integrated Case Study

Integrated Case Study — Kilfi District Council (KDC)

Kilfi District Council (KDC hereafter) is a local authority with 120 elected councilors representing 1.5 million people. There are several political parties that contested the recently held local elections in May and notable among them are the Labour Party (45 seats), Green Party (33 Seats), Democratic Party (31 seats) and other parties (11 seats). The Council is now predominantly dominated by the Labour Party who after fifteen years of struggle finally managed to defeat the Democrats. Political credentials of the Democratic Party have been shattered by allegations of corruptions, false accounting and insensitivity to public demands. The former Democratic Mayor, Mr. Ian Bernard, was found guilty of “false accounting” to the extent of exaggerating his expenses claims and residential status in a bid to claw more money from the council’s coffers. As an elected KDC councilor, he was allowed to claim genuine expenses borne in the process of fulfilling his official mandate. Another Senior Councilor Mr. Peter Frost, in a desperate attempt to save his political life, pleaded with his wife Mrs. Karen Frost to take driving offence points on her license on his behalf to avoid police backlash.

The former CEO of KDC Mr. Balunga David, states that “Councils have to look inward at the daily needs of their hardworking employees rather than investing time and money into catering to the needs of lazy families and individuals who are naturally destined to live and lead miserable lives”. “Believe you me, this stupid talk of affordable housing is not the solution but rather counterproductive as it only encourages laziness and the lack of personal initiative to be successful”. Mr. David went on, we have always denied the Blacks access to social housing outside their core communities and above all contrary to what was widely held, we don’t owe them a living. We are justified by the need to protect our predominantly White culture, and above all, we are by any measure better together as Whites. I don’t care if they call me a white supremacist so long as I am able to convince myself that I am doing the right thing for myself and my beloved communities.”

One of the leading critics of the Democratic Party is the Regional Environmental Agency (REA) responsible for the development and implementation of environmental policies. REA accuses the party of ignoring an environmental time bomb by overlooking the opportunity to reduce waste and increase recycling of waste matter. REA wants the following measures:

  1. Growth of waste bins
  2. Proportions of waste collected
  3. Urgency of the need to recycle bin wastes
  4. Adequacy of housing

Figure 1. Kilfi District Council’s Performance Data 2009-2012

20092010201120122012
Waste Bins400000410000420000450000480000
Actual bins collected per month320000390000410000420000450000
Recyclable waste Content per Bin %4554728084
Violent Crimes20003000320038005400
Council Houses80008500890092009600
Waiting list for Council Houses32004000420060007200
No. of New houses issued600500400300400
Budgeted Council Rates and Taxes $m120180240280420
Actual Council Rates and Taxes collected $135190255300440
Annual Police Budget $m810121416
Number of Police Officers1200015000170002000021000
Population of Kilifi District (millions)1.31.351.41.451.5
Size of the Council in Sq. Kilometers36003600360036003600
Actual Council Spending $m100180200260390
Bank and Cash Balances $m20307090130

The fierce criticism leveled against the Democratic Party paves the way for the successes of both the Labour Party and the Green Party who accused the party of “Sitting on a pile of public cash and ignoring their plight for recycling waste, improve access to social housing and above all stem crime rates. One local resident Mr. Samuel Teteh Letsu angrily said “we all at risk of hearing daily robberies, murder, rape and pick-pocketing. We want to know:

  1. Crime rate
  2. Ratio of police to the entire population
  3. Annual percentage increase in police numbers
  4. Annual investment or growth of police budget
  5. Police coverage of the entire KDC
  6. Per capita expenditure on police

The Labour Party is now in charge and wants to keep up to its promise of “listening and delivering the expectations of the electorates”.

Consequently the new Mayor of KDC Mr. Clive Rowan suggested hiring an investment banker as a new CEO to turnaround the fortunes of the Council and keeps it accountable to the electorates. Following a consensus on the Mayor’s suggestion, a new CEO Mrs. Pamela Feldman, a seasoned investment banker was headhunted and hired on a ticket of change. After two months of diagnostics, she suggested investing $60 million of the cash held at the commercial banks “since there are opportunity costs to excess liquidity.”

Figure 2 Investment of $60m as follows:

Year 0Year 2013Year 2014Year 2015Year 2016Year 2017Year 2018Year 2019
P1Invest in a Waste Recycling Plant($10m)
Savings Per Annum $0003000300030003000300030003000
Opportunity Cost of Capital %10%
P2
Investment in Share of JYS Ltd($30m)
Dividends Paid in Cents20303545556575
Beta of JYS1.2
Market Return %11
Risk-Free Rate %5
P3Invest in Corporate Bonds of JIL($20m)
Par value$100
Coupons8%$8$8$8$8$8
Terms (years)5
Yield to maturity (YTM)5%5%5%5%5%5%

On June 1st 2013, the new CEO desperate to get to the grips has suggested purchasing 80% of the Issued share capital of KLM Telecoms for $20 million. Although Councils by their nature are not profit-seeking, but convention allows them to create sustainable long-term investments to raise the much-needed funding for infrastructural development.

Figure 3 Summary Financial Statements of KLM Telecoms 31/12/2012

$000
Non-Current Assets15000
Current Assets excluding Stock4000
Stock3000
Retained Earnings6000
Total Net Assets28000

Additional Information

On the assessment of the current assets of KLM Telecom, it was found that 15% were obsolete and have to be written-off and the Non-current assets figure was undervalued by $2.5 million. The new CEO wants to know the historic financial performance of KLM Telecom but his particular about the financial analysis aspects.

On 1st January 2009, KDC has acquired 15% stake Jula Holdings for $4 million. The state of this investment is yet to be fully known. The following relates to Jula Holdings:

Figure 4 Extracts from Jula Holdings 31/12/2009-12

Year EndingEarnings After Interest and Tax$000
31/12/2009Earnings After Interest and Tax2000
31/12/2010Earnings After Interest and Tax2200
31/12/2011Earnings After Interest and Tax2400
31/12/2012Earnings After Interest and Tax2440

Figure 5 Financial Statements Extracts 31/12/2012

2007200820092010201120122013
000000000000000000000
EBIT %4000500060005800720066007600
Taxes 30%1200150018001740216019802280
Interest $300350480400540600720
Net Assets12000152001840021300240002700028000
Outstanding Shares5000500050006000600060006000
Debt $10000100001000010000125001500015000
Equity $20000200002000025000250002500025000
Share Price $1.201.051.501.401.801.902.10
Dividends Paid $400520540600640680720

Requirements

1)   Identify and assess ethical issues flagged in the case study. 20 Marks

2)   Using metrics suggested by REA and Mr. Samuel Teteh Letsu and other relevant measures, and assess the performance of Kilfi District Council (2009 and 2012) under the following:

  • Waste Management
  • Social Housing
  • Tax Management
  • Crime Management
  • Social Reach (per population measures)
  • Trend Analysis

30 Marks

3)   Calculate and comment on:

  • NPV of Plan P1
  • Market values of JYS shares under Plan P2
  • The Market Values of Corporate bonds under Plan P3)

25 Marks

4)   Using information on Figures 3, 4 and 5 compute and comment on the following:

  • Goodwill arising on the Acquisition of 80% stake in JYS
  • Year-on-year adjustments that truly reflect the value of KDC’s equity investment in Jula Holdings (Figure
  • Perform financial (Ratio) and Trend analysis Figure 5

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