffing costs * Disposal value/cost of asset used * Environmental costs*
Input materials and resources required to operate the asset * Capital cost of the
asset* Positive cash flows that the asset is expected to generate, net of financing costs
*Changes to working capital requirements
9.12 Other than cash flows as basis for the valuation technique, other factors, such as the
capacity to influence existing and future service delivery, capacity to influence future
cash flows, capacity to generate present and future benefits, rewards or savings,
timing of cash flows and impact of the investment on the business operations should
be taken into consideration. WCDOH must appropriately evaluate whether the
benefits of ownership of equipment or assets in the present, seem to be greater than
the wealth foregone, expressed as the price. We should establish whether the total
exchange price is in reality lower than the value or worth of the asset to WCDOH.
9.13 Accounting for leases must be congruent with the Conceptual Framework for Financial
Reporting 2010, as drafted by the International Accounting Standard Board [IASB] as
well as Finance Instruction G22/2009. [Jooste, J. 27 March 2009]
9.14 Finally, it is my assessment, based on all of the information gathered, assessed,
interrogated and discussed over the past year, subject to internal compliance issues
being satisfied, that an Operating Lease methodology as proposed within this report
can generate compelling and very real benefits to the WCDOH and should therefor
form part of the overal finance, procurement and funding strategy.
9.15 In general, the Finance, Investment and Capital structures of WCDOH should be
reviewed so as to be in more in keeping with the delivery of the strategic objectives of
the Western Cape Government, The Western Cape Department of Health and with the
changing service delivery and business landscapes.
The report and recommendations if adopted in its entirety will lead to the more effective use of
capital, reduction in costs and increases in available budget or free cash flow to WCDOH.
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16. 10. REFERENCES: FINANCIAL STRATEGIES REPORT AND RECOMMENDATIONS
Botha, T. 26 March 2012. Western Cape Health Budget Speech 2012 by Mr Theuns Botha,
Minister of Health at Western Cape Provincial Legislature
Braga,M.et al. December 2005. Laparoscopic versus open colorectal surgery: cost-benefit analysis
in a single center randomized trial.
Campbell, R. H. 2012. http://financial-dictionary.thefreedictionary.com/Finance+Lease. Define:
Financial Lease. Accessed August 2012
Child, K. 11 Oct 2011. Health Minister promises more doctors and nurses. www.mg.co.za.
Accessed September 2012
Enterprise Financial Solutions. 2012. Definition of Operating Lease
Ernst & Young. 9 February 2012. The Health Foundation: The Journey Thus Far. Presentation
format.
Flood, R.1999. Rethinking the Fifth Discipline: Learning from the Unknowable.
Flynn, D. EDP 2012. Financial Strategies Presentation document.
Flynn, D. 2009. Understanding Finance & Accounting. Chapter 6. Pg 27. 6. Non-financial issues in
analysis; 6.1 The Balanced Scorecard
Gartner Group. 2003. Total Cost of Ownership model.
Goldsmith, H. Herman, L. January 2002. Endoluminal gastroplication. A new therapeutic
endoscopic procedure for gastro-esophageal reflux disease.
Heisler, J. January 2012. Definition of Laparoscopic Surgery. About.com Guide. Accessed August
2012
http://www.businessdictionary.com/definition/positive-cash-flow.html. Define: Positive Cash
Flows. Accessed September 2012
http://www.fao.org/docrep/W4343E/w4343e08.htm. Basic Finance for Marketers. Advantages of
Operating Leases. Accessed August 2012.
http://www.investopedia.com/terms/n/npv.asp. Define: Net Present Value [NPV]. Accessed
August 2012.
http://www.investopedia.com/terms/o/operatinglease.asp. Define: Operating Lease. Accessed
August 2012.
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17. http://www-personal.umich.edu/~alandear/glossary/m.html#mtef2. Definition: Medium Term
Expenditure Framework [MTEF]. Accessed September 2012
International Accounting Standards Board [IASB]. 2010. The Conceptual Framework for Financial
Reporting. www.ifrs.org. Accessed August 2012
Jooste, J.M. March 2009. Finance Instruction G22/2009. Classification of Lease Agreements in the
Standard Chart of Accounts as well as the Reporting on Lease commitments at the end of each
financial year.
Lacy, P; Cooper, T; Hayward, R; Neuberger, L. June 2010. A New Era of Sustainability. UN
Global Compact Accenture CEO Survey study 2010. ; CEO reflections on progress to date,
challenges ahead and the impact of the journey toward a sustainable economy.
Liau, S.H.,Chang, W.J., Wu, C.C. & Katrichis, J.M. 2011. A survey of market orientation.
Lipsitz, N. 6 October 2011. CT Tender: Savings on upfront maintenance contracts: Siemens and
City of Cape Town
Maslekar, S. et al. March 2007. Cost analysis for trans-anal endoscopic micro-surgery for rectal
tumours
National Treasury Department: South Africa. August 2012. Medium Term Expenditure Framework
Guidelines. Preparation of Expenditure Estimates for the 2012 Medium Term Expenditure
Framework.
National Treasury: South Africa. Public Finance Management Act No. 1 of 1999 [PFMA]. Date of
commencement: 1 April 2000. Updated to Government Gazette 33059, 1 April 2010.
Public Finance Management Act No1. Of 1999 [PFMA]. Date of Commencement: 1 April 2000.
Gazette#25915. Public-Private Partnerships issued in terms of the Public Finance Management
Act. Treasury Regulation 16.
Rodriguez, A et al. January 2011. Providing endoscopy for underserved patients benefits public
health and resident education.
Roumm, AR. Pizzi, L et al. March 2009. Minimally invasive: minimally reimbursed? An examination
of six laparoscopic surgical procedures.
The Department of Environmental Affairs and Development Planning [DEADP]: Western Cape
Government. 21 June 2011. Draft White Paper on Greening the Procurement of Goods and
Services within the Western Cape Government. Provincial Gazette Extraordinary No. 6880
Vancock, H. 2007. "Dimensions of sustainability". Journal of Engineering for Sustainable
Development: Energy, Environment, and Health 2 (1): 47–57.
Western Cape Department of Health [WCDOH]. November 2011. 2020 –The Future of Health Care
in the Western Cape. A Draft Framework for Dialogue
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18. Western Cape Government Department of Health. March 2012. Health Annual Performance Plan
2012/13. www. Westerncape.gov.za/health. Accessed March 2012.
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19. 11. GLOSSARY OF TERMS and ANNEXURES
GLOSSARY OF TERMS
1. Non-financial issues in analysis
This methodology takes issues of interest and benefit to a variety of stakeholders into account,
which issues may not be directly viewed as being able to be measurable in financial terms. These
issues nonetheless add value and so to provide a complete analysis, should be considered as part
of emergence: the whole being larger than the sum of the parts. [Flynn, D. 2009]
This requires systemic evaluation rather than the quite one-dimensional practices that are often
used in analysis models and requires a leap from current conservative measurement metrics to
William Flood‟s integrated model of systems thinking, design and systemic evaluation. [Flood,
R.1999]
2. The Balanced Scorecard
The Balanced Scorecard focuses not only on the financial outcomes, but also on the operational,
marketing and developmental facets of a company/organisation. This tool links the objectives and
strategies of the organisation to measurable outcomes, but not only in financial terms. One of the
main challenges for financial management is to identify and agree on the strategies that would
achieve the overall goals and objectives of the organisation via a process of strategy mapping.
The further challenge is inherent in apportioning weighted values or quantum‟s to such non-
financial outcomes. [Flynn, D. 2009]
3. The Triple Bottom Line
People. Profit. Planet.
In her article, titled, Dimensions of Sustainability, published in the Journal of Engineering for
Sustainable Development, Energy, Environment and Health, Hasna Vancock [ Vancock, H. 2007]
speaks to the fact that sustainability is a process – this process deals with the development of all
aspects of human life that affects sustenance. This process involves constantly trying to balance
conflicting goals, objectives and interests and involves the simultaneous pursuit of economic
prosperity, environmental quality and social equity, known as the three dimensions or the Triple
bottom line. Triple Bottom Line Reporting is fast becoming mandatory for listed companies and
government.
4. Finance Lease
A agreement where the lessor receives lease payments to cover its ownership costs. The lessee is
responsible for maintenance, insurance and taxes. Some finance leases are conditional sales or
hire purchase agreements. [Campbell, R.H. 2012]
5. Operating Lease
A contract that allows for the use of an asset, but does not convey the rights of ownership of the
asset to the lessee. An operating lease is not capitilised; it is accounted for as rental expense in
what is known as „off balance sheet financing‟. For the lessor, the asset being leased is accounted
for as an asset and depreciated as such. Operating leases result in assets or liabilities not being
recorded on the lessee‟s balance sheet. This can improve the lessee‟s financial ratios.
[http://www.investopedia.com/terms/o/operatinglease.asp]
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20. 6. Capital Structure
Capital is a scarce commodity. The objective of business management is to create value and add
value by the correct allocation of scarce resources. There are two primary ways in which capital
is used to return in an operating business. These are investments in fixed assets and in current
assets that are referred to as working capital items.
Financial Management has to align the capital structure of an organisation
[debt; equity; cash; liquidity] to achieve the objectives, strategies and desired outcomes of the
business most optimally. [Flynn, D. 2009. Chapter 13-3]
7. Capital Budgeting
In the case of government, capital budgeting is the process of evaluating projects that generate
improvements in service delivery outcomes and that align with the achievements of the Strategic
Objectives of a particular department and the provincial government as a whole. In its broadest
sense, the term is used for any expansion or replacement decision.
All of the principles of capital investing are pertinent to capital budgeting. The capital investment
decision must earn the required return on investment in order to add value or by adding value to
the activities of the organisation.
Capital budgeting decisions are generally considered to be more risky than working capital
decisions, because capital budgeting decisions carry long-term commitments of funds and are not
easily reversed if they prove to be unsuccessful. [Flynn, D. 2009. Chapter 14-3]
8. Net Present Value [ NPV]
This methodology compares the value of a rand today to the value of the same rand in the future,
taking inflation and returns into account. If the NPV of a prospective project is positive, it should
be accepted. Conversely, if NPV is negative, the project should probably be rejected because cash
flows may also be negative. [www.investopedia.com]
9. Positive cash flow
Creating a situation where cash inflows during a period are higher than the cash outflows during
the same period. Positive cash flow, in the case of government, does not mean profit. It is
achieved due to the careful management of cash inflows and expenditure.
[www.thebusinessdictionary.com] The Capital Structure [Flynn, D. 2009. Chapter 13-3] plays a
large role in determining an organisation‟s positive or free cash flows.
10. Working capital policies and management
Financial managers constantly grapple with decisions relating to risk and return in all aspects of
the business. Working capital is no exception. This decision is also a clear risk and return issue.
Managers must decide how much of the scarce resources of capital should be invested in inventory
and debtors and then determine the extent to which creditors will be used to finance further
investments. In government terms, a more conservative policy would aim to be less reliant on
short-term credit, financing a greater proportion of current assets through the use of longer-term
finance. [Flynn, D. 2009. Chapter 13-3]
Commentary: Within the context of the report presented, working capital policies are
recommended so as to free up much needed cash flows within the narrowing fiscal envelope,
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21. whilst not compromising on the ability to procure much needed equipment required to improve
service delivery in the immediate future.
11. The Learning Organisation
In their abstract, A survey of market orientation research [Liao, S. H., Chang, W. J., Wu, C. C., &
Katrichis, J. M. 2011], we become aware that a Learning Organisation refers “to an organisation-
wide activity involved in creating and using knowledge to enhance competitiveness”.
12. Laparoscopic Surgery
Laparoscopic surgery, also known as minimally invasive surgery, is a technique that allows surgery
to be performed without the long traditional incision. By using multiple small incisions, each a few
centimeters long, the surgeon inserts instruments including a tiny camera. The camera allows the
surgeon to visualize the surgery. Incisions are made through the skin, muscle and other tissue,
making laparoscopic surgery safer as less tissue is cut [Heisler, J. January 2012.].
13. Extended Producer Responsibility
Extended Producer Responsibility is based on the „Polluter pays‟ principle and entails making
manufacturers responsible for the entire lifecycle of the products and packaging they produce.
This means companies that manufacture, import and/or sell products and packaging, are required
to be financially or physically responsible for such products after their useful life. They must either
take back spent products and manage them through reuse, recycling or in energy production or
delegate the responsibility to a third party which is paid by the producer for the spent-product
management. [DEADP.June 2011]
14. Life-Cycle Costing Analysis or Life-Cycle Cost Assessment
This is a procurement evaluation technique which determines the total cost of acquisition,
operation, maintaining and disposal of the items acquired; the lowest ownership cost during the
time the items is in use. [DEADP.June 2011]
15. Disposal Management
This refers to the decommissioning, clearance and removable of unserviceable, redundant and
obsolete assets. It considers obsolescence planning; maintaining a data base of redundant
material; inspecting material for potential reuse; determining a disposal strategy; and executing
the physical disposal process. [DEADP.June 2011]
16. Capped Budgeting
Budgeting is done by using historic or incremental budgeting, which has, in the main, the net
effect of not necessarily being able to keep pace with the constantly changing healthcare needs of
the citizens of the province or the changes required within the healthcare system as a whole.
Capped budgeting, by inference, remains unchanged, irrespective of the changing needs of the
organization and its clients.
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22. 17. Zero-based Budgeting and Activity-Based Budgeting
Expenses are justified for each new period and starts from a zero base. Each function within the
organization is analysed for needs and costs and budgets are built around what is need for the up-
coming period, regardless of whether such budgets are higher or lower than the previous period.
This allows for strategic goals to be implemented into the budgeting process.
Activity-based budgeting means that all activities that incur costs in every functional area of the
organization are recorded, their relationships defined and analysed. Activities are tied to the
strategic objectives, after which the cost of the activities are used to create the budget. This also
provides opportunities to streamline costs and improve business processes and activities. [Flynn,
D. 2009]
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23. ANNEXURE A: ERNST & YOUNG. 9 FEBRUARY 2012. THE HEALTH FOUNDATION: THE
JOURNEY THUS FAR. SLIDE 23 EXTRACTED FROM PRESENTATION
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24. ANNEXURE B: 2020 – The Future of Health Care in the Western Cape. A Draft
Framework for Dialogue: Key excerpt of material relevance to the Report and
Recommendations
“It is important to reflect on the achievements to date, what worked (and what did not) and the
lessons learned. While a formal external evaluation of the 2010 plan has not been undertaken, this
document summarises the most important achievements and lessons learned. An important theme
throughout the document is what should be done differently. (Section A).”
“What is the case for change? The compelling motivation for change includes changes in provincial
demography, socio-economic determinants of health and the burden of disease; advances in
technology; and the global, national and provincial policy environment. Sustaining the current
good practices, and improving others, is key to becoming a world class organisation. We
must focus on key priorities and the most cost-effective interventions within the limited
resources available. (Section B)”
“The planning for 2020 takes cognisance of both national and provincial policy developments.
Important policy frameworks include the “green paper” on the National Health Insurance, the
national Human Resources for Health framework and the provincial strategic plan, with particular
emphasis on Strategic Objective 4 (Improving Wellness). (Section B).”
“Prevention of disease and the promotion of wellness is the basis of health service development.
The upstream factors that contribute to the burden of disease will be addressed with the relevant
stakeholders through a “whole of society” approach. This approach has been recently endorsed
through the Cape Town Declaration on Wellness. The Department of Health will focus on
prevention and downstream promotion within the health service delivery platform. (Annexures A
and B).”
“The Department has drafted a broad strategic overview of a desired health care system in 2020.
Seven guiding principles have been identified to guide the 2020 strategy (Section C):
1. Patient-centred quality of care
2. A move towards an outcomes-based approach
3. The retention of a Primary Health Care philosophy
4. Strengthening the District Health Services model
5. Equity
6. Affordability
7. Building Strategic Partnerships “
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25. ANNEXURE C: WESTERN CAPE HEALTH BUDGET SPEECH 2012 BY MR THEUNS BOTHA,
MINISTER OF HEALTH AT THE WESTERN CAPE PROVINCIAL LEGISLATURE
EXCERPTS OF MATERIAL RELEVANCE TO THE REPORT AND RECOMMENDATIONS
“Creating Wellness
The department is now engaged in planning for 2020 to determine the service requirements
going forward to 2020 and beyond. It will enable human resources, infrastructure and other
requirements to be identified that will shape the future services. At the heart of the vision
for 2020, there is a renewed commitment to a quality, caring and patient-centred health
service and improved health outcomes where the care pathways will be designed to
respond to patient needs.”
“The shift in focus from illness to one of promoting and seeking wellness that gained significant
ground during 2011/2012 culminating with the Wellness Summit and the ensuing Cape Town
Declaration will be further strengthened in the coming year. In particular, I am committed to
developing wellness centres that will increase the access in communities to health services and
activities promoting a healthier lifestyle.”
“Public private partnerships
Partnership with a range of stakeholders have increased year-on-year during the term of
this government. In the past two years, the province has been able to secure successful
partnerships with the private sector that have led to significant contributions to our
healthcare system. These public-private partnerships leverage the talents of the private
sector for the benefit of public sector patients. It is based on a win-win philosophy that
improves the physical health of patients and the financial health of the economy.”
“Surgical skills training centre
Located at the Red Cross War Memorial Children's Hospital, this centre is a partnership with the
Children's Hospital Trust and Karl Storz Endoscopy SA, the latter having donated R10 million in
equipment and technical assistance. It is the only training centre on this continent for
surgeons-in-training from across Africa.”
“Western Cape Health Foundation
Supporting our efforts increase departmental income to address the R800 million
maintenance backlog, we have appointed Ernst and Young Consultants, which resulted in the
establishment of the independent Western Cape Health Foundation.
The Foundation will take responsibility for the Commercial Rights project and independently
spearhead new and innovative initiatives to generate resources for health. This is a
significant step in strengthening this key relationship between the department and the
private sector.
I am encouraged that a number of prominent people, including Dr Paul Cluver, who will chair the
board of directors of the Health Foundation, have been willing to give of their time and energy to
promote better health in the Western Cape. Clearly an example of people who also feel that it is
better together! The Foundation will be publicly introduced in the coming months.
These examples certainly demonstrate that the Western Cape has succeeded in responding with
solutions which have proved to bring about better health outcomes. At the heart of our
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26. provincial system is a commitment to accountability, affordability and efficiency - all
necessary elements for high-quality health outcomes.”
“The focus areas of the department in the coming 2012/2013 financial year include:
1. Developing action plans to improve overall patient experience and quality of clinical
care.
2. The full commissioning of the Khayelitsha Hospital.
3. Commissioning of the Mitchell's Plain Hospital.
4. Finalising the 2020 strategy and plan for health services in the Western Cape.
5. Finalising the priority projects related to the Cape Town Declaration on Wellness including
the:
 High Five area approach to reduce alcohol-related injuries.
 Healthy lifestyle campaign to decrease the incidence of chronic disease.
 Programme to reduce intimate partner violence.
6. Improving maternal and child health outcomes.
7. Achieving an unqualified audit for finance, human resources and pre-determined
objectives.”
“Challenges
The allocation to the department in 2012/2013, although increasing in nominal terms, is
marginally less in real terms than the 2011/2012 Adjusted Budget. The gap between the
need for health services and the available resources remains the challenge and increases
the need to increase efficiency, work smarter and reprioritise services within the
existing baseline allocation.”
“Distribution of the budget
The budget of the department is divided between the eight budget programmes with R12.722
billion or 87% of the vote being allocated to Programmes 2, 3, 4 and 5 which fund the direct
operational costs of providing health services.
Compensation of employees accounts for R8.478 billion or 58% of the total budget. The
department has allocated approximately 31 % or R4.456 billion to the procurement of goods and
services, which amounts to approximately 55% of the goods and services procured by the Western
Cape Government. “
“Programme Three: Emergency Medical Services
Emergency Medical Services, which is responsible for the provision of emergency medical transport
including inter-hospital transfers and planned patient transport, is allocated R701 million or 4.8%
of the vote.
An amount of R15 million has been allocated provisionally for the Information
Communication Technology system. This new computer-aided dispatch system, required to
replace the existing system, will provide both the communication centre solution and the vehicle-
based solution. It is anticipated that the system, once implemented, will improve the efficiency of
the ambulance dispatch process and will also provide real-time information. “
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27. “HealthNet is a transport service for our patients and the only-of-its-kind in the country. We
have a fleet of 78 HealthNet vehicles, adapted for ill patients, which transport approximately
4000 patients from rural areas across the province to central hospitals per month. The service
employs 95 personnel and performs outpatient transfers between levels of care.
This transport infrastructure also transfers patients from primary healthcare facilities to regional
and district hospitals. Although the service is often under unfair scrutiny, the new electronic
supply and demand system will certainly improve the booking system, and address the problems
of misuse.”
“Programme Four: Provincial Hospital Services
This programme is responsible for the provision of general specialist and specialised
hospital services that include tuberculosis, psychiatric, rehabilitation and dental training hospitals.
Central hospitals, which are large functional service delivery structures, are integral to a
coherent health care delivery system at provincial level. These hospitals are the health
facilities where a majority of health sciences trainees are trained to become health
professionals, and where much of the health professional service skills, health
research and knowledge capital resides.
The Western Cape is the only province that over a number of years attempted to define and
manage general and highly specialist services separately within the central hospitals. The funding
of these services was distributed accordingly to separate budgetary programs however after
concluding that with the current information and management systems that this was not possible
the department has reverted to funding the hospitals as functional entities. This reinforces the
argument that to attempt to manage and fund these hospitals divorced from the health system
within which they function is not viable.”
“Programme Five: Central Hospital Services
The central hospitals, Groote Schuur Hospital, Tygerberg Hospital and Red Cross Children's
Hospital, provide highly specialised healthcare services and a platform for research and
training of health workers by the universities. All three hospitals provide highly
specialised services as national referral centres.
Central hospitals are allocated R4.212 billion or 28.8% of the vote in 2012/2013, which amounts to
a nominal increase of R240.029 million or 6%.
The total National Tertiary Services Grant of R2.182 billion, R270 million of the Health Professions
Training and Development Grant and R3 million of the National Health Insurance Grant constitute
approximately 58% of the funding allocated to this programme. The balance of R1.757 billion
allocated to the programme is derived from the provincial equitable share, which clearly illustrates
the extent of the underfunding of highly specialised services by the national conditional
grants. Personnel costs are especially high in these hospitals constituting approximately 69% of
the expenditure of this programme.
The central hospitals will manage approximately 140 395 patient admissions in 2 545 beds and 1
123 389 patient day equivalents at a cost of R3 244 per patient day equivalent.”
“The provincial equitable share funding has been allocated as follows:
 R47 million for the purpose of maintaining current infrastructure.
 R11 million for preventive maintenance.
 R180 million for the purpose of maintenance and capital expenditure.
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28.  R12 million for Red Cross War Memorial Children's Hospital.”
“Although the Western Cape does not support the National Health Insurance green paper
in its current format, it does not mean that the province will not participate in the NHI pilot
projects.
As an alternative solution, Western Cape Government proposes Universal Healthcare, built
on a primary healthcare basis, similar to the structures implemented in the Western Cape at
present, where patients are referred to regional and specialised facilities according to their medical
needs, and government providing the transport infrastructure. The rest is governance-based on
good business principles - financial discipline, efficiency, equality, modernisation,
monitoring and evaluation.
The lesson we have learned in the Western Cape is that we can improve healthcare for everyone
by strengthening the positive elements of the public sector and removing its
deficiencies on a planned and sustained basis. “
“In the efforts to increase wellness by working together we can all be better together! If all
those who work in the department work effectively and efficiently and make the best use
of the available funds to provide the best service, we can be better together!”
“Improving the health status and well-being of the people of the Western Cape can only be
achieved through partnerships, put differently by working better together we can all live
a better life!
Thank you!”
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29. ANNEXURE D: WESTERN CAPE GOVERNMENT HEALTH. ANNUAL PERFORMANCE PLAN.
2012/13.
EXCERPT SUMMARISING STRATEGIC OBJECTIVE FOUR [4]
“The draft strategy for 2020 has two main thrusts, as described in the Strategic Objective:
Improving Wellness (SO 4) that forms part of provincial strategic plan.
Firstly, at the heart of the vision of 2020 is a renewed commitment to a caring, quality,
patient-centric health service. The district health service, supported by all levels and sections
of the service is the key vehicle to deliver this quality health service. The PHC philosophy implies a
comprehensive health service across levels of care and the various sectors allowing for meaningful
and active participation by communities.
The limited resource base compared to the need for health services demands a more
focused approach to improve health outcomes in the most efficient and productive
manner possible. The Department acknowledges that addressing these challenges requires
strong partnerships with a range of role players.
Secondly, there is an important conceptual shift from managing the consequences of the burden
of disease to improving wellness. Central to this approach is an increased emphasis on prevention
and promotion by addressing the upstream risk factors that impact on health and wellness in the
whole of society. The endorsement at the Western Cape Health Summit held in November 2011 of
the Cape Town Declaration on Wellness by approximately 250 delegates from all sectors of society
in the Western Cape was an important milestone in this regard. There are six focus areas that
have been identified and work is underway to identify, plan and implement projects in these
areas.”
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30. ANNEXURE E: FINANCE INSTRUCTION G22/2009
CLASSIFICATION OF LEASE AGREEMENTS IN THE STANDARD CHART OF ACCOUNTS AS WELL
AS THE REPORTING ON LEASE COMMITMENTS AT THE END OF EACH FINANCIAL YEAR
1. The contents of this Finance Instruction must be brought to the attention of all
officials concerned.
2. Finance Instruction G19/2009 dated 10 March 2009 is applicable to the 2008/2009
financial year only and is repealed as from 1 April 2009.
However Finance Instruction G22/2009 must be read in conjunction with Finance
Instruction G19/2006 dated 13 April 2006.
3. PURPOSE
3.1 The purpose of this Finance Instruction is to provide guidance to all financial staff on
the economic classification of lease payments in the budget and in BAS using the
new SCOA accounts and segments. In addition the circular clarifies the link
between the economic classification and the disclosure requirements in the Annual
Financial Statements and also introduces the differentiation between Operational
and Financial Leases.
4. DEFINITION OF LEASE COMMITMENTS
4.1 Lease commitments represent amounts owing from the reporting date to the end
of the lease contract.
4.2 A lease is a contract that gives the lessee (the renter) the right to use an asset for
an agreed period of time in return for a payment or series of payments.
4.3 A finance lease is a lease that transfers substantially all risks and rewards incidental
to ownership of an asset. Title may or may not eventually be transferred
4.4 An operating lease is a lease other than a finance lease.
4.5 Economic life is the period over which an asset is expected to yield economic
benefits or service potential to one or more users.
4.6 Useful life is the estimated remaining period, from the beginning of the lease term,
without limitation by the lease term, over which the economic benefits or service
potential embodied in the asset are expected to be consumed by the entity
4.7 The definition of a lease includes contracts for the hire of an asset, which contain a
provision giving the option to acquire title upon the fulfillment of agreed conditions.
These contracts are sometimes known as hire purchase contracts.
4.8 It is common practice for contracts to be termed rental agreements. This therefore
does not mean that this is excluded from being a lease. One still needs to go
through the conditions of the contract to determine whether it is a finance lease or
an operating lease.
4.9 It is important to note that the payment of a lump sum amount (rather than regular
periodic payment such as monthly payments) does not preclude lease accounting
as such arrangements may still meet the definition of a lease.
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31. 5. DETERMINATION OF A FINANCE LEASE VS. OPERATING LEASE
5.1 FINANCE LEASE
Lessor Lessee
Treat as a sale Treat as a purchase
Asset
Lease that transfers substantially all the risks and rewards of ownership
5.2 OPERATING LEASE
Lessor Lessee
Right to use the
asset
Lease that does not transfer substantially all the risks and rewards of ownership
6. CLASSIFICATION OF LEASES
6.1 The classification of leases is based on the extent to which risks and rewards
incidental to ownership of a leased asset lie with the lessor or the lessee rather than
on which party has legal ownership over the asset.
6.2 Risks include the possibilities of losses from idle capacity, technological
obsolescence or changes in value due to changing economic conditions. Rewards
may be represented by the expectation of service potential or profitable operation
over the asset’s economic life and of gain from appreciation in value or realisation
of a residual value
6.3 Although the following are examples of situations, which would normally lead to a
lease being classified as a finance lease, a lease does not need to meet all these
criteria in order to be classified as a finance lease:
 The lease transfers ownership of the asset to the lessee by the end of the lease
term;
 The lessee has the option to purchase the asset at a price which is expected to
be sufficiently lower than the fair value at the date the option becomes
exercisable, so that at the inception of the lease it is reasonably certain that the
option will be exercised;
 The lease term is for the major part of the economic life of the asset even if title
is not transferred;
 At the inception of the lease the present value of the minimum lease payments
amounts to at least 90% of the fair value of the asset.
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32.  The leased assets are of a specialised nature such that only the institution can
use the assets without modifications being made;
 The lessor’s losses associated with cancellation of the lease by the lessee is
borne by the lessee; or
 The leased assets cannot easily be replaced by another asset.
6.4 Transactions and other events are accounted for and presented in accordance
with their substance and financial reality and not merely with legal form. While the
legal form of a lease agreement is that the lessee may acquire no legal title to the
leased asset, in the case of finance lease the substance and financial reality are
that the lessee acquires the economic benefits or service potential of the use of the
leased asset for the obligation to pay for that right an amount approximating to the
fair value of the asset and the related finance charge.
6.5 Sometimes the terms of a lease is such that the lessee is substantially in the same
economic position as if the lessee had borrowed money to buy the asset (even
though legal title may not pass to the lessee). For example, this may be the case if
the lease payments effectively are paying for the whole asset or if the lease term is
such that the lessee can use the asset for the major part of its economic life.
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33. 7. CLASSIFICATION OF A LEASE AGREEMENT
Yes
Ownership transferred at end of lease?
No
Bargain purchase option? Yes
No
Lease term = major part of economic life?
Yes
No
Present value of minimum lease payment > Yes
fair value of asset?
No
FINANCE LEASE
OPERATING LEASE
8. ACCOUNTING POLICY
8.1 Operating and finance lease commitments are expensed when the payments are
made.
Assets acquired in terms of finance lease agreements are disclosed in the
annexures and disclosure notes to the Financial Statements.
8.2 The classification of the lease (i.e. operating or finance lease) must be made at the
inception of the lease agreement and accounted for as follows:
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34. Item Segment Asset Segment Project segment
Operating lease
OPERATING LEASE LEASES: PHOTOSTAT MACHINES NO PROJECTS (STAND ALONE
ITEM) CUR
LEASES: FAX MACHINES
Finance lease
FINANCE LEASE LEASES: CELLPHONES NO PROJECTS (STAND ALONE
(Capital portion of ITEM) CAP
instalments) LEASES: TELEPHONE SWITCHES
LEASES: MEDICAL EQUIPMENT
LEASES: NON-MEDICAL EQUIPMENT
Interest on leases
INTEREST ON LEASES LEASES: CELLPHONES NO PROJECTS (STAND ALONE
ITEM) CUR
(interest portion of LEASES: TELEPHONE SWITCHES
instalment
LEASES: MEDICAL EQUIPMENT
LEASES: NON-MEDICAL EQUIPMENT
8.3 Unfortunately the PFMA prohibits borrowing by National/Provincial Departments
and the Treasury Regulations makes it clear that finance leases are deemed to be
borrowings and are therefore not permitted.
8.4 Although departments are not permitted to enter into/have finance leases, all
finance leases that they do have should be disclosed as finance leases. It will
however mean that the department will not be complying with the Treasury
Regulations (TR 13). Finance leases may not (incorrectly) be disclosed as operating
leases even when the lease is condoned by National Treasury.
8.5 Practice Note 5 of 2007/08 issued by the Office of the Accountant General seeks to
provide the following circumstances where departments may enter into finance
leases without additional approval required:
8.5.1 Finance leases where:
 A Finance lease is more economical than an operating lease; and
 The period of the finance lease does not exceed 60 months in respect of motor
vehicles and 36 months for equipment except with written approval by the
relevant Treasury; and
 The finance lease was entered into in terms of RT3 of 2006 or a transversal
contract entered into by National Treasury
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35. 8.5.2 Blanket approval for any irregular expenditure incurred as a result of RT3 of 2000
and RT3 of 2003 Transversal contracts entered with various suppliers for the supply,
delivery, installation, commissioning and maintenance of office equipment and
labour saving devices has been given
9. PROCEDURES TO BE FOLLOWED BY DIRECTORATES/DISTRICTS AND INSTITUTIONS WITH
REGARD TO THE CLASSIFICATION AND ACCOUNTING OF LEASES
9.1 MAINTENANCE OF SEPARATE LEASE REGISTERS FOR FINANCE AND OPERATING LEASES
AND THE CLASSIFICATION OF LEASES:
9.1.1. Directorates/Districts and Institutions must ensure that all leases concluded be
identified and classified.
9.1.2. The following serves as examples of Operating and Finance Leases determined
from lease agreements currently in place.
Finance Leases Operating Leases
Cell phone contracts where the Photostat machines
department holds the contract
Telephone Switchboard Agreements Fax machines
Equipment Lease Agreements
These agreements are sometimes
known as hire purchase agreements
where it was clear from the outset
that the asset will remain with the
department for most of its economic
life and the only reason why it was
not outright purchased was because
it was deemed more economical
and affordable to pay the purchase
price over a fixed period.
Also in cases where assets are almost
permanently placed with
Departments with the written
arrangement that Departments will
buy dedicated consumables to be
used on the equipment. If there is a
fixed portion paid for the availability
of the equipment and even possibly
a fixed amount for consumables per
month, the fixed amount for the asset
will be the lease and that for the
consumables will be a normal
commitment while the variable
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36. amount for the consumables at a unit
price will be normal expenditure. If
there is no charge for the asset being
placed on the premises there is no
lease.
It must be noted that the terms of the agreement will dictate whether an Operating
or Finance Lease has been concluded. If in doubt kindly approach the SCM Unit
at Head Office for assistance.
9.1.3 Leases concluded must be entered into a Lease Register. Separate Lease registers
must be maintained for Operational and Finance Leases. Each Lease register must
contain the minimum requirements as per paragraph 6 of Treasury Circular 5/ 2006
dated 10 March 2006 distributed under cover of Finance Instruction G19/ 2006
dated 13 April 2006.
9.1.4 Information on leases concluded and copies of the Lease Agreements must be
forwarded to SCM: Section Contract Management, 4 Dorp Street, Cape Town on a
monthly basis. An indication must also be given of the classification of the lease for
audit purposes.
9.1.5 The Section: Contract Management will also maintain a Lease Register and will
ensure that the Register maintained at Head Office agrees with the Lease Register
maintained by the Directorate/District/Institution.
9.1.6 The rental of gas cylinders via National Contract RT 81 should not be considered
as leases as the rental is payable annually in advance. If any other gases or
containers are rented or leased on a basis where it is payable on a fixed monthly/
quarterly/ six-monthly basis, these arrangements should be measured against the
criteria for leases.
9.2 ACCOUNTING OF LEASES
9.2.1 Leases must be accounted according to the new SCOA effective from 1 April
2008.
9.2.1.1 All Operating Leases must be paid as follows:
Item Segment
Operating Leases
Asset Segment
Leases: Photostat Machines
Leases: Fax Machines
Project Segment
No projects (stand-alone) current
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37. 9.2.1.2 All Finance Leases to be paid as follows:
Item Segment
Financial Leases
Asset Segment
Leases: Cellphones
Leases: Telephone Switches
Leases: Medical Equipment
Leases: Non-Medical Equipment
Project Segment
No projects (stand-alone) capital
9.2.1.3 All interest payments on finance leases must be paid as follows:
Item Segment
Interest Paid: Finance Leases
Asset Segment
Leases: Cellphones
Leases: Telephone Switches
Leases: Medical Equipment
Leases: Non-Medical Equipment
Project Segment
No projects (stand-alone) current
9.2.2 At the end of the financial year i.e. from 1 – 15 April of each year the Section:
Contract Management will obtain the relevant information on the Finance Lease
payments made. A Journal where the interest portion will be shifted from capital
to interest will be drawn by Head Office before 31 April of each year.
Your co-operation is appreciated.
MR JM JOOSTE
pp HEAD: HEALTH
DATE: 27 March 2009 Jooste/Fin InstructionG22/2009
Classification of lease agreements in the SCOA/March 2009
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38. 38 | P a g e

39. Western Cape - Dept of Health
Capex Budget 2011 - 2016
Annual increase 5%
2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
0 0 0 0 0 0 0 0 0 0
1. Allocation for low-value equipment and other assets 100 000 000 105 000 000 110 250 000 115 762 500 121 550 625 127 628 156 134 009 564 140 710 042 147 745 544 155 132 822
2. Allocation for big-ticket assets * 100 000 000 105 000 000 110 250 000 115 762 500 121 550 625 127 628 156 134 009 564 140 710 042 147 745 544 155 132 822
Budgeted Expenditure 200 000 000 210 000 000 220 500 000 231 525 000 243 101 250 255 256 313 268 019 128 281 420 085 295 491 089 310 265 643
Possible # Possible # Possible # Possible # Possible # Possible #
of units of units of units of units of units of units
* 6 units at 5 000 000 = 30 000 000 6 0 0 7 0 0
3 10 000 000 = 30 000 000 3 0 0 2 0 0
1 15 000 000 = 15 000 000 1 0 0 2 0 0
75 000 000
75 000 000 0 0 85 000 000 0 0
2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Cash Flows
Annual Budget Per Year 100 000 000 105 000 000 110 250 000 115 762 500 121 550 625 127 628 156 134 009 564 140 710 042 147 745 544 155 132 822
Cumulative 100 000 000 205 000 000 315 250 000 431 012 500 552 563 125 680 191 281 814 200 845 954 910 888 1 102 656 432 1 257 789 254
Rental Cash Flows Per Year (17 601 918) (17 601 918) (17 601 918) (37 978 339) (37 978 339) (27 604 078) (27 604 078) (20 376 421) (8 366 917) (8 366 917)
Cumulative (17 601 918) (35 203 837) (52 805 755) (90 784 094) (128 762 433) (156 366 511) (183 970 590) (204 347 010) (212 713 927) (221 080 844)
Cash Differential Per Year 82 398 082 87 398 082 92 648 082 77 784 161 83 572 286 100 024 078 106 405 486 120 333 622 139 378 627 146 765 905
Cumulative 82 398 082 169 796 163 262 444 245 340 228 406 423 800 692 523 824 770 630 230 256 750 563 877 889 942 505 1 036 708 409
less: (assets not rented) (25 000 000) (26 250 000) (27 562 500) (28 940 625) (30 387 656) (31 907 039) (33 502 391) (35 177 511) (36 936 386) (38 783 205)
0.25
Available Cash: Per Year 57 398 082 61 148 082 65 085 582 48 843 536 53 184 630 68 117 039 72 903 095 85 156 111 102 442 241 107 982 699
Cumulative 57 398 082 118 546 163 183 631 745 232 475 281 285 659 910 353 776 949 426 680 044 511 836 155 614 278 397 722 261 096
Accelerated equipment purchases: 2011/2012
13
4 units at 5 000 000 = 20 000 000
2 units at 10 000 000 = 20 000 000
P A G E
1 units at 15 000 000 = 15 000 000 55 000 000
Accelerated equipment purchases: 2014/2015
5 units at 5 000 000 = 25 000 000
1 units at 10 000 000 = 10 000 000
1 units at 15 000 000 = 15 000 000 50 000 000
ANNEXURE F: TABLE 1: OPERATING LEASING BENCHMARK SCENARIO MODEL

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