Guideline: Preparing a Capital Expenditure Framework

Guideline: Preparing a Capital Expenditure Framework

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Contents

List of Figures ..................................................................................................................... iii

List of Tables ....................................................................................................................... iii

List of Abbreviations and Definitions ................................................................................ iv

Preamble ............................................................................................................................. xii

Part 1: What is Capital Expenditure Framework ................................................................ 1

1. Background ................................................................................................................................. 1

2. Introduction ................................................................................................................................. 2

3. Defining the Capital Expenditure Framework .......................................................................... 2

4. Understanding the CEF Strategic Alignment ........................................................................... 4

4.1 The Capital Expenditure Framework Model ....................................................................... 5

4.2 How does a CEF fit in with other municipal planning processes? ...................................... 7

4.3 How does the CEF guide sector plans? ............................................................................. 9

Part 2: Key Components Of The CEF ................................................................................ 11

1. Spatial Alignment ...................................................................................................................... 11

1.1 Quantification of Growth ................................................................................................... 13

2. Technical Assessment ............................................................................................................. 17

2.1 Categorization and Classification of Infrastructure ........................................................... 19

2.2 Relevant infrastructure plans from other role-players ................................................... 26

3. Financial Alignment .................................................................................................................. 26

3.1 Impact of infrastructure investment on the operating account .......................................... 28

Part 3: Guideline to Compile the CEF ............................................................................... 36

1. Introduction ............................................................................................................................... 36

2. Strategic Integration and continuous iteration ...................................................................... 37

3. Who should be involved in developing the CEF? .................................................................. 39

4. What are the steps to be followed? ......................................................................................... 40

5. How to Prioritize ........................................................................................................................ 43


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6. Analysis requirements of the CEF ........................................................................................... 45

7. Submission Content Guide ...................................................................................................... 46

7.1 Introduction ....................................................................................................................... 46

7.2 Spatial Transformation Agenda ........................................................................................ 47

7.3 Technical Assessments .................................................................................................... 47

7.4 Capital Expenditure Framework ........................................................................................ 48

7.5 Capital Expenditure Programme ....................................................................................... 49

8. CEF Process Flowchart ............................................................................................................ 49

Summary ............................................................................................................................. 51

References .......................................................................................................................... 52

TEMPLATE A ...................................................................................................................... 58

TEMPLATE B ...................................................................................................................... 59


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List of Figures

Figure 1: Strategic Alignment ............................................................................................................... 5

Figure 2: The Capital Expenditure Framework Model .......................................................................... 6

Figure 3: Programme Approach and Project Pipeline ........................................................................ 10

Figure 4: Spatial Alignment - Capital Expenditure Framework Model ................................................ 13

Figure 5: Technical Assessment - Capital Expenditure Framework Model ........................................ 18

Figure 6: Classifying Infrastructure ..................................................................................................... 20

Figure 7: Financial Alignment - Capital Expenditure Framework Model ............................................ 28

Figure 8: Integration of Spatial Alignment with Technical Assessment with Financial Alignment -

Capital Expenditure Framework Model ............................................................................... 38

Figure 9: Continuous Review Cycle.................................................................................................... 39

Figure 10: Process Flow Chart ............................................................................................................. 50

List of Tables

Table 1: Various Plans and Time Frames ........................................................................................... 7

Table 2: Typical Programme classification (CF Ehlers, 2018) .......................................................... 10

Table 3: Infrastructure Terminology Summary .................................................................................. 20

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List of Abbreviations and Definitions

Capital Projects Local Government: Municipal Finance Management Act No 56

of 2003 (MFMA))

Section 19: Capital Projects states

1) A municipality may spend money on a capital project only

if

(a) the money for the project, excluding the cost of feasibility

studies conducted by or on behalf of the municipality, has

been appropriated in the capital budget referred to in

section 17 (2) of the MFMA;

(b) the project, including the total cost, has been approved

by the council;

(c) section 33 has been complied with, to the extent that

that section may be applicable to the project; and

(d) the sources of funding have been considered, are

available and have not been committed for other purposes.

2) Before approving a capital project in terms of subsection

(1)(b), the council of a municipality must consider

(a) the projected cost covering all financial years until the

project is operational; and

(b) the future operational costs and revenue on the project,

including municipal tax and tariff implications.

3) A municipal council may in terms of subsection (1)(b)

approve capital projects below a prescribed value either

individually or as part of a consolidated capital programme.

Section 16: Annual budgets states that:

(3) Subsection (1) does not preclude the appropriation of

money for capital expenditure for a period not exceeding

three financial years, provided a separate appropriation is

made for each of those financial years.

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CEF Capital Expenditure Framework

It is acknowledged that the term ‘capital expenditure framework’ is

introduced in the Spatial Planning and Land Use Management Act of

2013 (SPLUMA) in section 21(n) where it states that:

"(n) Determine a capital expenditure framework for the

municipality's development programmes, depicted

spatially."

Currently SPLUMA does not provide further detail on what this CEF

should include.

The CEF includes the 3-year Capital Budget of the municipality as well

as an indicative budget framework for the outer years and it includes all

the infrastructure requirements (engineering, social and other capital

requirements such as land, fleet, IT, etc.) that falls within the mandate

of the municipality and is funded by the municipality. The CEF must fit

within an affordability envelope that is provided by a long-term financial

plan based on projected reserves, grants to be received as well as

potential borrowing to be raised based on sound financial ratios. It must

be underpinned by a clear development strategy towards a more

sustainable urban form

It is an important tool in ensuring that long-term infrastructure

investment decisions are timeously made in a financially viable way to

support the IUDF objectives in facilitating spatial transformation.

The CEF therefore differs from the Capital Investment Framework

which is a "catch all" infrastructure requirement including the

infrastructure to be provided and funded by other levels of Government.

CEP Capital Expenditure Programme

The Local Government: Municipal Finance Management Act No 56 of

2003 (MFMA), Section 16 (3)) states that a municipality may -

appropriate money for capital expenditure for a period not

exceeding three financial years, provided a separate

appropriation is made for each of those financial years.

IUSD Grant requires a three-year Capital Expenditure Programme that

is aligned with a 10-year CEF. The three-year capital programme must

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provide the following details for each sub-programme that is partially or

fully funded by the IUD Grant:

• Classification of sub-programme as informal settlement upgrading,

other new infrastructure or renewal;

• Anticipated outputs;

• Indication of the proportion of outputs that will be delivered in

priority development areas as identified in the Spatial Development

Framework; and

• Indication of the proportion of outputs that will benefit low income

households, high income households or non- residential

customers.

The three-year Capital Expenditure Programme must demonstrate

appropriate co-funding for the portion of the programme that does not

benefit low-income households.

CIF Capital Investment Framework

Reference is made in Chapter 2 of the Local Government: Municipal

Planning and Performance Management regulations of a capital

investment framework as a content requirement of the spatial

development framework, as per Section 2 par 4(e) -

"set out a capital investment framework for the

municipality's development programs".

This guide defines the CIF as a list of all infrastructure development

programmes that the municipality identified through its spatial

development framework that are necessary to ensure sustainable

development based on own quantification using specific standards.

It therefore includes all infrastructure requirements flowing from such

development programmes to be provided by the municipality from own

funding as well as all infrastructure requirements from other spheres of

government (e.g. schools, hospitals, higher order roads, etc.) including

all plans prepared by Provincial and National level departments and

State Owned entities that fall within the municipal boundary.

It is therefore a comprehensive list of infrastructure requirements as per

the SDF development programs (irrespective of who funds it), spread

over a planning period of at least 10 years that supports the growth and

sustainable development of the municipality.

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Functional

Areas

A functional area is intended to break the complex urban environment

into smaller areas for purposes of analysing population growth and

development strategies that have some similarities from a

developmental and service demand perspective. Functional areas can

be defined by any criteria as long as they assist with the reconciliation

of population growth and costing of development programmes. A

functional area should be clearly defined as a single contiguous

geographic area.

The sum total of all the defined functional areas within the municipality

must account for the total population (including growth per functional

area) in the municipal area over a period of at least 10 years, and the

total capex awarded for the 10 year period towards the infrastructure

investments to support development strategies and to ensure that it fits

within the affordability envelope.

Growth Strategy The Growth Strategy refers to the quantification of the Spatial

Development Framework from a population growth point of view, which

includes a detailed spatial analysis of the demography of the municipal

population as well as economic growth trends. It must demonstrate the

anticipated population growth and economic growth but it must go

further and translate it into a land budget indicating the demand for

residential (quantified for the different types of dwelling units for the

different income categories) as well as the land required (in hectares)

for other land uses (e.g. commercial, industrial, institutional, etc.).

The Growth Strategy will link space (location) to numbers and time in

order to facilitate well-informed and aligned infrastructure planning.

It is important not to confuse the Growth Strategy in the context of the

CEF with a municipality’s Growth and Development Strategy which

captures the long-term strategic social-, economic- and environmental

objectives of the municipality.

ICM Intermediate City Municipalities

The IUDF acknowledges that there is a spectrum of urban

municipalities with metropolitan municipalities at one end and

municipalities that are approaching a rural spatial form at the other. The

term Intermediate City Municipalities was introduced to refer to the

group of municipalities that sit adjacent to metropolitan municipalities

on the urban spectrum.

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39 municipalities have been identified as Intermediate City

Municipalities based on an assessment of population density and

economic strength.

IDP Integrated Development Plan

An IDP refers to what the Municipal Systems Act (Act No 32 of 2000)

defines as an Integrated Development Plan for municipalities as

described in Chapter 2 of the Regulations issued in terms of the

Municipal Systems Act on 24 August 2001.

Section 2 of the Regulations describes that an IDP must:

(a) identify the plans and planning requirements binding in

terms of national and provincial legislation on the district

municipality and the local municipalities or on any specific

municipality;

(b) identify the matters to be included in the integrated

development plans of the district municipality and the local

municipalities that require alignment;

(c) specify the principles to be applied and co-ordinate the

approach to be adopted in respect of those matters; and

(d) determine procedures-

(i) for consultation between the district municipality and the

local municipalities during the process of drafting their

respective integrated development plans; and

(ii) to effect essential amendments to the framework.

Implementation

Plan

In terms of the Spatial Planning and Land Use Management Act (Act

No 16 of 2013) (Chapter 4, Part E, Section 21), a municipal spatial

development framework must—

"(p) include an implementation plan comprising of—

(i) sectoral requirements, including budgets and

resources for implementation;

(ii) necessary amendments to a land use scheme;

(iii) specification of institutional arrangements necessary

for implementation;

(iv) specification of implementation targets, including

dates and monitoring indicators; and

(v) specification, where necessary, of any arrangements

for partnerships in the implementation process."

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This definition is included to clarify potential confusion with the definition

of a CEF. Section (p)(i) is included in the CEF, but the CEF does not

deal with the rest of the items under (p).

IUDF Integrated Urban Development Framework

The IUDF, as approved by Cabinet in April 2016, sets out the policy

framework for transforming and restructuring South Africa’s urban

spaces, guided by the vision of creating “liveable, safe, resource

efficient cities and towns that are socially integrated, economically

inclusive and globally competitive”.

IUDG Integrated Urban Development Grant

The IUDG refers to a new grant that is the result of a consolidation of

various existing grants. The purpose of the grant is to support the

spatial transformation process to the benefit of the urban poor.

LTFP Long Term Financial Plan

The Long Term Financial Plan must develop a longer term financial

perspective of the municipality (longer than 3 years but at least 10

years) to estimate and project the potential revenue of the municipality

and link that with the cost of running the municipality, and to determine

its potential to generate reserves as a municipality to increase its

financial credibility and in so doing improving its borrowing capacity

MSCOA Municipal Standard Chart of Accounts

The Municipal Standard Chart of Accounts makes provision for a

uniform and standardized financial transaction classification framework

as per the Municipal Regulations and Standard Chart of Accounts as

gazetted on 22 April 2014 (Gazette No 37577).

MTREF Medium Term Revenue and Expenditure Framework

The MTREF Local Government: Municipal Finance Management Act

No 56 of 2003 (MFMA) refers to annual, rolling three-year expenditure

planning. It sets out the medium-term expenditure priorities and hard

budget constraints against which sector plans can be developed and

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refined. MTREF also contains outcome criteria for the purpose of

performance monitoring.

PDA Priority Development Areas

Priority Development Areas (in terms of the Spatial Planning and Land

Use Management Act (Act No 16 of 2013) refer to those current and

future significant structuring and restructuring elements of a

municipality’s spatial form, including development corridors, activity

spines and economic nodes where public and private investment will be

prioritized and facilitated.

Policy The Law Dictionary defines a policy as a set of ideas or plans used as

a basis for making decisions.1

Policy

Framework

The Law Dictionary defines a policy-framework as a set of guidelines

as well as long-term goals, which are taken into account when policies

are made.

SDBIP Service Delivery Budget Implementation Plan

The Local Government: Municipal Finance Management 56 of 2003

(MFMA) requires municipalities to develop SDBIPs annually. In terms

of section 53(1)(c)(ii), the SDBIP is defined as a detailed plan approved

by the Mayor of a municipality for implementing that municipality's

delivery of municipal services. In particular it must indicate the service

delivery targets and performance indicators for each quarter.

SDF Spatial Development Framework

A Spatial Development Framework in this context refers to what the

Spatial Planning and Land Use Management Act (Act No 16 of 2013)

defines as a municipal spatial development framework in Chapter 4

Part E of the Act.

Chapter 2 of the Local Government: Municipal Planning and

Performance Management regulations that were published on 24

1 Source: www.thelawdictionary.org/policy-framework

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August 2001 in terms of the Local Government: Municipal Systems Act,

2000 (Act No 32 of 2000) also list the content requirements of a spatial

development framework. This is however an older legislation and in the

context of this guide the SPLUMA requirements are considered more

recent and therefore more appropriate for reference purposes.

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Preamble

This guideline was commissioned by the Department of Cooperative Governance

(DCOG) and sponsored by the World Bank. Due to the fact that Capital

Expenditure Frameworks are not clearly defined in the Spatial Planning and Land

Use Management Act (Act No 16 of 2013) nor adequately explained in the

Guidelines for the Development of Provincial, Regional and Municipal Spatial

Development Frameworks, 2017, the purpose of this document is to assist

Intermediate City Municipalities in the compilation of Capital Expenditure

Frameworks. While guidelines are developed to assist Intermediate City

Municipalities to develop their Capital Expenditure Framework, the guidelines cam

also be used by other cities subject to proper customization to their circumstances.

The guidelines for the development of Capital Expenditure Frameworks seeks to

contribute to the introduction of integrated long-term planning in our cities as one

of many efforts currently underway seeking to assist with the implementation of the

Integrated Urban Development Framework. Specifically. The guideline is one of

the interventions that responds to the short term priority of institutionalizing long-

term infrastructure planning as articulated in pillar four of the IUDF called integrated

urban infrastructure.

This document provides a starting point that will in all probability evolve over time

as experience is gained through the implementation process by municipalities.

Part One provides a theoretical explanation of what a Capital Expenditure

Framework is and where it fits in with other municipal planning processes

Part Two explains how the model works by elaborating on the key components of

the model.

Part Three explains the process to be followed in developing a Capital Expenditure

Framework, starting with basic requirements followed by an evolution of the CEF

over time towards the end-goal of ensuring spatial transformation through an

iterative strategic planning process that integrates long-term spatial planning,

infrastructure planning and financial planning.

It is important to emphasize that the development of a CEF is not a once-off

exercise but an ongoing iterative strategic planning process to be managed by the

senior executive of the municipality and which relies on quality outputs from each

of the three sectors mentioned above. The review of the CEFs must take into

account many factors, key amongst them would be disasters such as the COVID-

19 pandemic.


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Part 1: What is a Capital Expenditure Framework?

1. Background

In April 2016 Cabinet approved the Integrated Urban Development Framework (IUDF) as an

“all-of-government” initiative. The IUDF sets out the policy-framework for transforming and

restructuring South Africa’s urban spaces, guided by the vision of creating “liveable, safe,

resource efficient cities and towns that are socially integrated, economically inclusive and

globally competitive”. In addition the IUDF proposes an urban growth model premised on

compact and connected cities and towns.

The emphasis is now on implementation of the IUDF, which is coordinated by the Department

of Cooperative Governance (DCoG). The Department has set up institutional structures for the

coordination of activities across government departments and agencies, under the overall

management of an IUDF Working Group on which partner organizations such as National

Treasury, organized local government and the World Bank are represented.

The Intermediate City Municipality Programme (ICM) has been put in place by DCoG to assist

medium-size cities (which include 39 municipalities) to translate IUDF policy into practical

programmes of action. In doing so the programme aims to enable the achievement of the main

IUDF goals, namely (i) forging new integrated forms of spatial development; (ii) ensuring that

people have access to social economic services, opportunities and choices; (iii) harnessing

urban dynamism to achieve inclusive and sustainable growth; and (iv) enhancing the

governance capacity of the state and citizens in ICMs.

One component of the implementation of the IUDF is the introduction of a consolidated

infrastructure grant, namely the Integrated Urban Development Grant (IUDG), that moves

towards programmatic grant monitoring. As such, the business plan for the IUDG is a three-

year capital expenditure programme that is aligned with a long-term Capital Expenditure

Framework (CEF). All 39 ICMs are all eligible for the Integrated Urban Development Grant

(IUDG) from 2019/20.

There are a number of key reasons for using the CEF as the basis for monitoring the IUDG:

• To ensure that priorities identified in the spatial development framework are translated into

capital programmes;

• To promote long-term infrastructure planning;

• To promote infrastructure planning that follows a spatially targeted approach and is better

integrated across sectors and spheres; and

• To promote a more integrated planning approach within municipalities that brings together

technical, financial and planning expertise.


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This document provides ICMs with guidance on (i) what a CEF is, (ii) what it should include for

the purposes of the monitoring of the IUDG and (iii) how to go about preparing a CEF.

2. Introduction

The term ‘capital expenditure framework’ is introduced in section 21(n) of the Spatial Planning

and Land Use Management Act, 2013 (SPLUMA):

"(n) Determine a capital expenditure framework for the municipality's development

programmes, depicted spatially."

SPLUMA does not provide any further detail on what the CEF should include nor has

guidelines for a SPLUMA-compliant CEF been prepared by the relevant department.

In the absence of requirements, the purpose of this guide is to support the development of a

CEF that (i) meets the requirements for monitoring the Integrated Urban development Grant

(IUDG) and (ii) will achieve the Chapter 1 Development Principles set out in SPLUMA. The

CEF therefore remains an extension of the municipal SDF and an important implementation

tool for the SDF.

3. Defining the Capital Expenditure Framework

A Capital Expenditure Framework is a consolidated, high-level view of

infrastructure investment needs in a municipality over the long term2 that considers

not only infrastructure needs but also how these needs can be financed and what

impact the required investment in infrastructure will have on the financial viability

of the municipality going forward. (Guide to preparing an Infrastructure Investment

Framework, SALGA, 2017, page 2).

Infrastructure investment, and its implications for the implementation of an SDF, is not the

exclusive domain of municipalities. National government, State-Owned Enterprises and

provincial government are all role-players who have a responsibility towards contributing to the

functionality and sustainability of a municipality as outlined in Section 154 of the Constitution

and the District Development Model Concept Document. It is therefore important to make a

distinction between the total infrastructure that is required to ensure long-term sustainability

and functionality versus infrastructure that the municipality has to finance from its own budget,

including grants, and which falls within its own affordability means.

2 In the context of the Capital Expenditure Framework, long-term refers to a period not less than ten years. This period can be longer in order to align with other planning processes such as the One Plans where possible.


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It is therefore necessary to understand the two different mechanisms that are related to this

distinction. The one is called the Capital Investment Framework (CIF) and the other is the

Capital Expenditure Framework (CEF).

The Capital Investment Framework (CIF) is a mechanism introduced in Chapter 2 of the Local

Government: Municipal Planning and Performance Management Regulations, 2001 as part of

the requirements of the spatial development framework. Section 2 par 4(e) states that a spatial

development framework must -

"set out a capital investment framework for the municipality's development

programs".

Recommendations that came out of the BEPP review process (DRDLR 2104 SDF Guidelines,

2017) stated that:

"The work on BEPPs suggests that the content, process and tools making up the

BEPPs are in effect the "capital expenditure framework" of the SDF." The

document then proceeds to state that there is general agreement within the

National Treasury BEPP Team that the term "capital expenditure framework" as

per SPLUMA be changed to "capital investment framework".

The BEPP refers to ALL infrastructure requirements for the municipality including

infrastructure to be provided by other spheres of government and State-Owned Entities (e.g.

hospitals, police stations, schools etc.). A CIF should therefore reflect the outcome of

meaningful engagements by municipalities with all other spheres of government and agencies

to align the timeous delivery of all infrastructure (social and engineering) in support of the

municipalities’ development objectives.

This document proposes that the term Capital Expenditure Framework as per SPLUMA be

retained because it deals with all the infrastructure that the municipality is responsible for and

that requires municipal funding. It is an important tool to ensure that long-term infrastructure

investment decisions by the municipality are made in a timeous and financially viable manner

to support spatial transformation as per the IUDF.

In the Integrated Urban Development Grant Policy framework document (31 January 2017)

emphasis is placed on affordable capital investment. The Capital Expenditure Framework

therefore prioritizes the infrastructure that the municipality must pay for aligned with the

municipality's affordability envelope which flows from a municipality's Long-Term Financial

Plan (LTFP).

The Long-Term Financial plan, a National Treasury initiative, describes the LTFP as a long

term plan (10 years) that models the capital that the municipality can afford (affordability

envelope) against which infrastructure investments must be planned. The affordability

envelope is based on economic, population and financial assumptions to model future

surpluses that can be leveraged to raise additional capital as borrowings from the market on

the basis of the municipality’s balance sheet.


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4. Understanding the CEF Strategic Alignment

Following the guidelines as per the SALGA Guide to preparing an Infrastructure Investment

Framework, the following diagram reflects the current understanding of the context of a CEF.

Figure 1 illustrates how the main strategic components relate to each other and how the

political objectives, the spatial objectives and the city's growth strategy inform the CEF.

It is important to clarify the term "Growth Strategy", which should not be confused with a

municipality’s Growth and Development Strategy that captures the long term strategic social,

economic and environmental aspirations of the municipality.

The Growth Strategy for the purpose of this guide refers to the quantification of the Spatial

Development Framework from a population growth point of view, which includes a detailed

spatial analysis of the demography of the municipal population as well as economic growth

trends. It must demonstrate the anticipated population and economic growth, and translate this

growth it into a land budget indicating the demand for residential land (quantified for different

typologies and different income categories) and land for other land uses (e.g. commercial,

industrial, institutional etc.). The Growth Strategy will link space (location) to time and numbers

(as per the SDF) in order to facilitate well-informed and aligned infrastructure planning and

decision-making.


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Figure 1: Strategic Alignment

(Source: CF Ehlers, 2018)

4.1 The Capital Expenditure Framework Model

Figure 3 demonstrates how the quantification will translate to infrastructure requirements

(engineering and social) that require capex. The demand for capital funding is normally more

than what the municipality can afford, hence the need to identify infrastructure requirements

for the short, medium and long term (10 years) to enable strategic prioritization.


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Figure 2: The Capital Expenditure Framework Model


The model demonstrates how the various components of a SDF link and relate to each other

in order to inform a CEF. In this model infrastructure master plans and asset management

plans as well as the Long-Term Financial Plan are external inputs. On the other hand the

MTREF Capital Expenditure Programme is an external output informed by the CEF. The CEF

must account for the full MTREF capital budget of the municipality and it must demonstrate a

fundamental shift towards investing in the municipality’s spatial transformation vision.

The Spatial Development Framework (SDF) therefore informs the need for infrastructure in

line with the municipality’s long-term spatial development (and transformation) vision. This

long-term view will also provide certainty for major infrastructure projects that require long lead

times for planning and project preparation (land acquisition, EIA's, etc.).

The CEF is therefore an outcome of an iterative process to strategically prioritize infrastructure

delivery within the available Affordability Envelope of the municipality.

A CEF seeks to answer the following questions:

• How much infrastructure does the municipality need, where (spatially) and of what type?

• When will the infrastructure be required over the 10-year timeline?


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• How much will it cost to create/implement versus on-going maintenance and operations?

• What impact will it have on financial viability going forward?

• How will the required infrastructure be funded?

The approach to answering each of these questions with the assistance of the CEF is

described in further detail in sections to follow.

4.2 How does a CEF fit in with other municipal planning processes?

The CEF is an integral part of the SDF as per SPLUMA, and has several important

characteristics that distinguishes it from other municipal plans, most notably:

• It is a comprehensive and integrated plan that brings together the investment needs of all

sectors that fall within the mandate of the municipality;

• It supports the principle that strategic plans form the basis of budgeting in a public entity

("strategy-led budgeting);

• It looks at the long term, at least 10 years;

• It is programme-based with quantified targets;

• It considers the affordability of infrastructure investments, both by looking at what can be

financed from available capital finance sources and by considering the impact of

infrastructure investment on an on-going financial viability basis;

• It guides sector plans;

• It ensures evidence-led planning for the SDF and ultimately for the IDP;

• It is the outcome of an iterative process where the Long Term Financial Plan and the

Infrastructure needs are reviewed on an annual basis as and when new information

becomes available.

The CEF thus sets an ‘affordability envelope’ for capital investment and guide the

conceptualization of appropriate projects that support the IUDF. It will also be useful for

engagement with stakeholders during the Integrated Development Planning process.

Table 1 attempts to put the various plans into context:

Table 1: Various Plans and Time Frames

Planning Horizon: 20 - 40 years

District and Metro One Plan (20 to 30 years, reviewed every 5 years)

• Demographic change and people development

• Economic positioning


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• Spatial restructuring and environmental management

• Infrastructure engineering

• Integrated services provisioning

• Governance and financial management

Growth and Development Strategy (Review every 10 years)

• Demographic analysis (Census year)

• Economic Analysis (Every 10 years)

• Environmental Sustainability Plan (Climate change, Biodiversity and Air

• Quality)

• Water Resource Plan

• Energy Resource Plan

• Waste Minimization Plan

Planning Horizon: 10 – 20 years

Spatial Development Framework - SDF (Review every 5 years)

• Socio-economic analysis - Growth Strategy (Every 5 years)

• Sector Master Plans (every 5 years)

• Water and Sanitation

• Roads and Storm Water

• Electricity

• Waste Management Plan

• Transportation Plan

• Human Settlement Plan

• Environmental Plan

• Long Term Financial Plan (Every 5 years)

• Capital Investment Framework - CIF (Every 5 years)

• Capital Expenditure Framework - CEF (Every 5 years)

Planning Horizon: 5 Year Cycle

Integrated Development Plan - IDP (Review annually)

• Community Needs analysis

• 3 Year Capital compilation for MTREF


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• Budget compilation

4.3 How does the CEF guide sector plans?

Sector plans refer to the various master plans for each of the engineering/technical services

provided by the municipality. The CEF as a component of the SDF contains development

programmes that are aligned with an overall ‘affordability envelope’ that is derived from the

Long Term Financial Plan. These "budget-fit" development programmes will then serve as an

indicator for sector plans. In other words, the CEF indicates how much the municipality can

afford to spend on infrastructure per development programme over the long term. Sector plans

must then align and negotiate their respective infrastructure investment programmes and

make choices about what infrastructure projects to push forward towards the medium or short

term (3 year budgeting cycle) through the project pipeline.

Figure 3 illustrates how the longer term affordability envelope (derived from a Long Term

Financial Plan), results in identifying capital investment programmes that fit the affordability

envelope. These programmes provide the broader framework in which the sectors can

conceptualize and initiate specific projects. Projects that mature through the project pipeline

and pass all the project readiness criteria are then eligible for consideration during the 3-year

budget cycle and to be reflected in the 3-year Capital Expenditure Framework. These projects

will then make up the Strategic Development Budget Implementation Programme (SDBIP) for

the municipality which is a 12-month budget broken up into quarterly targets.


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Figure 3: Programme Approach and Project Pipeline


Table 2 provides an indication of generic programmes that cover investment requirements.

Table 2: Typical Programme classification (CF Ehlers, 2018)

INFRASTRUCTURE INVESTMENT PROGRAMMES

New bulk infrastructure programme (to increase capacity)

Existing bulk infrastructure upgrade programme (asset management and increase of

capacity)

Existing bulk infrastructure refurbish/replacement programme (to extend useful life of

assets)

New network infrastructure programme (to extend capacity)


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Existing network infrastructure upgrade programme (asset management and to extend

capacity)

Existing network refurbishment/replacement programme (to extend useful life of assets)

New Social infrastructure (facilities) programme

Existing Social Facilities upgrade, refurbishment, replacement programme

New Economic infrastructure programme

Existing Economic infrastructure upgrade, refurbishment, replacement programme

OTHER INVESTMENT PROGRAMMES

Land assimilation programme

Housing delivery programme

Community Health programme

Recreation Programme

Environmental programme

Safety programme.

Other: Fleet, IT, Furniture, Plant and Equipment etc.

In comparison to other municipal plans, the CEF is an iterative model that is reviewed regularly

as more information becomes available from either the financial modelling side (declining

revenue or increase in specific cost items) or from the technical side with project information

changing as projects evolve and project timelines change.

While it does consider the deadlines for meeting key targets (for example, backlogs must be

eradicated by a target year, or a specific target for the renewal of infrastructure must be

achieved over a certain time-period), the timing of the project may change. The CEF may for

example state that “We need to increase the capacity of our water treatment works by 40 Mega

litres/day over the next 10 years, or by 2 Mega litres/day on average per annum”.

Part 2: Key Components of the CEF

For purposes of the IUDG, a CEF consists of three main components each including a number

of key elements. These are described in more detail below.

1. Spatial Alignment

This component relates to the development of a Spatial Development Framework (SDF) that

both complies with SPLUMA and is spatially quantified to support the Technical Assessment


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and the Financial alignment processes. The SDF must provide a longer-term development

perspective (at least 10 years) that can be used to estimate and project the potential

demographic and economic growth of the municipality in terms of both quantity and spatial

distribution.

Spatial alignment seeks to ensure that the spatial agenda directs the capital expenditure

requirements that inform the CEF. The SDF must address issues of lack of integration,

inaccessibility and inequality, and translate spatial transformation (a more sustainable urban

form) and urban functionality (keep the lights on) into capital programmes.

The first step is to divide the municipality's Spatial Development Framework with its priority

development areas into functional areas that cover the whole municipal area. The purpose for

this wall-to- wall coverage is to ensure that the entire municipal area is included for the purpose

of allocating the municipality's financial resources.

A functional area is an area with similar characteristics (homogenic) from a developmental

and service demand perspective. A typical example is to demarcate the rural part of the

municipality or a tribal land area because it has more or less similar challenges (low density,

lack of higher order services, etc.) and it requires a specific development strategy that is unique

to the challenges of the area. A functional area may include specific Priority Development

Areas (for example a specific focus on servicing traditional villages or providing basic services

to informal settlements as well as maintaining services for the rural area).

In a similar way the built-up urban area can be divided into one or more functional areas that

can each include Priority Development Areas (PDA's) (e.g. the Central Business District, or

other specific nodes, other employment areas such as industrial areas, transport corridors,

residential areas to be densified or expanded) that require upgrading of existing infrastructure.

"Priority development areas" are areas where the municipality intends to focus investment in

order to achieve the objectives of the SDF and which normally require the development of

lower order plans such as Precinct Plans. An entire functional area may be identified as a

priority development area, or a priority development area may be a sub-area within a functional

area.

A functional area may also be aligned with the "Regional Indicator Segment" as per MSCOA,

which is intended to identify and assign municipal expenditure to the lowest relevant

geographical region as prescribed.

The logic of unpacking the SDF into Functional Areas is to be able to quantify the population

growth in discrete functional areas to ultimately enable a reconciliation of growth for the

municipality as a whole. It also enables the municipality to break down the specific economic

growth opportunities for each functional area by quantifying land requirements as well as the

need for municipal services.


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1.1 Quantification of Growth

The quantification of the Spatial Development Framework per functional area provides the

basis for a NEED ASSESSMENT to determine the number of consumers per functional area

in relation to a specific development strategy. Figure 4 illustrates the inputs that are necessary

to quantify the outputs:

Figure 4: Spatial Alignment - Capital Expenditure Framework Model


The above-mentioned analysis is necessary to answer the following key questions in the

development of a CEF:

1. Who are the customers and where are they located?

Classify customers:

• Per customer grouping (residential, business, institutional)

• Per service type (sanitation, etc.)

• Per services level (water borne toilet, etc.)

• Household type and size of households.


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• Per income group (poor, non-poor).

• Per age group and gender (ECD age, school going age groups).

The intention is to understand the relationship between population, household and

consumer units:

• Population is simply the number of people in a municipal area.

• A household is made up of a number of people. Levels of demand per consumer

unit for water and electricity, for example, will depend on the number of people

that make up the consumer unit.

• A consumer unit may be made up of several households (due to families sharing

(common in middle-income households, backyard shacks, overcrowding etc.)

The unit to which a municipality provides services is referred to here as the ‘consumer

unit’. In urban areas, this is typically a plot/stand/erf while in rural areas it may be a

number of closely grouped dwellings.

For trading services (water, sanitation, electricity and solid waste), a consumer unit is

identified as the connection point to the municipal reticulation, with a meter in the case

of water and electricity or the pick-up point in the case of solid waste. In urban areas,

it is roughly equivalent to the number of proclaimed properties that are developed

(excluding vacant properties).

For social infrastructure it is necessary to analyse the number of facilities in relation to

the population e.g. the number of schools required are determined by the number of

school-going children.

Levels of Service refer to the nature of the infrastructure and the type of service

provided. Levels of service may differ from municipality to municipality and they may

differ for different priority development areas within functional areas. For example, a

municipality may provide a communal standpipe shared between 25 households, a 25

Amp electricity connection and a weekly black bag removal service in informal

settlements, but a full pressure in-house water connection, a 60 Amp electricity

connection and a weekly kerb-side 240 litre bin removal service in formal areas.

Levels of Service for trading services (water, sanitation, electricity and solid waste) are

generally well-defined and well understood because these services are, by their very

nature, provided directly to an individual customer. Levels of Service for non-trading

services (roads, community and social services, sports and recreation, public safety

and health) are often less well-defined.

Several non-trading services are concurrent functions between provincial and local

government spheres, who should jointly agree on definitions and service levels (norms

and standards).


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For other services a municipality will have to consider its own definitions for Levels of

Service (e.g. distance to a facility or time taken to reach a facility).

Different Levels of Service have different costs associated with them and so

understanding the existing mix of Levels of Service is important. Choices around what

Levels of Service to provide in future are a key element of the development

strategy/infrastructure vision of a municipality and also a key determinant of the

financial viability of infrastructure going forward.

Separate estimates of numbers of customers, demographic and socio-economic

profiles and Levels of Service should be undertaken for each functional area and for

all priority development areas that have been identified.

2. Align number of consumer units between the different trading services to

understand customer base

The number of customers for trading services should be closely aligned with the

package of services that is typically provided to each consumer unit.

However, these numbers often do not align. One reason for this is different service

delivery arrangements (e.g. Eskom may provide electricity in some parts of the

municipality). Another reason is that there may be a single water meter for a complex

or block of flats but electricity meters may be provided to each individual unit.

Situations are also found where a development stretches over more than one erf but

only use one water and one electricity meter.

If customer numbers for different trading services do not align, it is worth taking the

time to understand why and to consider how this might affect the assessment of

infrastructure needs.

3. Align number of consumer units for non-trading services for comparison

purposes

Most non-trading services such as roads and sports and recreation facilities are by

their very nature accessible by the general public and so the customer base for these

services is theoretically the whole population of the municipality. It is therefore

important to develop measurement units that will enable comparisons between

functional areas for purposes of estimating cost implications and to assist with

prioritization.

4. Determine the number of residential consumer units per income group


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The income profile of residential consumer units in the municipality is important for the

financial viability of infrastructure investment because different income groups have

different levels of willingness and ability to pay for services.

It is important to at least understand how many indigent consumer units there are in

the municipality. It is also useful to understand how many consumer units are ‘low

income’3 and will pay below cost for a service and how many are ‘high income’ and

can pay the full cost or possibly cost plus a surcharge.

5. Determine the number of non-residential consumer units (business, industrial,

institutional)

Municipalities provide services to a number of non-residential customers such as

institutions, commercial customers, industrial customers and agricultural customers.

The CEF should reflect on the number of customers per non-residential category. This

information is normally available in the municipality on billing databases and property

registers.

6. Determine the non-revenue services

In most municipalities there are specific situations where services (water and

electricity) are consumed but not metered. Examples are for street lighting, irrigation

of parks and open spaces, irrigation of landscaping on road islands, etc.

In some municipalities informal settlements are provided with high mast lighting, water

and sanitation, etc. If possible, these non-revenue services need to be determined and

quantified in order to understand the extent of non-revenue consumption. The will

improve the quality of the Long Term Financial Plan)

7. Determine the number of unserved customers (backlogs)

• Per service type.

• Per service level.

• Per income group.

It is important to understand the extent of backlogs in the municipality, per functional

area. Service backlogs are defined as consumer units who are currently not provided

with services. The extent of the backlog may differ for different services.

3 "Low Income" is generally defined as those households earning less than R3 500 per month.


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The intended outcome of the spatial alignment component is therefore the following:

• A quantified perspective of the developmental needs of each functional area. These needs

will be informed by the IDP consultative process. The needs must be expressed in

numbers e.g. housing units required (distinction should be made between needs for the

poor and the non- poor) and service connections for the different type of services

(consumer units).

• The quantified need for housing must be translated to a quantified need for social facilities

and amenities for the functional area (consumer units). Distinction must be made between

those facilities and amenities that fall within the ambit of the municipality and that of

provincial and national government.

• The need for economic growth must be expressed in land requirements as well as

municipal service requirements (consumer units).

• A quantified long-term development perspective (at least 10 years) for the functional area

(including its Priority Development Areas) broken down in consumer units and level of

services on the one hand, and the number of facilities, number of housing units to be

provided on the other hand.

2. Technical Assessment

This component relates to the responsibility of the Technical Services Departments to develop

a Consolidated Infrastructure Plan. This plan is intended to develop a longer-term

perspective (at least 10 years) to estimate and project the demand for new and current services

and the necessary infrastructure to provide such services.

The following information must serve as input from the Spatial Alignment component for the

Technical Assessment to be undertaken:

• Spatial vision that captures the spatial transformation agenda required for changing the

urban form.

• Geographically demarcated functional areas (covering the municipal area wall-to-wall)

each with a clear development strategy and services vision, and possibly also including

specific interventions for Priority Development Areas within the functional area.

• Clear quantification of the population growth as well as household growth over the

extended period (minimum 10 years) for each functional area ((including Priority

Development Areas where applicable).

• A demographic and socio-economic profile of the population for each functional area,

making a clear distinction between "poor" and "non-poor" population and households.

• Number of residential units (consumer units) for each of the different income groups.

• Quantification of the non-residential demand (commercial, industrial, institutional,

community facilities etc.) reflected as number of facilities that requires land space and

engineering infrastructure services (connecting points).


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Existing infrastructure is located in space and should be captured in functional area context.

Based on the socio-economic analysis the consumer units served by the existing infrastructure

should have been identified and located per functional area (spatially) under the "Spatial

Alignment" component.

Bulk infrastructure items, in particular, may be physically located in a different place to the

consumer units that they serve. It is the location of customers that will determine the size of

any backlogs in bulk infrastructure. This can be done by comparing the demand for a service

(water, for example) in a functional area with the capacity of the infrastructure supplying the

functional area.

If a reservoir is located in functional area A, and the reservoir requires upgrading (increase in

capacity to serve both functional area A and B), then the cost will be reflected in functional

area A and functional area B should only indicate its dependency for additional capacity to be

supplied by the reservoir in functional area A and not the cost in order to avoid double counting.

The Technical Assessment will ensure alignment of the technical requirements necessary to

facilitate spatial transformation. Figure 5 captures the integration and alignment of the

Technical Assessment with the Spatial Alignment.

Figure 5: Technical Assessment - Capital Expenditure Framework Model



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2.1 Categorization and Classification of Infrastructure

It is necessary for the municipality to agree on the grouping and classification of their

infrastructure for purposes of packaging the infrastructure needs in a standardized way in

developing programmes for each functional area. There are many different ways to classify

infrastructure but for the purposes of this guide, the following approach is useful.

One classification is based on the elements that make up the infrastructure. This classification

differentiates between engineering infrastructure and social infrastructure. Engineering

infrastructure includes water supply, sanitation, electricity, solid waste, roads and public

transport. Social infrastructure includes community halls, sporting facilities, fire stations etc.

and are mostly buildings or built public spaces.

Another important classification depends on the way in which the infrastructure is provided and

accessed. Plot-based services include water supply, sanitation, electricity and solid waste (the

trading services) while publicly accessed services includes roads, public transport and social

infrastructure services. Demand for plot/stand/erven-based infrastructure is driven, as the

name suggests, by numbers of plots/stands/erven provided with these services; while demand

for publicly accessed services is driven by population size or number of households.

Another important classification of infrastructure is used within a particular service, most

notably water supply and sanitation. This classification is between bulk infrastructure and

distribution infrastructure (which includes connector (or link) infrastructure and internal

infrastructure).

Demand for bulk infrastructure is driven by the volume of water or wastewater passing through

the system while demand for distribution infrastructure is driven by number of customers

(although it should be noted that while connector infrastructure is primarily driven by number

and location of customers served, the cost is also influenced by volume of water supplied to

these customers).

Figure 6 shows that resource development/supply is seldom a municipal function. If the

municipality purchases bulk water from a water board, then the water board will provide the

bulk infrastructure. However, there are municipalities that are undertaking their own resource

development (or part thereof) and as such will make investments in such assets.


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Figure 6: Classifying Infrastructure

(Source: Guide to preparing an Infrastructure Investment Framework, 2017)

With regard to electricity, the bulk and distribution networks are also relevant. Eskom usually

provides bulk while the municipality provides the distribution network and must therefore

consider what drives the demand for its connector and internal infrastructure. More and more

municipalities are considering renewable energy solutions in support of environmental

sustainability where different types of technologies (assets) are introduced.

Finally, the bulk and distribution classification can also be applied to roads. Distributor and

connector roads follow a ‘bulk’ classification while access roads (streets) follow distribution

classification.

Table 3 summarizes the terminology as explained above.

Table 3: Infrastructure Terminology Summary

GROUPING CATEGORY CATEGORY DESCRIPTION

Capacity

New Capital projects to provide new assets to meet the

current and future growth demands.

Upgrade Upgrade projects are generated according to the

requirement for the replacement of a part of an asset

Distribution infrastructure

Resource

development Bulk

infrastructure

Connector infrastructure

Internal infrastructure

Distribution reservoir

Water treatment

works

Bulk water

pipeline

Connector

pipeline Internal Pipe network

Dam To other settlements

Pumping

station

River Wastewater treatment

works

Sewerage

Treated effluent

outfall

Outfall sewer


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GROUPING CATEGORY CATEGORY DESCRIPTION

component with the aim to increase the current

capacity of the asset.

Functionality

Refurbishment/

Rehabilitation

Refurbishment projects are generated according to

the requirement for the replacement of a part of an

asset component, not increasing the capacity of the

asset, therefore enhancing the Remaining Useful Life

(RUL) of the asset, e.g. impeller of a pump.

Renewal Replacing of existing infrastructure that has reached

a RUL of zero, while providing the same capacity and

service.

Replacement

Replacement projects are generated according to the

requirement for damaged assets which still has a

Remaining Useful Life (RUL) greater than zero, not

increasing the current capacity of the asset, replacing

the exact same asset, e.g. light post being hit by a

car.

Source: COJ Consolidated Infrastructure Plan, 2017

Infrastructure needs falls into two categories namely, infrastructure investment to increase

capacity or investment required to maintain functionality of infrastructure assets going forward:

• ‘Functionality’ is an umbrella term that includes refurbishment/rehabilitation, renewal and

replacement. All the above are considered capital expenditure that extends the Estimated

Useful Life of assets.4

• Planned Repair and Maintenance on the other hand is normally an operating expenditure

incurred to ensure that assets reach their Estimated Useful Life.

• Emergency Repair and Maintenance is also an operation expenditure incurred to deal with

emergency situations that doesn’t necessary extend the remaining useful life.

The need to maintain existing infrastructure is a key driver of the need for infrastructure

investment in South African municipalities. Upgrade and functionality needs can only be

accurately assessed using a sound, up to date and comprehensive Asset Management Plan

but they can be estimated at a very high level based on an assessment of the current

replacement cost of the assets and their remaining useful life. At the very least, it is necessary

4 Capacity and Functionality is thus distinct from Repair and Maintenance in the sense that it requires Capex, whereas

Repair and Maintenance is normally an operating expenditure incurred when unexpected repairs (emergency) are

required or to maintain assets (planned maintenance) to reach their Estimated Useful Life.


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to have an estimate of the current replacement cost of the existing asset base, its estimated

useful life and its condition or remaining useful life.

An analysis based on the above categorization and classification is therefore necessary to

answer key questions with regards to volumes consumed or generated and to translate it into

a demand for infrastructure per functional area that is aligned with the development strategy

for each functional area.

A projection of infrastructure demand is at the heart of the CEF and it provides the answer to

what the municipality needs. Answers/responses to the following questions will contribute

towards the formulation of the CEF:

1. What is the current demand for bulk supply?

• Per service type (sanitation, etc.)

• Per income group (poor, non-poor)

Understanding the total mass or volume of trading services demanded is key in

understanding the need for bulk infrastructure. Water, electricity and solid waste

requirements are thus an important element of a sound CEF.

For water and electricity, it is necessary to know at least:

• How much water or electricity enters the system (a system input volume for water

or the kWh purchased from Eskom for electricity).

• How much water or electricity is consumed by customers (the system input volume

or kWh purchased less any real or technical losses).

• How much water or electricity is paid for by customers (volume of water or

electricity sold5).

For sanitation, it is necessary to know what volume of wastewater is treated.

For solid waste, a comprehensive waste balance is ideal, showing how much waste is

generated by consumer units of different types, how much passes through transfer

stations, how much is recycled, how much is treated, if relevant, and how much

ultimately ends up at landfill sites.

In a similar way the need for social infrastructure per functional area should also be

determined.

5 Volume of water or electricity sold may differ from volume consumed due to theft or meter inaccuracies but also due to

consumption that is simply not billed, for example in informal settlements.


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2. What infrastructure does the municipality have?

• Social infrastructure.

• Engineering infrastructure.

A sound understanding of the current extent or capacity, value and condition of assets

is key in developing a CEF. It is necessary to understand what infrastructure is already

in place in order to determine what investment in infrastructure is needed going

forward.

A comparison between existing extent or capacity and existing demand is necessary

to determine if there are any backlogs in existing extent or capacity.

3. Where is the infrastructure located and whom does it serve?

Mapping of the bulk and network/reticulation networks is necessary and it is useful to

draw polygons for the areas they serve (e.g. catchment areas). The same applies for

social infrastructure (catchment area is based on walking distance and population

density).

4. Align service levels with the development strategy for each functional area

The development strategy answers the question: what is the municipality trying to

achieve with infrastructure in each of the functional areas and more specifically in the

Priority Development Areas? The CEF should ensure that infrastructure investment is

aligned with the long-term development strategies and key objectives and outcomes

of the municipality.

The development strategies should go beyond a high-level vision for a functional area

and should include specific targets for the following:

• The eradication of service backlogs (lack of water, sanitation or electricity).

• Increase the levels of service (replace VIP's with water borne sanitation).

• Maintaining the functionality of the asset base (keep the lights on with planned

maintenance).

• Eradicating the backlog for infrastructure renewal

• Resource conservation (saving water).

• Technology transition (e.g. from manual meters to pre-paid meters).

• Rectifying spatial inequities (increase accessibility and levels of service).

5. What is needed to eradicate the current backlog?

The first driver of infrastructure demand is backlogs. Backlogs may exist in servicing

individual consumer units (for example water, sanitation and electricity connections,


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plot-based solid waste services and neighbourhood streets), bulk infrastructure (water

and sanitation bulk infrastructure, electricity connector infrastructure, solid waste

disposal, distributor and connector roads) or publicly accessed infrastructure such as

community centres etc.

The demand for infrastructure to eradicate backlogs can be determined based on the

size of the backlog and the targeted date by which the backlog must be eradicated.

The CEF will thus say: “We have a backlog of 15 000 consumer units without water

connections and the backlog must be eradicated over the next five years. As a result,

the municipality must provide on average 3 000 new water connections each year for

the next five years.”

These estimates of infrastructure backlogs to be eradicated should be produced for:

• Each sector (infrastructure type).

• Each functional area.

• Each priority development area.

6. What is needed to provide for growth?

The second driver of infrastructure demand is growth. Both demographic and

economic growth drives the need for new infrastructure.

Demographic growth refers to the extent to which the population and number of

consumer units is expected to increase over time. Demographic growth includes in-

migration and natural growth of existing population in the municipality.

Growth in number of consumer units is a result of several dynamics:

• Population growth: At what rate is the population of the municipality expected to

increase over the next 10 to 20 years due to natural population growth and in-

migration?

• Changing household size: Household sizes in South Africa have been declining

over the past 10 to 20 years. This means that the rate of increase in households

in South Africa has increased more rapidly than the rate of increase in people.

What is the dynamic with household sizes in the municipality and what does this

mean for expected household growth compared to expected population growth?

• Changing consumer unit size: The consumer unit is the unit ultimately served by

the municipality for plot-based services such as water, electricity and solid waste.

As noted above, a consumer unit may be made up of several households and this

dynamic may change over time. For example, as more formal housing is provided

there may be fewer backyard shacks and fewer people per consumer unit. How

many households are there per consumer unit in the municipality and how is this

expected to change over the next 10 to 20 years? What does this mean for


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expected consumer unit growth compared to expected household and population

growth?

Population and consumer unit growth are the most important for projecting the demand

for infrastructure to provide for growth.

Demographic growth should be estimated for each functional area or priority

development area. A common growth rate can be applied but if one area is growing

faster than another different growth rates should be used.

Economic growth drives infrastructure need through two dynamics.

Firstly, economic growth leads to more businesses and therefore increased demand

for services by non-residential consumer units. The relationship between economic

growth and non-residential demand will be different for each municipality. Looking at

historical trends in non-residential demand and economic growth will help to

understand what this relationship looks like in a particular municipality. This can then

be used as a basis for estimating what impact economic growth will have in future.

Secondly, economic growth may change the income profile of residential consumer

units over time. This relationship is likely to be different for different municipalities, but

the CEF should at least reflect on whether the income profile of the population is

expected to change and what implications this might have for infrastructure demand.

7. What is needed to increase capacity?

Growth does not necessarily create a demand for new infrastructure only. Upgrading

existing infrastructure to expand its capacity, which may be cheaper, can also

accommodate growth; hence, the support for more compact city forms.

8. What is needed to maintain functionality of existing infrastructure?

Renewing the existing infrastructure base is a key driver of infrastructure demand. If

infrastructure is not renewed when it reaches the end of its useful life it will either fail,

which prevents customers getting a proper service and result in a loss of income for

the municipality, or it will become very expensive to maintain, pushing up maintenance

costs beyond what is desirable.

A discussion of estimating renewal needs based on an Asset Management Plan or the

current replacement cost and remaining useful life of the assets has already been

provided in the discussion of ‘What does the municipality currently have?’

The need for renewal should also be identified for each functional area and priority

development area.


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2.2 Relevant infrastructure plans from other role-players

As per the diagram, the CEF should capture any relevant plans from other role- players in the

municipal space that has infrastructure implications.

A typical example is Provincial and National Roads. Municipal planning must respond to these

plans and it is necessary to indicate in the CEF the municipality's dependency on such

infrastructure to make their urban areas functional and sustainable. Another example is to

ensure that housing plans by the Department Human Settlements are also well integrated with

the municipality's infrastructure networks, especially with regards to bulk services. In this

regard a similar process to the BEPP process should be followed by COGTA to make a

concerted effort to bring the different spheres of government together to facilitate the

integration.

The CEF should not only note what plans are in place from other role-players and how these

have influenced or been factored into municipal infrastructure planning, but it must also list all

infrastructure requirements for these other role-players that the municipality think is necessary

to ensure sustainable development for the future based on own quantification using specific

standards. Hospitals, schools, police stations are typical examples of infrastructure that is

essential for sustainable urban communities.

The CEF can therefor serve to identify and substantiate the matters to be included in the

integrated development plans (IDP) of the municipality that requires alignment with Provincial

and National Departments and associated State Owned Entities.

Annexure B is an example of how infrastructure needs can be consolidated per functional

area.

3. Financial Alignment

This component relates to the responsibility of the Finance Department to develop a Long

Term Financial Plan (LTFP).6 The LTFP is intended to develop a longer term perspective

(longer than 3 years but at least 10 years) to estimate and project the potential revenue of the

municipality and link that with the cost of running the municipality and to determine its potential

to generate reserves as a municipality to increase its financial credibility and in doing so

improving its borrowing capacity.

Following on from the Spatial and Technical components, the following information should be

available as input for the Financial Alignment to be undertaken:

6 this section links to the LTFP as a specific module that is currently under development by National Treasury.


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• Geographically demarcated functional areas (covering the municipal area wall to wall)

(including Priority Development Areas where applicable) to provide clear quantification of

the population growth as well as household growth over the extended period (minimum 10

years). This will give context to the customer base that will support the financial viability of

the municipality.

• A clear development strategy (vision) for the functional area, including where applicable

specific interventions for specific Priority Development Areas in the functional area.

• Quantification of the residential demand with a clear distinction between "poor" and "non-

poor" households for each functional area.

• Quantification of the non-residential demand (commercial, industrial, institutional (social

infrastructure) reflected as number of facilities that require land space and engineering

infrastructure services.

• Infrastructure levels and service standards aligned with poor and non-poor as well as with

residential and non-residential.

The above-mentioned information will contribute towards a well-aligned revenue and

expenditure projection model to determine the municipality’s long-term financial viability and

ability to generate capex. Figure 7 captures the integration and alignment of the Spatial

Alignment and Technical Assessment with Financial Alignment.

Infrastructure investment impacts on on-going financial viability through two primary channels:

• Firstly, infrastructure must be operated and maintained over its useful life and must be

renewed as it ages. Investing in infrastructure therefore commits a municipality to

additional operating and capital expenditure in the future. The size of these future financial

commitments will depend on the extent of infrastructure investment but also, critically, on

the type of infrastructure chosen. Technology choices can make a big difference on the

extent of future operating expenditure needs.

• Secondly, infrastructure generates revenue for the municipality. The extent to which this

is true depends on whom the infrastructure is intended to serve. Infrastructure that serves

primarily indigent or poor households will generate less revenue than infrastructure that

serves primarily wealthy households and businesses.7

7 This depends on how tariffs are set, but municipalities often set tariffs that are below cost for poorer households and

above cost for wealthier households and enterprises which is referred to as cross-subsidization.


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Figure 7: Financial Alignment - Capital Expenditure Framework Model


In summary, the impact that infrastructure investment has on on-going financial viability

depends to a large degree on what type infrastructure is delivered and whom that infrastructure

will serve. It is important to make these decisions together as an Executive Management

Team.

3.1 Impact of infrastructure investment on the operating account

Up to this point the guide has spoken about estimating the need for infrastructure investment

(capex). The next key component of a CEF is an estimate of what level of capital finance the

municipality will be able to access as per the LTFP. A municipality can finance infrastructure

out of:

• Inter-governmental transfers and grants.

• Public contributions and donations, or

• Municipal own sources.

‘Municipal own sources’ include both borrowing and internally generated funds. The availability

of these two sources of finance depends on the performance of the municipality’s operating

account and its ability to generate cash surpluses (i.e. the net effect of revenue generation

versus expenditure), either to repay debt or to use directly to finance infrastructure. An estimate

of the extent to which the municipality will have access to own source capital finance thus

requires a projection of the operating performance of the municipality.


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In this context it is important to understand that the income profile of residential consumer units

has a number of possible impacts on the operating performance of the municipality:

1. Higher income consumer units tend to use larger volumes of service. For example, high-

income households tend to use more water than low-income households. Improving

income distribution may thus result in greater demand for some services.

2. Higher income consumer units are better able to pay for services. Improving income

distribution is good for the financial viability of infrastructure as higher income households

are able to pay higher bills than lower income households. The structure of municipal

tariffs comes into play here, but if there are step or inclining block tariffs in place then

higher income customers, who use higher volumes of service, will pay above cost for the

service. The result is an improvement in the ability of the municipality to cross-subsidize

lower income customers. Such a model is however price sensitive because if municipal

charges becomes too expensive, the high-end consumers may decide to cut back on

consumption which has a negative impact on revenue.

Higher income consumer units are sometimes given higher levels of service. This depends on

the strategy of each municipality.

The following key aspects need to be determined:

1. Projecting operating expenditure

Infrastructure must be operated and maintained after it is installed. As already

discussed, different infrastructure technologies have different operating and

maintenance costs. It is vital that the CEF moves beyond the capital expenditure needs

resulting from infrastructure demand and also looks at the operating expenditure

implications.

A possible approach to estimating the impact on each of these is discussed below.

Operating and maintenance costs

Operating and maintenance costs refer to the cost of keeping the infrastructure

running after it is installed. This would include the salaries and other employee related

costs associated with any operating and maintenance staff; material and plant running

costs; fleet etc.

For publicly accessed services, operating and maintenance costs include all the

expenditures involved in running the facilities, including employee related costs.

Operating and maintenance expenditure can be estimated based on unit operating

costs obtained from historic financial data for the municipality. It is however important

to account for the fact that different technological choices have different operating and


30

maintenance implications. Further, if the municipality is not currently operating and

maintaining its infrastructure properly the unit costs for the particular municipality may

not be appropriate for long range planning. A judgment will need to be made as to

whether these unit costs should be higher or lower than they are currently. Operating

and maintenance expenditure can then be projected forward over time based on the

planned investment in new infrastructure.

Bulk purchase costs

Bulk purchases primarily comprise the purchase of water from a water board (if the

municipality is served by a water board) and the purchase of electricity from Eskom.

The infrastructure demand projection should include a projection of demand for water

and electricity. The cost implications of the growth demand can be relatively easily

obtained by applying the prevailing water board and Eskom tariffs to this demand.

Depreciation

Infrastructure must be depreciated over time and so investment in infrastructure has

an impact on depreciation expenditure required. Depreciation expenditure is a

standard accounting calculation based on the purchase value of the asset and its

expected useful life.

Interest

If infrastructure is to be loan financed, then infrastructure investment will result in

additional interest expenditure. This can be estimated based on an average term of

loans and interest rate.

Debt impairment

Investment in infrastructure means that the municipality can serve additional

customers and thus expand its revenue base. However, some proportion of the

revenue generated by the infrastructure will become bad debt and so infrastructure

investment has an impact on expenditure in terms of provisions for bad debt and thus

debt impairment.

This can be estimated by projecting the additional revenue that will be generated by

the planned infrastructure, applying a cash collection efficiency to determine the

amount of bad debt anticipated and then calculating the debt impairment expenditure

required.

Overheads

‘Overheads’ include all expenditures that the municipality incurs that are not directly

related to service provision. In the standard classification, this would be governance


31

and administration costs (Mayor and Council, Municipal Manager, budget and treasury

and corporate services).

Infrastructure investment impacts overheads costs indirectly: infrastructure investment

grows the municipal business as a whole and thus grows the overheads of that

business. While there may not be a direct relationship between infrastructure

investment and overheads, it is worth at least mentioning the impact that the municipal

growth driving infrastructure investment needs may also have on overheads

expenditure in the CEF.

2. Projecting operating revenue

Investment in infrastructure also results in additional operating revenue for the

municipality, with the profile of customers using the infrastructure (poor households,

wealthier households or non-residential users) playing an important role here. The

municipality must be able to comment on each of the key operating revenue sources

discussed below.

Inter-governmental transfers to cover operating expenditure

As for capital transfers, the Division of Revenue Act publishes the amount of operating

transfers from national government that each municipality can expect to receive for

the next three years. The most important transfer is the local government equitable

share of national revenue, typically referred to just as ‘equitable share’. The

municipality would need to take a view on what will happen to transfers after the three-

year medium term.

Note that there may be small amounts of operating transfers received from provincial

government, which must also be taken into consideration.

Service charges

Service charges are primarily tariff revenue received for trading services although

there is also a small amount of user charge revenue received from publicly accessed

services, such as fees for using community halls. As mentioned previously in this

guide, it is important for the municipality to consider the profile of the customers that it

is serving when it estimates the service charge revenue that will be generated in future.

If infrastructure is being provided primarily for customers who are low income or face

affordability constraints, then the growth in service charge revenue going forward is

likely to be limited. The municipality should thus consider both current tariffs and

affordability constraints when projecting service charge revenue.

Property rates

Property rates are the primary source of funding for non-trading services. The amount

of property rates revenue going forward will be dependent on how the value of property


32

in the municipality grows and what property rate is applied. Property rates revenues

should be projected forwards with some reference to economic growth and its likely

impact on property values. An analysis of historic growth in property rates revenue can

also inform the projection.

Other revenue

Municipalities receive revenue from other sources such as rental of facilities and

equipment, interest earned, fines, licenses and permits, agency services and so on.

These revenue sources are usually small compared with inter-governmental transfers,

property rates and service charges but remain important.

Projecting operating surpluses and cash

The projection of operating expenditure and operating revenue can be brought

together to produce a projection of the anticipated operating surpluses of the

municipality. This should be extended to a projection of the cash that will be available

going forward, by adjusting for non-cash expenditures and working capital

requirements. Available cash can be used to finance infrastructure directly (internal

funds) or to repay debt (borrowing).

3. Available capital finance

Once the operating account and cash position of the municipality has been projected,

the municipality can explore the options to match the infrastructure requirements to

available capital finance resources.

The discussion of the status quo and estimates of capital investment needs outlined

earlier in this report all referred to the need to make estimates for each separate

functional area. In contrast, estimates of the availability of capital finance are made for

the municipality as a whole, and not separately for each functional area.

Inter-governmental transfers

The first source of capital finance available is inter-governmental transfers.

Municipalities receive a wide range of inter-governmental transfers that can be used

to finance capital expenditure. These may be either formula-based or application-

based.

Formula-based transfers include the new Integrated Urban Development Grant

(IUDG). The amount of formula-based transfers to be allocated to each municipality

over the medium term is published annually in the Division of Revenue Act and so

municipalities have a good idea of how much grant funding they will be receiving for

the next three years at least. The municipality will have to take a view on what will


33

happen to transfers over the longer term, based on historic trends and the overall

economic outlook.

Application-based transfers for example include the Regional Bulk Infrastructure Grant

(RBIG). There are relatively few of these grants, but the allocation of these grants to

municipalities is based on applications submitted to the administering department.

Municipalities will have to take a view on the extent of funding that they will be able to

access.

Public contributions and donations: development charges

The term ‘public contributions and donations’ is used in classifying capital finance

options. For the purpose of the CEF the most important component of this category is

development charges. A development charge is an amount paid by a property

developer to the municipality to cover the cost of providing bulk and connector

infrastructure to the development. To date, development charges have largely been

levied on a development-by- development basis based on negotiation. Development

charges are an important way of funding infrastructure for middle to high-income

residential as well as commercial/industrial properties but they are typically

significantly under-recovered by municipalities. Therefore, National Treasury is

developing policy and legislation on development charges to introduce more uniformity

with regard to the way in which they are calculated and to encourage municipalities to

utilize this capital funding source more fully.

Borrowing

Debt is a third source of capital finance available to municipalities. The municipality

will have to take a view on how much additional debt it can raise over the long term.

This can be done based on the indicators suggested in National Treasury’s MFMA

Circular 71 (loan book as a percentage of operating revenue and total debt service

payments as a percentage of operating budget) but it is important to note that these

are rules of thumb and not prudential limits. A full borrowing capacity assessment is a

complex exercise and lending institutions consider a wide

range of factors when deciding whether or not to lend to municipalities. Financial

modelling of free cash flow available after meeting commitments is one basis for

estimating the level of borrowing that might be possible

Internally generated funds

Internally generated funds refer to cash surpluses generated by municipalities. The

funding source is used either directly to finance infrastructure or transferred to a

Capital Replacement Reserve for use in future. The ability to generate internal funds

for capital financing is obviously dependent on the extent to which the municipality is

able to generate cash surpluses and thus on its overall financial viability. This guide

has already discussed the need to project the impact of infrastructure investment on


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the operating account. This will allow for an assessment of the availability of internally

generated funds.

Service provider funding

Where the municipality has appointed a service provider, or has had one appointed

for it by national government, this service provider can be made responsible for raising

capital to fund the infrastructure that they provide. Primarily this relates to Eskom (if it

is responsible for electricity distribution in the municipality) and water boards (which

typically, but not exclusively, provide bulk water infrastructure). Both Eskom and water

boards raise their own capital finance.

There are also arguments for municipalities to engage in public-private partnerships

(PPPs) where private firms act as service providers. It is possible to make these

providers responsible for raising capital for the infrastructure related to the service.

This has not often happened in South Africa but remains a possibility.

4. Determining the affordable capital framework

It is highly likely that the total amount of capital finance that can be raised is lower than

the magnitude of the capital investment required. The final step in preparing a CEF is

thus to ‘fit’ the planned capital expenditure within the capital finance available. In this

way, an affordable capital framework is identified.

The starting point here is the capital investment need. If the capital investment need

is greater than the capital finance available, then the municipality must indicate what

capital investment will in fact be incurred. This should be done with consideration to:

• The overall balance of expenditure on different services that will be targeted (mix

of expenditure on water, sanitation, electricity, roads, community services etc.).

• The mix of expenditure on backlog eradication, growth and renewal that will be

targeted.

• The mix of expenditure that is targeted at poor households, non-poor households

and non-residential customers. It is important to note here that inter-governmental

grants and transfers are mostly spent on poor households. The availability of this

particular finance source may therefore influence how much capital expenditure

will be incurred for poor households.

• The priority to be given to particular functional areas or priority development areas

in the municipality.

The process of reducing the planned capital investment to fit within the available

capital finance will be iterative. In the previous paragraphs the point was made that

the projection of the operating account was informed by the capital expenditure to be

incurred based on the needs analysis. If this capital expenditure is reduced, then the

operating account projection must also be revised. This process should be repeated


35

until the municipality has identified a capital expenditure programme that can be

achieved within the available capital finance framework.

The final affordable capital programme should be presented for each functional area

and priority development area. In this way, the municipality can show the emphasis

that it is giving to investment in different spatial areas of the municipality and the

linkage between the spatial development framework and the long-term capital

programme is made clear.

5.

How much will it cost?

The next key question to be addressed in the CEF is: how much will it cost? This

involves providing a high-level cost estimate of the overall infrastructure requirements.

Note that cost estimates will improve through the municipal infrastructure planning

process: ultimately, the cost of individual projects will be determined through a

competitive tender process. At the CEF stage, high-level cost estimates are made

using unit capital costs.

What is a unit cost?

A unit capital cost is an average capital cost. For distribution infrastructure (water,

sanitation and electricity connections, solid waste collections) and public services this

is typically a cost per additional consumer unit served. For bulk and connector

infrastructure it is a cost per unit of capacity (cost per Mega litre capacity of a treatment

works, for example).

Where to obtain unit costs

Unit capital costs can be estimated based on recent projects implemented in the

municipality or obtained from engineering consultancies that are involved in a number

of projects and thus have a good sense of costs. For some sectors, national

departments may publish unit costs. The Department of Water and Sanitation for

example publishes unit cost guides every few years, with the most recent published in

2016.

Applying unit costs to determine capital investment required

The capital investment required is determined by applying the unit cost to the

infrastructure demand.

For example: the demand projection has determined that the municipality will need to

install 1 500 new in-house water connections over the next 10 years. The cost of

internal infrastructure associated with each connection is R7 000 per connection. The

total cost over the 10 years is thus 1 500 x R7 000 = R10.5 million.


36

Recall that the CEF gives a high-level picture over the long term. The CEF will thus

not necessarily deal with the timing of the investment. Rather, it will state the total

amount that must be spent over 10 to 20 years, or the average amount per annum.

Estimating required renewal expenditure

As has already previously mentioned, a sound estimate of renewal expenditure

required can only be made based on an Asset Management Plan. However, a very

high-level estimate of renewal expenditure per annum can be obtained by dividing the

current replacement cost of the entire infrastructure network by its estimated useful

life. This does not address the timing of this investment need (for example, some

assets may need immediate renewal while others may still have substantial useful life

remaining) but it gives a high-level estimate of total renewal expenditure required over

the long term. This should be sufficient for a CEF. A more nuanced estimate can be

obtained by looking at the current replacement cost, purchase date and estimated

useful life of each individual asset. The replacement date and replacement cost for

each asset can then be determined and summed up over all assets to estimate a need

for renewal over time.

Estimating capital investment required in space

The estimates of capital investment required should be made for each functional area

and for each priority development area. In this way, the SPLUMA requirement that the

capital expenditure framework be depicted spatially is met.

Part 3: Guideline to Compile the CEF

1. Introduction

This component relates to the responsibility of the Executive Management Team led by the

City Manager to develop the Capital Expenditure Framework. This framework is intended to

develop a longer-term perspective (at least 10 years) to match the affordability envelope with

the need for infrastructure. The plan must be informed by the spatial vision that builds on spatial

transformation as the means towards a more sustainable future. The investment decisions

must be informed and guided to enable the spatial form to respond and adjust to ensure long

term sustainability for implementation whilst meeting the IUDF goals.

Part Three provides a step by step guide to develop the three key components that are critical

to the development of the CEF and how to integrate these components into a Capital

Expenditure Framework for the municipality.


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Based on some status quo analysis of the two pilot municipalities, it is accepted that the

process may be daunting and that all the data and information is not readily available (e.g.

some of the critical planning documents such as the SDF may not be up to date and fully

compliant with SPLUMA, the Master Plans have not been aligned with the SDF or the total

municipal area as yet, asset management plans do not always exist and there is no

consolidated infrastructure plan nor a long term financial plan for the municipality). It is in this

context that this guide recommends starting with a programme budgeting approach that fits

programmes into the affordability envelop and in doing so:

• get a more comprehensive handle on the need and cost requirements for the municipality

taking a longer term perspective;

• screen existing projects to select appropriate projects in terms of the functional area and

development strategy perspective;

• start including projects under each programme as a second fit exercise.

2. Strategic Integration and continuous iteration

This Part focuses on the integration of the three key components of the CEF to provide a 10-

year capital expenditure framework for the municipality that starts to respond to the spatial

vision of the municipality.

The objective of these guidelines is therefore to develop the following components with the

best information available:

• to produce a growth analysis of the spatial framework for the future that is broken down

per defined functional areas that captures the intended spatial form as per the SDF as

well as the intended development strategy for the provision of infrastructure in response

to the needs of the functional area;

• to identify the essential infrastructure requirements for each functional area in support of

the development strategies for each functional area, and

• to define the affordability envelope for the municipality as a whole.

Figure 8 captures the integration and alignment of the three key components of the CEF

namely, the spatial element with the Technical Assessment element with the Financial

Alignment element to produce the CEF.


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Figure 8: Integration of Spatial Alignment with Technical Assessment with Financial Alignment - Capital

Expenditure Framework Model


Integration and alignment is a continuous iterative process that enables the development of a

CEF as a supporting tool to the SDF. It is not merely an extraction and consolidation of existing

information, but rather an integrated holistic strategic planning exercise that provides strategic

context for the development of appropriate projects to transform the urban space and to ensure

long term sustainability whilst addressing spatial restructuring.


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Figure 9: Continuous Review Cycle


3. Who should be involved in developing the CEF?

One of the key characteristics of a CEF is that it is a cooperative effort between the different

technical departments, the municipal treasury and the planners:

• Sector departments have the knowledge of what infrastructure is required and what

technology is appropriate; they should also know the water, energy and waste balances

for their services; and they should also know what assets they have and the condition of

these assets.

• The municipal treasury understands the capital and operating finance options and the

factors limiting how much finance can be raised.

• Planners are the custodians of the spatial development framework and understand the

spatial priorities of the municipality and they normally have access to population statistics

that analyse and understand the kind of growth that the municipality will face.

The integration of these three perspectives is very important for the creation of the CEF.


40

Despite the cross-departmental nature of the CEF, it is important to make a single person

responsible for the framework. This ensures better accountability and gives one person the

role of coordinating. There is no rule as to where this is best located and much depends on

the organizational structure of the municipality. It may be possible to locate responsibility within

a planning unit in the Municipal Manager's office, for example, or within a sector department

or the municipal treasury.

4. What are the steps to be followed?

A very brief summary of each of the steps to be followed is provided below.

Step Task description Responsibility

Step 1 Based on the current SDF, agree on functional area and

priority development areas (PDA's) within such functional

areas that comply with SPLUMA principles.

Planning

Step 2 Undertake profiling of each functional area and priority

development area (PDA) to cover a ten-year period.

Profile each functional area based on the following:

• Demographics and population shift trends.

• Land development changes.

• Access to social facilities.

• Access to services (type of service and level of

service).

Minimum information required is socio-economic

demographics per ward with a growth projection for the

future.

Quantify the growth for the functional area based on the

above information per ward, if that is available. A GIS

analysis is recommended with information broken down

per Sub-place and/or Small Area (CIDMS Module 4)

Planning

Step 3 Compile or verify a land budget for residential and

commercial/industrial growth for the next ten years as per

the SDF.

This exercise must analyse land requirements against

available land that is suitable for development.

Planning


41


Step 4 Confirm the appropriateness of the SDF Vision and long-

term spatial structure (urban form) for the municipality

based on supply and demand of land and infrastructure. A

well-developed SDF should provide this assurance.

Planning

Step 5 Ideally, Sector Master Plans should be revised based on

the outcome of steps 1 to 4 with the view to determine

infrastructure requirements for the various priority

development areas. It must reflect the need for additional

"service connections" per income group as well as land to

be serviced for future non-residential growth.

This step must also incorporate existing backlogs. Existing

backlogs will include backlogs with regards to access to

services as well as asset refurbishment, replacement and

renewal requirements for the next ten years. Asset

refurbishment, replacement and renewal address the need

to replace assets overtime, which has reached the end of

their economic useful life (EUL). There may be backlogs in

this regard that need to be built into the CEF.

It will also be necessary to workshop the policy

imperatives, the norms and standards to be met and the

unit rates for each service and level of service with the

service sectors

The iterative nature of the process will most probably

demand that these policy imperatives, norms and

standards be reconsidered in the context of affordability.

Technical Services

Step 6 Develop a long-term financial plan for the municipality.

This exercise requires a close working relationship with the

consultants that are appointed to develop the Long Term

Financial Plan for each ICM pilot.

Chief Financial

Officer

Step 7 Link the costing from Step 5 with the Long Term Financial

Plan that provides the affordability envelope.

The outcome of this step will be to model the expected

investment levels over time and the operating impact of

providing and maintaining the various services.

Executive

Management

Team (HOD's)


42


This step requires some high-level prioritization that will

assist with the development of the CEF. As an example, it

is important (as a first attempt) to determine/agree the

percentage to be spent on engineering infrastructure

versus social infrastructure versus other requirements for

capex. It is also important to determine/agree on the split

in spending over the ten-year period on capacity versus

functionality (investment on existing infrastructure). Lastly

it will assist greatly to prioritise between priority

development areas.

Step 8 Structure all requirements into programmes per functional

area that support the development strategy of the

functional area while following the principles of the SDF. It

is important to understand that a CEF is a high-level plan

and so the infrastructure demand identified in a CEF does

not necessarily refer to specific projects.

A CEF is not a 10 or 20-year project list. It is a summary

(consolidation) of development programmes intended to

address developmental and spatial transformation issues

that falls within the mandate of the municipality. Existing

projects must be fitted into these programmes and new

projects must be conceived in terms of these programmes

to ensure relevance and alignment in terms of the spatial

transformation agenda.

Executive

Management

Team (HOD's)

Step 9 On the completion of steps 5,6,7 & 8, a Capital

Expenditure Framework can be developed that:

• Is based on a quantified spatial plan.

• Responds to long-term land development needs.

• Provide outcomes for the different priority

development areas that are assessed and then

consolidated.

• Compiled into a single statement of infrastructure

investment requirements.

• Spread over at least a ten-year period.

• Indicates the cost implications of such investments by

determining the capital and operating implications.

Executive

Management

Team (HOD's)


43


In order to maximize service delivery within the affordability

envelope, it will be useful to test a few scenarios based on

different service levels and service delivery models.

Step 10 Projects that are conceptualized in terms of various

programmes per functional area as reflected in the CEF

and that obtains readiness status, will be considered in

terms of the MTREF budgeting cycle. Projects that are

approved as part of the MTREF will form the basis for the

Capital Expenditure Programme, which is a monitoring

requirement of the grant.

The Capital Expenditure Framework will include specific

outputs per project that will measure against the longer-

term targets that are being used for the CEF.

Executive

Management

Team (HOD's)

5. How to Prioritize

There are sophisticated models available to support a municipality in prioritization based on

certain criteria to facilitate a budget fit. This guideline intends to provide only a basic

understanding of the critical aspects to consider when attempting to prioritize. CIDMS (Module

6) proposes a prioritization based on weightings.

There are however three levels where prioritization should occur:

Sector level Each sector must relate to the needs as identified per functional area

that is guided by a development strategy for the functional area.

Each sector must apply its mind to spreading the requirements over the

10-year planning period aligned with the initial programme budgeting

that is provided by the Executive Management Team. Where specific

infrastructure projects are required such as a Waste Water Treatment

Works (WWTW's) that are normally expensive and capital intensive,

such items should be smoothed into the programme budget framework.

It may be necessary to reduce the same programme in other functional

areas. If this budget smoothing and fitting demands more than what the

sector budget framework provides, then it should be elevated to the

Executive Management Team level to smooth and fit between different

functional areas and programmes.


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Executive

Management

level

• The LTFP provides the affordable envelope for the municipality

• Agree on a budget split as an overall guideline between:

• Engineering infrastructure (say 60%)

• Social infrastructure (say 30%)

• Other requirements (say 10%)

• Agree on a further split on the following basis for engineering

infrastructure (60% of envelope):

• Increased capacity (for growth)

• say 20% for new infrastructure

• say 30% for the upgrade of existing infrastructure

• Improved functionality (for asset management)

• the remainder (say 50%) for refurbishment, renewal and replacement. See definitions as per Table 2;

• Backlogs should form part of "Increased capacity" to cater for

access to basic services and "Improved functionality" to cater for

asset management backlog.

• Agree on a similar split for social infrastructure (30% of envelope):

• say 40% for new social infrastructure

• say 60% for existing social infrastructure (upgrade, refurbish,

renew, replace)

• Divide affordable envelope between the functional areas as a first

attempt;

• Split the proposed budget between programmes (Table 5) guided

by the development strategy for each functional area;

• Evaluate the impact of the proposed budget by

calculating/estimating the output over the 10 year planning period;

• Make adjustments to address needs as per the IDP but in line with

the development strategy;

• Consider different service level standards and alternative

technologies;

• Run different scenarios and/or permutations to balance budget

between programmes and between functional areas;

• Adjust the framework after finalizing the 3 year MTEF

• 3 Year MTEF must consider projects that are ready for

implementation. Only projects that have progressed through the

project pipeline should be considered. Projects that are not ready

remain with the remaining years and within the affordability

envelope;


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• Analyse the 3 year MTEF in terms of how close it is to the initial

budget split percentage e.g. between engineering, social and other,

etc.

• Adjust prioritization model accordingly.

Political level This guideline proposes that the Executive Management Team meet

with the Mayoral Committee to discuss the Capital Expenditure

Framework. Such an engagement should be preceded by the

prioritization done by the Executive Management Team.

The Executive must present the growth and economic analysis per

functional area together with the proposed development strategies.

In this context present the actual budget amounts, percentage split, with

outcomes for each programme to enable the Mayoral Committee to

understand bulk versus reticulation/distribution

networks requirements in the context of capacity versus functionality in

the case of engineering infrastructure.

Present the outputs in terms of targets in the context of the different

service levels and in the context of how it support poor versus non-poor

and residential versus non-residential. This can be further enhanced by

reflecting how the capex adds up towards other political priorities as

contained in the IDP, e.g. job creation, safety, etc.

Specific political requirements must be assessed in the context of the

impact it will have on affordability.

6. Analysis requirements of the CEF

The CEF should be structured in such a way that it enables the following analysis for purposes

of monitoring the impact on spatial transformation, backlog alleviation and how the IUDG was

used.

It must be able to answer the following questions:

• Did the municipality undertake a comprehensive assessment of the need?

• Did the municipality develop a Long Term Financial Plan that spells out the affordability

means of the municipality?

• Does the plan include financing and funding options?

• Does the municipality plan future investment within its affordability envelope?

• How much does the municipality intend spending on:

• Engineering infrastructure versus social infrastructure versus other infrastructure


46

• On capacity versus functionality

• Bulk versus networks

• Backlogs versus growth

• How does the intended spending support spatial transformation?

• % Spent within PDA's versus % Spent outside PDA's

• How much of the investment is spend on:

• The poor versus the non-poor. The objective is that the State can determine its

contribution on supporting the municipality with pro- poor development

• Residential versus non-residential

• From an engineering infrastructure point of view, what is the long term spending on:

• Bulk infrastructure

• Distribution/reticulation networks

• Can the municipality demonstrate performance against output targets:

• Access to basic water

• Access to basic sanitation

• Access to energy

• Access to waste services

• Environmental sustainability

• Economic growth

• Social development including housing.

7. Submission Content Guide

7.1 Introduction

• Describe the geographical location of the municipality very briefly in national and regional

context (one paragraph – locality map)

• Describe the municipality in terms of:

• Physical size

• High level description (for the municipality as a whole) of current population size and

number of households, growth rate, rate of household forming

• Future population and number of households in the municipality

• Breakdown of socio-economic profile of future population

• Brief economic profile


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7.2 Spatial Transformation Agenda

• Introduction to dividing municipal area into functional areas

• Discuss each functional area (use and adjust template A for your own needs – one for

each functional area)

Existing Situation

• Descriptive developmental title

• Map

• Physical size

• Population break down primarily from a socio- economic profile point of view

• Describe future growth per income groups and in household numbers

• What is the current unemployment within the functional area

• Describe development challenges (backlogs in housing and social infrastructure that the

municipality is responsible for, capacity constraints for the future date)

Future Situation (At least 10 years into the future)

• Describe development strategy or strategies

• Where do we accommodate the future population (taking socio-economic profile into

consideration, proximity to work-opportunities)?

• What do we do with the existing footprint should it fall outside a Priority Development

Area)?

• Quantify needs (backlog plus future demand) in terms of future customer base.

7.3 Technical Assessments

Backlogs

• Based on the development strategies and quantification developed in Workshop 1,

describe development challenges (backlogs in access to services, backlogs in terms of

asset management, capacity constraints for the future date)

Capacity (Work on programme estimates rather than projects)

• Supply (Water, electricity)

• Bulk (Water, sanitation, electricity, roads, bridges, storm water, waste management, public

transport, social, environmental)

• Networks (reticulation or distribution)

• Costing based on service levels, service standards and technology options -

environmental consideration)


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Consolidated 10-year requirements

• Provide consolidated 10-year requirements from all sectors per functional area in the

following categories for purposes of developing investment programmes: (Use and adjust

template B to your needs)

• Bulk (new and existing)

• Distribution/reticulation (new and existing)

• Social infrastructure

• Other (e.g. economic, environmental)

7.4 Capital Expenditure Framework

• Long term financial plan (assumptions and projections)

• Affordability envelope (10 year capex projection based on reserves/surpluses, borrowing

and grant allocations and PPP arrangements)

• Cover the following periods:

• Current financial year (2017/18)

• MTREF period (2018/19, 2019/20, 2020/21)

• Remaining 7 years (2021/22 to 2025/26)

• Do a first fit for all functional areas based on the development strategies and need

• If the need exceeds the affordability envelope, then discuss and review service levels and

standards and if necessary, review development strategies

• Analysis:

• Stay within affordability margin

• Engineering vs Social vs Other

• Engineering

• Capacity vs Functionality

• Bulk vs networks

• Backlogs vs growth

• Functional area

• Poor vs Non-poor

• Residential vs Non-residential

• Within PDA's vs Outside PDA's

• Need to develop Performance Targets that supports the spatial agenda and promotes

social and economic development: Propose the following targets:

• % Capex Awarded and Spend within PDA's vs Outside PDA's

• % Capex Awarded and Spend to improve Access to basic services

• % Capex Awarded and Spend to improve Service Delivery improvement

• % Capex Awarded and Spend to improve Environmental sustainability

• % Capex Awarded and Spend to improve Economic growth


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• % Capex Awarded and Spend to improve Social upliftment

7.5 Capital Expenditure Programme

• Draft MTREF capital budget

• Output targets that supports the Performance Targets for the 3 year period broken down

per annum

• Use and adjust template Annexure C to your own needs

8. CEF Process Flowchart

The flowchart Figure 10 describes the process steps with input and output.


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Figure 10: Process Flow Chart



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Summary

The CEF is intended to optimize the projected affordability envelope for programmes that

support the development strategy for each functional area in alignment with the spatial vision.

The CEF will also enable COGTA and National Treasury to understand the infrastructure

investment required to support urban growth and spatial transformation requirements of the

municipality. Any grant award made in this context will enhance infrastructure investment

decisions. These requirements must be packaged to meet the requirements of the IUDF Grant.

The CEF is intended to add value in the following areas:

• Introducing a longer term planning approach into the municipal environment;

• It forces strategic alignment between municipal departments;

• It provides a reality check in the context of cost of providing and maintaining infrastructure

and how that relates to affordability;

• It will provide more certainty for the Technical Departments with regards to funding

availability for capital intensive projects and projects that require a long lead time;

• The CEF will provide a sound basis for Capex and Infrastructure Planning and

prioritization within the municipality, which should be a continuous activity and not only a

"once a year" activity;

• The CEF will ensure the conceptualization of appropriate and relevant projects to be

considered in the 3-year MTEF and to inform the SDBIP;

• It will inform and improve more realistic engagements with local communities and

stakeholders based on evidence based planning;

• It will improve the quality of discussions and engagements with other levels of government

in terms of IGR and cooperation;

• Access to grant funding;

• It will provide a basis for performance management against development objectives and

outcomes; and

• It will assist in the monitoring of grant funding expenditure in a more meaningful way.

The guideline is also promoting more spatially based granular data that should be gathered on

a continuous basis for each of the key elements that will provide more credibility in the

evidence-based planning process of the municipality.

The CEF is therefore considered to be a tool to improve infrastructure investment decisions

that will (i) ensure functionality and service delivery and (ii) contribute to building more

sustainable municipalities.

The tool requires strategic integration at executive management level and the process should

be institutionalized within the municipality for purposes of implementing the IUDF.


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References

Kim, Walsh (PDG). Final document: Guide to preparing an Infrastructure Investment

Framework. SALGA, 3 April 2017.

Draft document: Guidelines for the Development of Capital Investment Frameworks.

Department of Rural Development and Land Reform, Undated.

Integrated Urban Development Framework, 2016 (Cabinet)

Local Government: Municipal Planning and Performance Management regulations that were

published on 24 August 2001 in terms of the Local Government: Municipal Systems Act, 2000

(Act No 32 of 2000)

Spatial Planning and Land Use Management Act, 2009 (SPLUMA). Consolidated

Infrastructure Plan, City of Johannesburg, 2017

The Local Government: Municipal Finance Management 56 of 2003 (MFMA) Municipal

Systems Act, No 32 of 2000

Municipal Regulations and Standard Chart of Accounts as gazetted on 22 April 2014 (Gazette

No 37577)


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TEMPLATE A

Program Name

Provide Project Name

Development Strategy

Provide a brief description of the Priority Development Area towards say 2026 (2 political terms). Formulate development goals in terms of Economic Growth, Spatial Transformation and Socio-Economic Development.

Example: To provide access to basic services while maintaining the existing tribal/rural character of the area, to restrict densification and promote subsistence farming.

Intended Impact Quantify goals and set specific objectives based on affordability. Example: To roll out the RDP standard of 1 tap within 200 meters of each traditional home as a service standard rather than providing water connections to every traditional home.

A hierarchy of needs and service standards that must flow from community engagements should inform this.

Population Growth and Profile

Low-low Income

Low Income

Middle Income

High Income

Total No. of households

Existing number of households

Projected number of Households

Demand for Residential

Low-low Income

Low Income

Middle Income

High Income

Total No. of households

Existing number of residential Units

Projected number of residential units needed

Units to be achieved through densification (brown fields)

Units to be achieved through additional land (Greenfields)

Demand for Non-residential

Commercial Industrial Institutional Social Total hectares

Existing take up rate of land

Future Demand for land


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TEMPLATE B

Program Name Year

Water Services

1 2 3 4 5 6 7 8 9 10

Bulk new

Bulk upgrade

Bulk refurbished

Bulk renewal

Bulk Replacement

Total Bulk

Reticulation new

Reticulation upgrade

Reticulation refurbished

Reticulation renewal

Reticulation replacement

Total Reticulation

TOTAL WATER

Program Name Year

Energy Services

1 2 3 4 5 6 7 8 9 10

Bulk new

Bulk upgrade

Bulk refurbished

Bulk renewal

Bulk Replacement

Total Bulk

Reticulation new





Total Reticulation

TOTAL ENERGY

Program Name Year

Roads and Storm Water Services

1 2 3 4 5 6 7 8 9 10

Bulk new

Bulk upgrade

Bulk refurbished

Bulk renewal

Bulk Replacement

Total Bulk

Reticulation new





Total Reticulation

TOTAL R& SW


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Program Name Year

Social Infrastructure

1 2 3 4 5 6 7 8 9 10

New facilities

Upgrade of existing

facilities

Facilities to be

refurbished

Facilities to ne renewed

Facilities to be replaced

TOTAL SOCIAL

INFRASTRUCTURE

Guideline: Preparing a Capital Expenditure Framework

Documents