City of Johannesburg n part due to a rather anemic economic recovery, many local governments across South Africa have recently faced budget short- falls. The city of Johannesburg found an interesting way to help plug the hole in its budget. In March 2013, the Johannesburg City Council voted five to four to hand over the management of 5,000 metered parking spaces and seven parking lots and garages to a private company. In the deal, the city would give up the revenues it had been collecting from parking fees. The private company would staff the lots and garages, and it would maintain and collect fees from the parking meters. In exchange for the right to run the citys parking operations, the company paid an up-front lump sum of R92 million to the city and promised to pay R3 million per year for the life of the deal (30 years). Why did Johannesburg agree to such an arrangement? Perhaps it was because city leaders believe that the private company could run parking operations more efficiently than the city could. However, the deal was appealing, at least in part, because it allowed the city to accelerate its collection of parking revenues. Rather than collecting parking receipts as citizens paid them, Johannesburg received a large up-front payment along with a smaller annual stream of income. Johannesburg was not alone in making this decision. A few years earlier, City of Tshwane had struck a similar deal, as had Bloemfontein. City of Cape Town had considered the idea but had rejected it. How should city leaders evaluate such a proposal, which involves giving up a substantial stream of future income for (primarily) a lump sum payment? The answer lies in a concept known as the time value of money. The time value of money refers to a set of analytical tools that allows investors and other individuals to evaluate cash flows that arrive at different times in the future. At its most basic level, the time value of money simply recognizes that a dollar tomorrow is worth less than a dollar today because of the opportunity to earn interest. The key issue for Johannesburg leaders to consider was/is whether the lump sum they received from the parking deal was worth more than the right to collect parking fees over time.

By applying shareholder value analysis, predict the value that would have accrued to the City of Johannesburg if the city had not entered into such an arrangement given the credible information that the City of Johannesburg would have collected parking fees the following year of R6 million (net of operating costs), and those fees would have grown at a steady 3% per annum for the next 30 years. (15)

b. Using 5% per annum returns to value the payments that the city was set to receive in this deal, do you think that the city made the correct decision? Why or why not?