Cidms Module 8

Investment appraisal and planning MODULE 8
TOOLKIT EDITION 1 2018
MODULE 8
Investment appraisal
and planning
MODULE 8 Investment appraisal and planning
MODULE PURPOSE
This module provides tools and techniques for project design, infrastructure investment appraisal, project financial
planning and the prioritisation of capital projects for inclusion in the capital budget.
WHY
1. Investment proposals are responses to problems or opportunities. In most instances there are several possible alternative
solutions in responding to problems and opportunities that include a range of non-asset and asset solutions. Whatever solution
is selected, it will most likely come at some cost, whether to the municipality, the community or the environment. It will also draw
on a limited pool of available capital, leaving less for other worthy initiatives. Investment appraisal is a means for decision-makers,
whether Councillors, National Government, lenders, development agencies or donors to determine whether proposed projects
are viable.
2. Traditionally, public sector projects were considered viable when they technically responded to the problem or opportunity to
be addressed, and were affordable. Today, public sector projects are considered viable when they deliver net benefits to society.
The most attractive projects are those that deliver benefits across a range of sustainability outcomes, and that limit or eliminate
negative externalities.
3. An upfront understanding of what society and providers of funds value and dislike can help design attractive, value-for-money
capital proposals more likely to succeed. Investment appraisal therefore isn’t just a particular point in the process of identification,
development and approval of projects, it should be viewed as a means to both plan and select the best possible solution.
OUTPUTS OF MODULE 8:
The adoption of a corporate multi-criteria analysis system to evaluate and rank investment proposals to firstly assess their merits
against desired city outcomes, and secondly to rank investment proposals for inclusion in the city’s budget. The multi-criteria
analysis system should:
1. Reflect the outcome areas defined in the city’s asset management policy, and the asset management objectives defined in the
city’s strategic asset management plan (defined as impacts in the multi-criteria analysis system).
2. Be prepared with full participation of the political leadership, especially with respect to the amalgamation rules applied to the
multi-criteria analysis system.
3. Be formally submitted to Council for approval, and documented in the city’s strategic asset management plan.
KEY RELEVANT NATIONAL REGULATIONS, POLICIES AND STRATEGIES:

1. Municipal Finance Management Act, No. 56 of 2003
2. Municipal Systems Act, No. 32 of 2000
3. Spatial Planning and Land Use Management Act, No. 16 of 2013
I
CONTENTS
Module 8 Investment appraisal and planning
8.1 INTRODUCTION TO INFRASTRUCTURE INVESTMENT APPRAISAL AND PLANNING 8.1

8.1.1 What is investment appraisal and planning? 8.1
8.1.2 Lay-out of this module 8.3
8.2 IDENTIFY PROBLEMS OR OPPORTUNITIES AND DEVELOP POTENTIAL SOLUTIONS 8.4

8.2.1 Sustainability and realisation of city strategic objectives 8.4
8.2.2 Identification of a problem or opportunity 8.5
8.2.3 Identify potential solutions 8.7
8.2.4 Sift potential solutions 8.8
8.2.5 Process summary: identification of problem or opportunity through to shortlisting of options 8.9
8.2.6 Determining benefits and costs 8.10
8.2.7 Preparing cash flow forecasts 8.17
8.3 INVESTMENT APPRAISAL 8.23

8.3.1 Net present value (NPV) 8.23
8.3.2 Internal rate of return (IRR) 8.26
8.3.3 Benefit cost ratio (BCR) 8.28
8.3.4 When to use which metric 8.28
8.3.5 Further analysis: sensitivity and scenario analyses, and simulation 8.29
8.4 FINANCIAL PLANNING 8.32

8.4.1 Elements included in the financial analysis 8.32
8.4.2 Funding arrangements 8.33
8.4.3 Prepare or adjust cash flow forecast 8.34
8.4.4 Conduct sensitivity analysis and analyse results 8.34
8.5 ORGANISATIONAL OPTIMISATION 8.36

8.5.1 Corporate-level prioritisation using a multi-criteria analysis framework 8.36
8.5.2 Elements of a MCA system 8.38
8.5.3 Define outcome areas 8.39
8.5.4 Define impacts for each outcome area 8.41
8.5.5 Develop the MCA ranking system 8.45
8.5.6 Develop benefit and cost parameters for each impact 8.47
8.5.7 Formulate amalgamation rules 8.48
8.6 APPROVAL OF MCA SYSTEM 8.50
8.7 CONCLUSION 8.51
II
LIST OF
Figures that appear in this toolkit
FIGURE 8.1: Process from identification of problem or opportunity through to shortlisting of options 8.9
FIGURE 8.2: Process to develop a MCA system 8.38
Tables that appear in this toolkit

TABLE 8.1: Asset and non-asset solutions 8.7
TABLE 8.2: Investment proposal screening list: examples of deal-breakers 8.8
TABLE 8.3: Potential benefits per type of infrastructure portfolio 8.13
TABLE 8.4: Potential costs per type of infrastructure portfolio 8.14
TABLE 8.5: Benefits and costs considered in infrastructure investment appraisal 8.15
TABLE 8.6: Calculation of PV at 8% discount rate 8.21
TABLE 8.7: Summary of capital budgeting techniques 8.28
TABLE 8.8: When to use which method, and not to 8.29
TABLE 8.9: Proposed foundational outcome areas 8.40
TABLE 8.10: Specific impacts per outcome area 8.44
TABLE 8.11: Projects delivering different baskets of benefits 8.45
TABLE 8.12: MCA ranking system 8.46
TABLE 8.13: Examples of benefit and cost parameters for selective economic development impacts 8.47
TABLE 8.14: Amalgamation rules 8.48
III
LIST OF
Annexures
8A: City-level multi-criteria analysis framework 8.53
IV
8.1 INTRODUC TION TO INFR ASTRUC TURE

INVESTMENT APPR AISAL AND PLANNING
8.1.1 What is investment appraisal and planning?
The asset management planning process described in the previous modules generates multiple capital project proposals.
These proposals are generated across departments for functions such as potable water, electricity, roads and stormwater,
solid waste, public amenities, and for municipal operational facilities such as administrative buildings, depots, stores and
yards. The nature of these capital proposals vary from the creation of new infrastructure, to upgrading of existing facilities,
to the renewal of infrastructure, or consolidation or reconfiguration of current systems. All of these capital proposals have
certain characteristics in common, as follows:
• They need capital outlay or funding to implement. Most

require funding ranging from a few hundred thousand to
several million Rand, a smaller number of projects will require
funding measured in hundreds of millions of Rand, and then
there are the mega projects, requiring in excess of a billion
Rand. Collectively, the value of all capital project proposals
will in a typical city amount to several billion Rand per annum.
• Constructing infrastructure creates long term liabilities.
Once infrastructure is commissioned, it must be operated
and maintained for its service potential or economic benefit
to be enjoyed. In the event that infrastructure is funded
through loans, interest costs and capital payments must also
be made. These are all recurring operating expenditure that
stacks up over time. In many asset portfolios initial capital
investment, though large, represents less than 20 per cent
of total lifecycle costs. The remainder of lifecycle costs are
operating expenditure that municipal customers must fund
by paying rates and tariffs.
In practice there are several economic realities to contend

with. Funding requests generally exceed available funding.
This is because capital is a scarce resource, and human needs
are unlimited. This is the economic principle referred to in
Module 1. In such an event a city will follow a capital rationing
strategy, which is when the size of the available capital budget
is restricted and all capital project proposals are screened for
viability, and the best projects are incorporated into the capital
budget until the capital budget limit is reached. The remaining
projects are then deferred, redesigned for future consideration,
or rejected. This is investment appraisal. Of course, when a city
formulates several very attractive and viable projects for which
capital is not available through normal means such as grant
funding or own sources of funding, it can always obtain funding
from the market place. In such an event investment appraisal
is still needed to ensure that projects are viable, that there will
be attractive returns, and that loans can be serviced from the
projected returns.
8.1
The economic principle also applies to customers. One project may, when considered on its own merits and in isolation of any
other project or commitments, be feasible. But implementing all viable projects may exceed the ability of ratepayers to absorb
increases in rates and tariffs, particularly in times of economic downturn. Accordingly investment planning should not only consider
a municipality’s own financial capabilities, but also that of the citizenry it is dependent on for revenue.
Financial considerations such as capital availability and periodic renewal. The parameters and mechanics of financial
affordability are important. Cities must always take decisions appraisal reject projects that do not generate net revenue.
to ensure ongoing financial viability. But there are other Cities nonetheless have to invest in non-revenue generating
considerations as well, not all of which are financial. Capital assets for a variety of reasons. Accordingly, this module
investments should always support the mandate of cities, introduces techniques and models to appraise projects against
and the strategic objectives and outcomes that a city defines a range of benefits or outcomes (e.g. financial, social, economic
for itself. Some projects may from a financial perspective be and environmental) aligned to city strategic objectives. This
very attractive, but may not support the mandate, objectives latter category of techniques and models include benefit-
or desired outcomes of the city. Not all projects are financially cost analysis (BCA) and multi-criteria analysis (MCA). Not only
feasible in their own right. Municipal roads, for example, do these allow appraisal of a range of projects with dissimilar
require high levels of capital outlay, do not directly generate characteristics and baskets of benefits and disbenefits, they also
municipal revenue (though they have the potential to unlock provide the means to assess, rank and prioritise at a corporate
land value and contribute to increased municipal property rates level the project proposals submitted by various line functions
income), and once they are constructed, require significant and and departments.
sustained expenditure over long periods for maintenance and
Investment appraisal and planning, therefore, is about:
Assessing capital project Planning for how investments are Ensuring that investments
proposals to quantify their to be funded; made are affordable over the
benefits and costs, and to lifespan of assets, to both the
determine which projects are municipality and customers.
both viable and desirable for
inclusion in the capital budget;
8.2
8.1.2 Lay-out of this module

Section 8.2 deals with the identification of problems and opportunities, and the development of infrastructure investment
options. It focusses on basics such as what are benefits and costs, how to distribute and discount them, opportunity costs and
capital rationing, and what analysis periods to select for investment appraisal.
Section 8.3 provides techniques for infrastructure appraisal, Section 8.4. Section 8.5 deals with organisational optimisation,
including net present value, benefit-cost analysis and internal ensuring that projects meet the strategic outcomes desired
rate of return, and for sensitivity analysis. Qualifying (worthy) by Council, and are prioritised accordingly for inclusion in the
project proposals are subjected to financial planning in capital budget.
8.3
8.2 IDENTIFY PROBLEMS OR

OPPORTUNITIES AND DE VELOP
POTENTIAL SOLUTIONS
8.2.1 Sustainability and realisation of city strategic objectives
Cities should adopt sustainable development strategies and their investments should support the achievement of sustainable
outcomes. Sustainability has multiple dimensions in the urban infrastructure context, including:
01 ECONOMIC SUSTAINABILITY
Including providing an enabling environment for economic
growth through the timely provision of appropriate
infrastructure services at reasonable cost, and avoiding
infrastructure investment decisions that create periodic city
fiscal shocks.
02 SOCIAL SUSTAINABILITY
Involves creating sustainable, successful places that promote
wellbeing and social inclusion by combining design of the built
realm with design of the social world, and providing amenities
to support social and cultural life. It also requires systems
for citizen engagement, cultural relationships, recognition
of community strengths and needs, and transmitting social
sustainability awareness.
03 ENVIRONMENTAL SUSTAINABILITY
Requires that development and consumption do not exceed
the environment’s carrying capacity. This involves limiting city
spatial footprints, curbing consumption through non-asset
solutions, addressing net demand wherever possible through
green infrastructure solutions, and over time to retrofit existing
infrastructure to be more resource efficient.
04 FINANCIAL SUSTAINABILITY
Requires investment decision-making that pursues financial
viability of the municipality measured in a favourable solvability
position and ongoing liquidity.
Accordingly, all capital project proposals should be measured against city strategic objectives. This is done by adopting a corporate
multi-criteria analysis system, and evaluating all capital project proposals against this system. Guidance on the design of a multi-
criteria analysis system is provided in Section 8.5. Note that in investment appraisal terminology, capital project proposals or
investment proposals are simply referred to as “projects”.
8.4
8.2.2 Identification of a problem or opportunity
Any request for capital investment starts with the identification of a problem or opportunity. A problem can be something like:
01 COMPLIANCE REQUIREMENTS 03 SERVICES BACKLOG OR COMMITMENT TO

EXTEND SERVICES
New regulation forces infrastructure system upgrades or Such as:
reconfiguration. Examples include:
• People from outside the municipal area illegally settled on
• Environmental legislation requires landfill sites to implement vacant land on the urban periphery. The matter was not
and operate technologies to deal with leachate control and addressed when it first happened, as initially there were less
process methane emissions. Two of the cities landfill sites do than 10 shacks. Over time this informal settlement grew to
not meet these requirements. some 1 700 shacks. The court ruled that the settlers cannot
• Following a facility safety audit conducted in terms of be moved, and services must be provided in situ.
new safety regulations, it was determined that the current
configuration and manual clearance operations at the inlet
chambers of the city’s waste water treatment plants present
unacceptable safety risks to workers, and that inlet design
does not sufficiently address smell pollution.
• An eight storey municipal building accommodates some
246 employees across several corporate units. Following
inspection, a certificate was issued stating that the building
was unsafe, and the municipality was notified to rectify
issues identified during the inspection within a specified
time limit or the building would be condemned. These issues
04 ASSET FAILURE
Such as:
included basement flooding with some structural damage,
• Capacity: given current mortality rates, available plot space
malfunctioning lifts beyond end-of-life expectation, and an
in the city’s cemeteries will be filled in the next 30 months.
insufficient air conditioning system which contributes to
chronic employee illness. • Condition: concrete reservoir 7 has been inspected. The
assessment team found visual deformation of 50mm on the
02 UNACCEPTABLE RISK EXPOSURE

foundation and visible, persistent cracks in excess of 1 mm
wide on the walls.
Such as the following incident: • Performance: a large motor has been rewired on two
• A vehicle accident on a rainy night involving loss of life led to previous occasions, and the power loss has become such that
litigation against the city. The regional high court found that it can no longer perform to expectations.
the accident was triggered by an aquaplaning event, which • Cost-of-operations: a borehole and pump has been
could have been avoided had the municipality implemented providing potable water to a small remote village. It was fitted
appropriate stormwater infrastructure arrangements. The with a diesel motor but the cost of regular fuel deliveries
court awarded damages to the family of R 8.7 million. The (including personnel and vehicle costs) has become
city’s corporate risk management policy declares any risk prohibitive. Although the motor is still in good condition,
above R 5 million to be unacceptable risk exposure that it has become more cost-effective to supply from a nearby
requires intervention. village that has been recently electrified.
8.5
Opportunities can generally be classified as follows:

• Risk reduction: in the event that the city itself proactively
identifies scope for risk reduction (as opposed to the problem
where the court found that the city should have provided
proper stormwater). An example of this is when the city
decides to change design standards for road-side poles to be
frangible.
• Efficiency improvements: whether they are opportunities
for cost reduction (e.g. reduced maintenance expenditure
or improved energy efficiency) or opportunities for
improvement in operations.
• Revenue enhancement: examples of which include smart
metering systems and investment in industrial parks.
• Unique opportunities: seldom or only periodically present
themselves, each of which are distinct in the promise they
hold.
Having identified a problem or opportunity, a clear project

objective must be defined and documented – this is the starting
point for preparation of the project proposal. The project
objective must describe the problem or opportunity to be
addressed, and the outcome(s) desired.
Good practice dictates that the project objective(s) demonstrates

achievement of the city’s strategic objectives. In the event that
the project objectives(s) does not support any of the city’s
strategic objectives, then test the project objective against
legislative requirements as it applies to the city, and document
the relationship. If the project objective(s) does not support
any city strategic objective or legislative requirement, then:
• It may be an unique case that warrants further careful
consideration;
• The matter should be rejected and no further effort invested;
or
• The issue should be referred elsewhere. For example,
the city’s population exceeds the capacity of the existing
hospital. However, hospitals are a provincial competence
and extending the current hospital or building a new
facility is a decision for the provincial administration. The
problem should be brought to the attention of the provincial
authorities.
8.6
8.2.3 Identify potential solutions
Having identified and documented the problem or opportunity as well as the project objective, the next step is to identify
possible solutions. Avoid the temptation to simply propose easy solutions or solutions that have always been implemented
in the past.
The process of identifying solutions to a problem or opportunity should be an honest attempt to

find the best possible solution for the city. It should reflect current best thinking – not preconceived
solutions or outcomes.
When formulating solutions, be sure to consider both non-asset and asset solutions, such as:
SOLUTION
TACTIC
TYPE
Reassess service requirements Possible adjustment in levels and/or standards of service
and delivery options Outsourcing options
Maintain status quo
Non-asset Synchronisation of supply and demand
solutions Limit or reduce demand
Demand management
Substitute demand
Delay demand
Increase demand
Maintain status quo
More/less maintenance
Shift maintenance regime (between predictive, preventative and reactive
maintenance)
Renewal: modern equivalent with similar functionality
Renewal: green retrofitting
Asset level options
Upgrading
Combination renewal and upgrading
Asset
Asset decommissioning/disposal – no replacement
solutions
Replacement: different asset with the same functionality and capacity
Replacement: different asset with more/less functionality and capacity
Replacement: green infrastructure
System expansion
System reconfiguration
System or portfolio level
options Regional system integration
Shift function: e.g. design public parks for stormwater capture and
attenuation
TABLE 8.1: Asset and non-asset solutions
Module 5: Future demand provides guidance on future infrastructure trends, demand management and demand responses.
When identifying solutions, attempt to identify both asset and non-asset solutions. Asset solutions should also consider both green
infrastructure and traditional grey infrastructure.
8.7
• Very often the best solution requires adoption of several tactics across the asset and non-asset
solution categories, or over the asset lifecycle. Be careful to adopt linear thinking, but also do not
unnecessarily over-complicate possible solutions.
• Think beyond purely technical options to solutions that would, if implemented, deliver a range of
economic, social, financial and environmental benefits.
8.2.4 Sift potential solutions

Developing robust project proposals or business cases to address a problem or opportunity takes a lot of effort, as does the
appraisal of such proposals. Ultimately only one project proposal will be accepted. As a result it is prudent to strike a balance
between finding the best possible solution and not spending excessive resources in finding the best solution.
Accordingly, potential solutions should be sifted at this

SCORING FOR
point using some basic criteria. These include the following DEAL BREAKERS
COMPLIANCE
questions:
1. Will the solution, if implemented, contribute appropriately Aligned to city vision and strategic
Yes No
to the financial, economic, social and environmental objectives
sustainability of the city? (Note: solutions that only contribute
towards one dimension of sustainability (e.g. financial) Comply with legal requirements Yes No
are often not fully sustainable, however, the solution itself
Negative economic, financial, social or
may hold the potential to contribute towards multiple
environmental consequences that can’t Yes No
sustainability outcomes, but simply have not been conceived
be reasonably mitigated
or articulated as such – in such a case consider redesigning
the solution).
Exposes the city to unacceptable levels of
2. Does the potential solution pass deal-breakers? Deal-breakers risk (see risk tolerance levels in corporate Yes No
are non-negotiable asset management objectives defined in risk policy)
the City’s asset management policy (see Module 2). Non-
compliance with any of these objectives or deal-breakers
should result in the elimination of a proposed solution, even TABLE 8.2: Investment proposal screening list: examples of deal-
if the solution is otherwise an attractive one. breakers
Having sifted potential solutions, the shortlist of available options should normally include the following solutions as a minimum:
The current solution or status The least cost solution that will still The apparent most beneficial
quo option (base case) achieve the project objective solution
These potential solutions must now be developed to a point where rigorous evaluation of their merits are possible.
8.8
8.2.5 Process summary: identification of problem or opportunity

through to shortlisting of options
The preceding sub-sections described a process starting with the identification of a problem or opportunity, definition of
a clear project objective and outcome, and preliminary screening that results in a shortlist of options which must now be
analysed in more detail.
FIGURE 8.1: Process from identification of problem or opportunity through to shortlisting of options
8.9
8.2.6 Determining benefits and costs
CAPITAL PROJECT PROPOSALS PRESENT BASKETS OF

BENEFITS AND COSTS
Each capital project proposal presents a basket of benefits and
costs. A viable capital project proposal is one that delivers net
benefits, meaning the benefits exceed the costs of the project.
But what are benefits and costs? This sounds like a simple
question, but it really isn’t. Some benefits and costs can be easily
measured in financial terms, others not. Consider investment
in a road. Direct costs are easy to quantify: they include the
costs of design and construction (initial capital outlay), as
well as recurring operating and maintenance expenditure.
There are generally no direct financial benefits accruing to the
municipality, since municipal roads aren’t tolled, and no direct
revenue is earned. But there are many other non-financial
benefits and costs associated with road construction. Direct
benefits could include greater movement, reducing congestion
and improving the efficiency of the city’s economy (e.g. less
time in traffic, greater levels of trip reliability and faster delivery
times), lower vehicle operating costs and reduced accidents.
But how to quantify the benefits of, say, reduced accidents?
There are also indirect benefits, which may include unlocking
land for economic purposes and enabling increased property
rates income. Then there are further costs still, such as possible In the event that the road investment proposal is accepted
increases in the levels of air pollution, more noise pollution, and but no mitigation measures are implemented to counter, say,
more restrictions on the movement of fauna. increased air and noise pollution, negative externalities arise.
Negative externalities are costs or adverse impacts not included
in the cost structure of the organisation producing those adverse
impacts. In other words, the organisation gets a free ride, and
society at large suffers the consequences. Should the city decide
to internalise those costs, the nature of the costs change from
indirect costs (e.g. air or noise pollution), to direct costs (e.g.
costs to construct noise barriers and selection of appropriate
surface pavements).
When infrastructure is constructed for a newly proclaimed

township it is generally easy to determine the revenue and
expenditure streams relating to the new infrastructure. But what
about the replacement of a segment of water pipe in an existing
system? Though water is a revenue generating service, the city
will not earn any more income after replacing the segment
of pipe than it did before. Situations like these require careful
thought about the benefits and costs of the proposed project.
Any worthwhile project will however generate benefits. In the

case of the replacement of a segment of water pipe, the benefits
will include reduced water losses and reduced maintenance
expenditure, both of which amount to real savings in operating
expenditure, as shown in Box 8.1 below.
8.10
BOX 8.1: DE TERMINING THE NE T BENEFITS

OF WATER PIPE REPLACEMENT
A segment of 600mm diameter water pipe that is 200m long has failed (e.g. bursts) on seven occasions over the past twelve
months. The cost of replacing a linear meter of 600mm diameter pipe is R 5 000 (brownfields rate), and to replace the whole
segment would cost R 1 million. The cost per repair event is R 4 150, amounting to repair expenditure of R 29 050 per annum
on that segment of pipe. At face value it appears that it would be less expensive to continue to maintain the pipe. But let’s
consider the possible benefits of replacing the pipe. Every time the pipe fails, water losses are incurred that lead to increased
expenditure. And if the pipe is replaced, maintenance expenditure is reduced, resulting in savings.
The first step is to determine the volume of water carried in different diameter size pipes and water losses for different sizes of pipes,
to calculate the likely savings from reduced water losses if the pipe is replaced. The bulk purchase cost per kilolitre is R 7.71, and the
water loss per metre of large diameter pipe in poor or very poor condition is 45 kℓ per annum.
Pipe distribution network: Diameter sizes, volumes and water losses

WATER
MATERIALS TYPE VOLUMES
LOSSES
Ø AVE
OTHER TOTAL %
(MM) Ø VOLUME IN % BY
AC UPVC HDPE STEEL (MPVC, SMALL/
Kℓ VOLUME
GRP) LARGE
<100 928 060 1 728 725 361 525 235 910 3 080 3 257 300 80 16 364 675 3
≥ 100
1 788 590 2 674 010 111 050 1 348 215 17 210 5 939 075 150 104 898 912 22
<200 35
≥200
309 220 376 695 4 490 235 660 0 926 065 250 45 435 064 10
<300
≥300
181 515 134 690 1 530 447 345 0 765 080 400 96 094 048 20
<500
≥500
39 725 17 225 30 279 255 895 337 130 600 95 272 938 20
<700 65
≥700
5 170 3 315 0 120 935 0 129 420 800 65 020 608 14
<900
≥900 165 6 070 0 58 425 0 64 660 1 000 50 758 100 11

TOTALS 3 252 445 4 940 730 478 625 2 725 745 21 185 11 418 730 473 844 345 100
Next, distribute the benefits and costs in a cash flow projection:
Cash flow forecast

YEAR 1 2 3 4 5 6 7 20
Renewal 1 000 000 - - - - - - -
Water losses 68 831 68 831 68 831 68 831 68 831 68 831 68 831 68 831
Repair costs 29 050 29 050 29 050 29 050 29 050 29 050 29 050 29 050
TOTAL ANNUAL SAVINGS 97 881 97 881 97 881 97 881 97 881 97 881 97 881 97 881
Initial indications are that the municipality would save R 97 881 per annum in reduced maintenance expenditure and reduced water
losses if it replaced the water pipe segment – these are the project benefits. The project cost is the cost of renewal of the segment of
water pipe.
8.11
8.12
The water pipe replacement example shows that savings in expenditure are treated as benefits: they equate to revenue.
POTENTIAL BENEFITS AND COSTS PER TYPE OF INFRASTRUCTURE PORTFOLIO

Possible benefits per type of infrastructure portfolio are indicated in the table below, on the assumption that the city has adopted
a climate resilient infrastructure policy that also entails implementing green infrastructure wherever feasible. Following through
on this assumption, a landfill site, for example, would contribute to the city having to purchase less bulk electricity, as the methane
produced by the facility would be converted to energy and taken up in the municipal grid. See Module 5 for more guidance on
green infrastructure trends. Also note that benefits are not automatic, projects have to be designed to deliver the types of potential
benefits that capital investment in these asset portfolios hold.
INFRASTRUCTURE
POTABLE WATER
ACTIVE TRAVEL
STORMWATER
SOLID WASTE
SANITATION
BUILDINGS/
BENEFITS CLASSIFIED PER
AMENITIES
DIMENSION OF SUSTAINABILITY
ENERGY
ROADS
PARKS
ECONOMIC
Accident reduction
Enhanced tourism opportunities
Flood damage control
Improved transportation efficiency
Increased business opportunities
Job creation
Land value capture/enhanced property value
FINANCIAL
Bulk purchase cost savings
Maintenance savings
Operation cost savings
Reduced risk
SOCIAL
Accessibility
Improved health
Improved public safety
Improved social inclusion
Improved social well-being
ENVIRONMENTAL
Flood management/mitigation
Improved ecological functioning
Improved energy efficiency
Reduced water consumption
TABLE 8.3: Potential benefits per type of infrastructure portfolio
8.13
INFRASTRUCTURE
POTABLE WATER
ACTIVE TRAVEL
SOLID WASTE
STORMWATER
SANITATION
BUILDINGS/
POTENTIAL COSTS CLASSIFIED PER
AMENITIES
DIMENSION OF SUSTAINABILITY
ENERGY
ROADS
PARKS
ECONOMIC
Business relocation costs

Increase in accidents
Reduced tourism opportunities
Greater flood damage potential
Reduced transportation efficiency
Reduced business opportunities
Job shedding
Impaired property value
FINANCIAL
Capital investment costs

Increase in bulk purchase costs
Increase in maintenance costs
Increase in operation costs
Increased risk
SOCIAL
Diminished accessibility
Reduced health
Reduced public safety
Reduced social inclusion
Reduced social well-being
ENVIRONMENTAL
Carbon production
Increased flood potential
Declining ecological functioning
Land take and habitat loss
Greater levels of energy consumption
Increasing water consumption
TABLE 8.4: Potential costs per type of infrastructure portfolio
8.14
Note that not all costs necessarily apply in each investment case.
CATEGORIES OF BENEFITS AND COSTS

The water pipe example shows that there are both direct and indirect benefits and costs associated with capital project proposals.
There are also a range of intangible benefits and costs (e.g. increases or reductions in air or noise pollution).
CLASSIFICATION DESCRIPTION BENEFITS COSTS

Increased revenue: Investment costs (capital outlay):
• Property rates income • Disposal of facility to be replaced
These are • Income from service charges • Concept and detailed designs
incurred by the • Income from ticket sales • Land acquisition
municipality • Rental income • Costs associated with any consents or
undertaking the • Capital appreciation of investment approvals required
investment. properties • Construction costs (or costs of acquisition
of manufactured items)
Direct benefits and Direct benefits • Other professional fees relating to the
costs and costs can be Asset life extension project
calculated with • Asset handover and commissioning costs
relative ease using
cost accounting Savings in either operating or maintenance Additional or incremental operating
techniques or expenditure expenditure:
through market • Additional operating expenditure e.g. bulk
research. purchases of water or electricity, more staff
Risk reduction and other consumables
• Additional maintenance expenditure
These are often
externalities or
spill overs that
emerge when Externalities that benefit the community: Externalities that disbenefit the community:
the proposed • Enhanced property values • Diminished property values
capital project is • Improved transport efficiency • Reduced transport efficiency
implemented. • Expanded business opportunities • Contracted business opportunities
Indirect benefits
• Increased employment opportunities • Reduced employment opportunities
and costs
Externalities • Higher levels of tourism • Lower levels of tourism
can be positive • Improved public safety • Reduced public safety
(benefits) • Improved community wealth • Diminished community wealth
or negative • Improved social well-being and inclusion • Reduced social well-being and inclusion
(costs), and are
experienced by
the citizenry
The mental and health costs associated with
These are benefits
noise pollution are examples of intangible
Tangible benefits and costs that can All direct benefits listed above are examples
costs – provided that there is no recent
and costs be quantified in of tangible costs
study quantifying the impacts of noise
financial terms
pollution
TABLE 8.5: Benefits and costs considered in infrastructure investment appraisal
Why do we differentiate between direct and indirect costs? The Any investment by a municipality involves the application of
municipality making the investment must consider the capital public funds, and should result in a positive contribution to the
investment proposal based on its financial merits to determine community’s total welfare. The indirect benefits and costs listed
the financial viability of the project. A municipality must after above measure those changes in community welfare – they do
all remain financially sustainable. The direct benefits and costs not reflect in the annual financial statements of the city, but they
listed above accrue directly to the municipality, and are therefore are the reason the municipality exists.
considered in financial analysis tests performed on projects.
8.15
It is also reasonable to ask why to bother with assessing intangibles if we can’t easily quantify them in financial terms. The following
sub-sections provide guidance on the weighting of all types of benefits and costs whether direct, indirect, tangible or intangible.
A multi-criteria analysis system is also presented which takes account of all benefits and costs to both the municipality and the
community it serves.
Take care to identify pecuniary benefits and costs for what they really are: they do not constitute
gains to either the municipality or the community it serves.
One category of benefits and costs not reflected in Table 8.5 is pecuniary benefits and costs. These materialise following changes in
relative prices as the economy adjusts to the provision of a public service. When this happens, benefits accrue to some but are offset
by losses accruing to others. In short, there are winners and losers, and there are no net additional benefits to society. How can this
happen? Consider the following two examples:
01 GENTRIFICATION 02 A SECOND MUNICIPAL AIRPORT

The municipality embarks on an urban renewal project. Some A municipality has an airport, largely used for limited freight
552 families are moved to other areas to make way for an exciting haulage, private operators and parachuting. The facility has
new mixed-use development incorporating 44 high-end loft space for expansion of both on-site facilities and runways to
style apartments for executives, high street retail facilities, accommodate larger planes, and currently generates annual
fashionable restaurants, a gym and some office space. Shop net revenue of R 24 million per annum. The city nonetheless
owners, mostly local small operators, some of whom have been decides to construct a new municipal airport some 25 km away,
operating their businesses in the area for decades, are not able as it intends to develop an aerotropolis precinct at a different
to afford the new, higher rents. They are forced to either close location. The cost of constructing the new facility is estimated to
their businesses or to relocate to other areas, incurring the costs be R 641 million, annual revenue some R 51 million, and annual
of relocation and the difficulty of building a new clientele. In this operating and maintenance expenditure around R 22 million
example 44 families benefit, but 552 families are worse off. They (including interest charges and capital repayments). Since the
have to relocate, their social networks are disrupted, and they existing facility is itself profitable with a well-established brand,
likely have to travel greater distances to places of employment, the city intends retaining the existing airport alongside the new
increasing their costs of living. Society as a whole does not facility. This is another example where pecuniary costs come
benefit. Note though that whilst this example is realistic and into play. Why? The new facility will generate R 3 million more
reflective of many experiences to date, urban renewal itself is not in net revenue than the existing facility. However, to generate
a bad thing – the urban renewal intervention can be designed in this income it has to capture the clientele of the existing facility.
such a manner that net benefits to society is created. This is because any city will only have so many flight operators
and private pilots with their own airplanes – so demand will be
limited. One facility benefits at the cost of the other, and since
the operating expenditure of both exceed the city’s airport
revenue potential, society incurs net additional costs.
A multi-criteria rapid environmental and social assessment tool for municipal infrastructure
projects is included in Appendix 8.A. This tool will assist cities to improve the design of projects by
considering which project alternatives deliver the best basket of benefits and appropriately deal
with externalities.
8.16
8.2.7 Preparing cash flow forecasts
Investment appraisal is about considering proposals and their future impacts in terms of benefits and costs. The first important
point here is the emphasis on future impacts. This means that past investments are considered sunk costs and play no part in
the consideration of the investment proposal now being appraised.
01 PREPARING DISCOUNTED
CASH FLOW FORECASTS 02 DISCOUNTED CASH FLOW ANALYSIS
Future benefits and costs are typically presented in a cash Investments in infrastructure normally represent long term
flow forecast that depicts expected revenues (benefits) and impacts, with benefits and costs accruing over years, often
expenditure (costs) on an annualised basis over the analysis decades. Discounted cash flow (DCF) analysis is a means of
period. The length of the analysis period should be calibrated discounting future benefits and costs to present value (PV)
to the expected economic life of the project or asset being using the following formula:
appraised. The cash flow forecast should be presented in the
initial investment proposal. There are some rules to apply when EXPENDITURE IN YEAR N
preparing discounted cash flow forecasts. These are: PV =
(1+DISCOUNT RATE) (N)
1. Distribute revenue and expenditure over the analysis period

as they are expected to materialise.
2. The exception to rule 1 is that residual or scrap value, which
is revenue that the city expects to earn from the sale of the
asset at end-of-life, is included in year 1 of the forecast, or
if the project involves multi-year construction, in the year in
which the asset is expected to be ready for use.
3. Ignore depreciation. Depreciation is a means to allocate
capital costs over the life of the project. This is however not
necessary, as capital costs are already included in the form of
investment costs or original capital outlay.
4. Do not provide for general inflation. Financial appraisal
employs discounted cash flow analysis that adjusts future
cash flows to present values. However, if the price of a
specific expenditure item such as structured steel, concrete
or diesel is expected to increase relative to general prices,
then adjustment should be made for this, but only in relation
to the general price level. Any such an assumption should be
noted in the analysis.
5. When first preparing the cash flow forecast as part of the
project proposal, ignore financing costs. At this stage the
proposer does not yet know how the project will be funded,
and the discount rate already takes account of the weighted
average cost of capital – these terms are discussed in
following sub sections.
“ Financial appraisal employs discounted

cash flow analysis that adjusts future
cash flows to present values.”
8.17
BOX 8.2: C ALCULATING PRESENT VALUE
Recall the segment of 600mm diameter water pipe that is 200m long. Let’s assume that we know the number of pipe failures,
but the municipal costing system is not sophisticated enough to allow us to determine the cost per pipe repair event. We
also do not have sufficient data to reasonably cost the impacts of water losses incurred during pipe bursts. We do however
know that the pipe segment needs replacing at some point. The MTEF has largely been fixed, and the CFO indicated that the
inclusion of the pipe segment project in the budget will require that another water project must be removed from the budget.
Is there any benefit in delaying the project to replace the segment PV = R 1 000 000 / (1+0.08)(4)
of pipe at a later stage? Replacing the segment of pipe today = R 735 030
would cost R 1 million. The MTEF is a three-year instrument, so
the earliest the project can commence if we delay the project
is four years. The discount rate is 8%. The present value of the Deferring the water pipe capital expenditure will result in a
capital expenditure to replace the segment of pipe in four years’ saving of:
time is then: R 1 000 000 – R 735 030 = R 264 970
8.18
03 DISCOUNT RATE
The discount rate converts flows of benefits and costs over time (present and future money values) into a net present value. This is
done to:
Establish whether a project is Compare projects with unequal DCF analysis can also be used
worthy. A worthwhile project will lives, a situation that often occurs to select the optimum timing of
have a positive net present value. in the municipal space. investment projects, especially
when there is unused capacity in
earlier years.
The discount rate equates to the opportunity cost of capital. Public money is limited, as is capital that can be sourced from the
market to finance public projects, whilst the needs of the city are unlimited. Therefore money invested in one project means an
opportunity missed to invest in another project, or, more simply, the opportunity cost of a choice is what you give up to get it.
OPPORTUNITY COST IS DEFINED AS:

The cost of cash flows that could have been earned in the best alternative investment opportunity.
The discount rate is also referred to discounting rate, the capital hurdle rate or the social discount rate (the latter when applied in
the public sector).
18
8.19
The following are key rules and considerations in the

establishment and application of the discount rate:
1. The discount rate is set annually by the Chief Finance Officer,

and then applied in all investment appraisal analyses.
2. The implication of (1) above is that all project proposals
are subjected to the same discount rate, as the issue of the
opportunity cost of capital applies to the organisation as a
whole.
3. It is sometimes believed that it is not necessary to apply
discounted cash flow analysis to grant-funded investments.
This belief is incorrect, for the following reasons:
• Grant funding represents public money that should be
used wisely and to best effect.
• Grant funding itself is limited, hence opportunity costs still
apply.
• Capital grants fund initial investment costs. That
investment gives rise to future benefits and costs that
are generally not grant-funded, and that requires careful
analysis of the present value of those future impacts to
determine whether it is a good investment.
4. The discount rate is normally the weighted average cost of
capital (WACC) for the organisation as a whole.
5. When determining the discount rate, consider the following:
• It should normally absorb all available capital on projects
where the benefits exceed project costs.
• In times of capital scarcity, the discount rate should
be raised, all other considerations being equal. The
discount rate should therefore also be lowered in times
of abundance of capital. The discount rate must however
always be a positive factor (higher than 0%).
• When raising the discount rate in times of capital scarcity,
be careful that the discount factor does not prejudice
against optimal lifecycle solutions. Under these conditions
the discount rate can lead to selection of lower capital
investment costs and higher maintenance cost solutions.
6. Notwithstanding (1) and (2) above, there are specific
circumstances under which a different discount rate would
be applied, typically when a project with a risk profile higher
than the norm is being evaluated.
“ The discount rate is set annually by

the Chief Finance Officer, and then applied
in all investment appraisal analyses.”
8.20
04 INVESTMENT ANALYSIS PERIOD

The choice of the investment analysis period is an important one. If the period selected is too short, it highly unlikely that capital
projects will generate sufficient benefits to be financially viable. Selecting excessively long periods are not the answer either. The
longer the analysis period, the more the discount rate reduces future benefits and costs, as shown in the table below.
DISCOUNT RATE = 8%
YEAR ANNUAL REVENUE/EXPENDITURE PRESENT VALUE % VALUE IN CURRENT TERMS
0 R 1 000 000,00 R 1 000 000,00 100%
1 R 1 000 000,00 R 925 925,93 93%
5 R 1 000 000,00 R 680 583,20 68%
10 R 1 000 000,00 R 463 193,49 46%
15 R 1 000 000,00 R 315 241,70 32%
20 R 1 000 000,00 R 214 548,21 21%
25 R 1 000 000,00 R 146 017,90 15%
30 R 1 000 000,00 R 99 377,33 10%
35 R 1 000 000,00 R 67 634,54 7%
40 R 1 000 000,00 R 46 030,93 5%
45 R 1 000 000,00 R 31 327,88 3%
50 R 1 000 000,00 R 21 321,23 2%
Here are general rules and considerations in selecting an TABLE 8.6: Calculation of PV at 8% discount rate
appropriate investment analysis period:
1. One year (12 months) is the base unit of analysis in the
analysis period. Expenditure that results in benefits accruing
in a period shorter than one year is operating expenditure.
2. The analysis period should generally correspond with the
economic life of the asset being considered. If a road surface
has an economic life of 15 years, then the analysis period
should also be 15 years.
3. Some assets, such as dam walls, have extremely long
economic lives. In some instances their lives can be measured
in hundreds of years. In other words, the asset life, seen from
the perspective of our generation, is for all practical purposes But there is another reason still. Each successive generation
infinite. In such a case, the correct approach is to only forecast is wealthier than the one before it, and enjoys a progressively
benefits and costs to the point where the project breaks even higher standard of living. Even relatively poor people today
(benefits equal costs), or to the point where future cash flows enjoy benefits that kings in past generations could not conceive
assume an unchanging pattern. of, such as instant communication, the ability to travel great
4. Notwithstanding (3) above, in practice it is more prudent distances in short spaces of time, and all the benefits that
to limit the investment appraisal period to 30 years in the electricity offers. An investment that can’t yield positive benefits
event that the asset will have a longer lifespan. This is partly within the next 30 years means that the current generation is
because future cash flows beyond the 30-year boundary are investing on behalf of future generations, who will have greater
discounted to very small amounts and their impacts will in capacity to make investments. Is it worthwhile and just to invest
the distant future have little effect, and partly because the mostly for the benefit of future generations, when there are so
distant future is highly uncertain. many unserved needs in the current generation?
8.21
BOX 8.3: MORE ON LONG INVESTMENT

ANALYSIS PERIODS
Is it worthwhile and just to invest mostly for the benefit of future generations, when there are so many unserved needs in the
current generation?
The answer would generally be no. At the heart of it, this is a There are however definite exceptions. It would, for example, be
discussion about sustainability. And sustainability demands irresponsible to design and construct large civil structures such
that each generation is entitled to meet its own needs without as high dam walls and heavy vehicular traffic bridges to have
comprising the ability of future generations to do the same. So short lifespans. Not only would such designs likely be unsafe
when there is a large proportion of poor people in the current and unfit for use, they are also not sustainable.
generation, their needs are the priority, provided that addressing
those needs does not impede the ability of future generations
to address their own needs.
8.22
8.3 INVESTMENT APPR AISAL
Having prepared a shortlist of investment options to address a problem or opportunity and having furthermore prepared
cash flow forecasts of benefits and costs, it is now time to subject these proposals to investment appraisal to determine the
financial merits thereof. Three methods are generally considered appropriate for use in appraising public sector infrastructure
investments, these being:
NPV IRR BCR

Net present value Internal rate of return Benefit-cost ratio
Financial practitioners refer to these methods as capital budgeting or investment appraisal techniques.
8.3.1 Net present value (NPV)

NPV is the difference between the present value of benefits and the present value of costs, as follows:
NPV = PV OF NET BENEFITS – PV OF INVESTMENT COSTS
The expected cash flow of the project in period t is denoted by Ct, the present value of the investment (capital outlay) by Co (this has
a negative sign), and the discount rate as r, as follows:
A positive NPV indicates that projected benefits exceed

C1 C2 CN expected costs (both in present Rands), and the investment
NPV = C 0 + + +...+
(1+R) (1+R) 2 (1+R) N proposal is therefore financially feasible. A negative NPV
indicates that the investment project will lead to a net loss to
N
∑ CR the city. In practice NPV calculations would be normally be done

=
using Excel spreadsheets. The first step is to discount all future
(1+R) N
T-0 cash flows to determine present values, and then to solve for
NPV by calculating the difference between benefits and costs.
8.23
8.24
BOX 8.4: DE TERMINING NE T PRESENT VALUE
We have already calculated the cash flow for our 600mm diameter water pipe replacement project, as follows:
Cash flow forecast – not discounted yet

YEAR 1 2 3 4 5 6 7 20
Renewal cost 1 000 000 - - - - - - -
Water losses 68 831 68 831 68 831 68 831 68 831 68 831 68 831 68 831
Repair costs 29 050 29 050 29 050 29 050 29 050 29 050 29 050 29 050
The next step is to discount cash flows. The discount rate given by the CFO is 8%.
Discounted cash flow forecast

YEAR 1 2 3 4 5 6 7 20
Renewal cost 925 926 - - - - - - -
Water losses 63 733 59 012 54 641 50 593 46 845 43 375 40 162 14 768
Repair costs 26 898 24 906 23 061 21 353 19 771 18 306 16 950 6 233
Test this yourself in Excel by calculating the discounted water losses in year 2 (cells marked in grey):
= 68 831 / (1 + 0,08)^2
= 59 012
To obtain the NPV of this project, subtract the sum of all discounted annual savings over the analysis period (R 961 013) from the
discounted renewal cost (R 925 926). The project NPV is this instance is R 35 087. This is a worthwhile project.
Calculate the project NPV

YEAR BENEFITS/COSTS
NPV of costs (capital outlay to renew pipe) 925 926
NPV of benefits (savings in water losses and maintenance expenditure) 961 013
Project NPV (net benefit/loss) 35 087
8.25
8.3.2 Internal rate of return (IRR)
IRR is the discount rate that makes the NPV of all cash flows in a project equal to zero. This is the technically correct definition,
and it sounds odd. Put differently, IRR is the specific discount rate which would make the discounted income (present value)
equal to the cost of the project. More simply still, it is the rate at which the investment breaks even. The resulting rate (IRR) is
then the rate of return on the investment. IRR is also known as the economic rate of return (ERR).
Discount rate where: PV OF NET BENEFITS = PV OF INVESTMENT COSTS
IRR can’t be calculated directly, it is done iteratively till a NPV IRR also requires some additional notes on interpretation. Many
of zero is found, or alternatively using a financial calculator or practitioners using the IRR function in Excel believe they have a
financial software. When calculated for a financially feasible viable project when achieving a positive IRR (say something like
project, two results will be achieved. The first is a NPV of zero, as 5%). This is not how IRR works. Using IRR, the project will only be
noted, and the second is a rate or percentage. This rate is the IRR. feasible when the IRR is higher than the cost of capital.
8.26
BOX 8.5: C ALCULATING IRR
We have already calculated the cash flow for our 600mm diameter water pipe replacement project, as follows:
Calculate the project NPV

YEAR 1 2 3 4 5 6 7 20
Renewal cost 1 000 000 - - - - - - -
Water losses 68 831 68 831 68 831 68 831 68 831 68 831 68 831 68 831
Repair costs 29 050 29 050 29 050 29 050 29 050 29 050 29 050 29 050
The result is 8.58%, marginally better than the discount rate (cost of capital) set at 8%. This project can be accepted.
BOX 8.6: C ALCULATING BCR

As was the case with calculating the NPV for the 600mm diameter water pipe replacement project, we need discounted cash
flows and present values for both net benefits and investment costs:
YEAR 1 2 3 4 5 6 7 20
Renewal cost 925 926 - - - - - - -
Water losses 63 733 59 012 54 641 50 593 46 845 43 375 40 162 14 768
Repair costs 26 898 24 906 23 061 21 353 19 771 18 306 16 950 6 233

YEAR BENEFITS/COSTS
NPV of costs (capital outlay to renew pipe) 925 926
NPV of benefits (savings in water losses and maintenance expenditure) 961 013
BCR 1.04
The result of 1.04 (961 013 / 925 926) is positive (greater than 1) and the project can be implemented.
8.27
8.3.3 Benefit cost ratio (BCR)
BCR measures the extent to which the discounted net benefits exceed the discounted investment costs. This ratio is
independent of the size of the project being considered. BCR is calculated as follows:
BCR = (PV OF NET BENEFITS) / (PV OF INVESTMENT COSTS)
A ratio of one means that the benefits equal costs, hence there is no net benefit to be had from implementing the project. A ratio of
less than one indicates net costs after implementing the project, meaning that the project is not feasible. A ratio greater than one
indicates a viable project.
8.3.4 When to use which metric

NPV, IRR and BCR can all be easily calculated from the same cash flow forecasts in Excel, and as a general rule infrastructure planners
and analysts are advised to set up their spreadsheets to calculate for all three metrics. However, applied over a range of projects with
different characteristics, these metrics may yield different and sometimes confusing results. The following tables provide guidance
on when to use which metric, and when not to.
ACCEPT INVESTMENT
METHOD EXPRESSION MEASURES…
PROPOSAL WHEN…
NPV = The value or magnitude of an
NPV NPV > R 1
PV of net benefits – PV of investment costs investment
Discount rate where: The efficiency or yield of an
IRR > than the cost of capital
PV of net benefits = PV of investment costs investment
BCR = The overall value of an
BCR BCR > 1
(PV of net benefits) / (PV of investment costs) investment proposal
In most instances all three methods can be used to evaluate a TABLE 8.7: Summary of capital budgeting techniques
single project or investment proposal. It is generally accepted
that NPV is theoretically the superior method over IRR, though
IRR is more widely used in the private sector as it provides a rate
that can be compared with other market rates. NPV, as the best
indicator of value created by a project, is a great metric to use
when either appraising a single project, or multiple projects
with similar investment costs. In practice, though, a city will each
year consider hundreds to over a thousand project proposals of
varying sizes. These projects will range in value from less than R
1 million, to over R 100 million. In these instances IRR and BCR
are better suited to compare and rank projects, and NPV less so.
This is because one project with a smaller initial investment may
have a smaller NPV than that of another project with a larger
investment, but the benefit per Rand may be higher for the first,
smaller project. In other words, NPV does not measure the size
of the project.
8.28
SITUATION NPV IRR BCR
Evaluation of the merits of a single project
Evaluation of mutually exclusive projects
Evaluation of projects with different lifespans
Evaluation of projects that differ significantly in scale
TABLE 8.8: When to use which method, and not to
Care however needs to be taken when using IRR as the decision When two projects are mutually exclusive, then a city intends
criterion for projects with a large initial capital outlay, long to only proceed with one of these projects, such as the choice
lifespans and low levels of surpluses (net benefits), all of which between developing a new cemetery or constructing a
are characteristics associated with most infrastructure projects. crematorium. When evaluating mutually exclusive projects NPV
IRR tends to reject such projects, instead preferring projects and IRR sometimes give conflicting results. What to do then? If it
with more immediate or higher net benefits. is because the projects under consideration have very different
“
lifespans or differences in the timing of cash flows, then rather
When evaluating mutually exclusive projects rely on NPV. If it is a case that the projects are of significantly
NPV and IRR sometimes give conflicting results.” different scale, then rather give credence to IRR.
NPV and IRR can produce conflicting results when the following differences occur: scale or size of
the project, project duration and the timing of cash flows. Be sure to understand why, and when to
give preference to which metric.
8.3.5 Further analysis: sensitivity and scenario analyses, and simulation
01 SENSITIVITY ANALYSIS
The project cash flow forecasts prepared and subjected to investment appraisal are expectations of the magnitude and distribution
of future benefits and costs. As such it is a view of an expected future scenario, based on certain key assumptions represented by
key variables. A key variable is an assumption or value that, if it changes in reality, can affect the outcome of the project to the extent
that it can become more beneficial or can cause the city to incur net losses. It is therefore both accepted and prudent practice to test
the sensitivity of key project variables.
Sensitivity analysis evaluates the effect of changes in a key variable on the project outcomes. It does so by examining one variable
at a time, though multiple key variables may be examined consecutively. Sensitivity analysis therefore involves asking “what if”
questions. As a process, it involves changing the value of a key variable (both up and down), modelling the impact of the change,
and assessing the impact on the project outcomes.
8.29
BOX 8.7: SENSITIVIT Y ANALYSIS

ILLUSTR ATED
Let’s again return to our project proposal to replace the section of 600mm diameter water pipe, and perform sensitivity
analysis on the proposal.
STEP 1:
Identify the key variables to be tested for sensitivity
KEY VARIABLE VALUE

Replacement cost per linear metre of 600mm
R 5 000.00
diameter pipe
Bulk purchase cost of water R 7.71kℓ
Cost per repair event R 4 150.00
Nr of burst per annum 7
STEP 2:
Develop “what if” questions for each variable, and in successive order test the sensitivity of each variable by modelling the outcomes
of the “what if” questions
TOTAL
PROJECT PROJECT PROJECT
WHAT IF…? PROJECT
NPV IRR BCR
Sensitivity analysis 1: SAVINGS
Change in bulk Base case: cost per repair event of R 4 150 R 961 013 R 35 087 8,58% 1.04
purchase costs
Maintenance costs decreased by 5%? R 946 752 R 20 826 8,34% 1,02
Maintenance costs increased by 5%? R 975 274 R 49 348 8,81% 1,05
TOTAL
PROJECT PROJECT PROJECT
WHAT IF…? PROJECT
NPV IRR BCR
SAVINGS
Sensitivity analysis 4: 7 bursts/annum R 961 013 R 35 087 8,58% 1.04
change in number of
pipe bursts per 5 bursts/annum R 879 522 -R 46 403 7,23% 0,95
annum 6 bursts/annum R 920 268 -R 5 658 7,91% 0,99
8 bursts/annum R 1 001 758 R 75 832 9,24% 1,08
9 bursts/annum R 1 042 504 R 116 578 9,90% 1,13
STEP 3:
Assess outcomes of sensitivity analysis and, if necessary, redesign or reject the project proposal
8.30
02 SCENARIO ANALYSIS
Scenario analysis is about developing a range of scenarios on
a continuum, typically as follows:
• Best case scenario – this is the most positive future state or
most desirable project outcome
• Middle-of-road or probable scenario – this is the likely future
state or project outcome
• Worst case scenario – this is the future negative or undesirable
state possible, to be avoided
Other scenarios can be added, depending on factors such as

the complexity of the problem or opportunity and the level of
control that the city has in shaping future outcomes. One such
other scenario typically added to the range of scenarios tested is
that of an optimum scenario, typically somewhere between the
best case scenario and the middle of the road scenario.
03 SIMULATION
Simulation is nothing but advanced sensitivity analysis. It involves simultaneously changing the values of several or all key variables,
and modelling the impacts thereof.
8.31
8.4 FINANCIAL PLANNING
Investment appraisal techniques (NPV, IRR and BCR) determine whether investment proposals are likely to yield net benefits
and to select amongst a shortlist of potential options those proposals that will generate the most net benefits for the city (the
municipality and the community it serves). A more comprehensive financial analysis is still required to determine whether the
project will be financially feasible, how it will impact on both the municipality (financial position and performance – terms
that are discussed in later sub-sections) and on ratepayers (tariff implications), how the project will be funded, and specific
budget requirements.
8.4.1 Elements included in the financial analysis

Financial analysis can be done per project, across an entire asset portfolio or for the city as a whole. The financial plan for an asset
portfolio will be included in the asset management plan for that portfolio, and the financial plan for the city as a whole in the city’s
strategic asset management plan.
The following elements should be included in the financial

plan, regardless of whether for a project/asset, asset portfolio
or for the city as a whole.
• Total capital requirement (investment cost)
• Capital lay-out required per annum
• Sources of capital
• Operating expenditure per annum – this also includes annual
capital redemption and interest payments as well as provision
for depreciation
• Revenue expectations per annum
• Annual surplus/loss
• Tariff impacts
“ The financial plan for an asset portfolio will

be included in the asset management plan....”
The financial analysis and plan should build on the cash flow projection initially prepared, there is no need to duplicate effort. For
purposes of investment appraisal all benefits and costs were considered, to the municipality and the community it serves. The
financial analysis only considers financial impacts on the municipality, meaning the expenditure it will incur that will lead to actual
cash outflows, and the revenue it is expected to earn that will result in cash inflows. Other benefits accruing to the community or
society in general are not considered in this phase, and must be stripped out from the initial cash flow forecast.
When developing cash flow forecasts for financial analysis purposes, build on the work done in
preparing the initial discounted cash flow forecasts. But do not override the initial file. Instead save a
different version of the same file for purposes of comparison. Much can be learned from comparing
the initial cash flow forecast with the financial analysis cash flow, which helps to refine future similar
efforts, and to develop a feel for the intricacies involved in the process.
8.32
8.4.2 Funding arrangements
When undertaking financial planning for either a project or for an asset portfolio, consider how capital investment will be
financed. This is important for a number of reasons, including:
• The manner in which the project is financed can determine • Suppliers of capital, whether government, development
its financial viability. This should not ordinarily be the case, financiers or other suppliers, may impose conditionalities.
as all projects must pass the capital hurdle rate. It is however These conditionalities may affect the design and net benefits’
possible that the project under consideration has a high risk package of the project, from the manner in which project
profile, and that financiers will require a higher rate of return objectives and stated outcomes are defined, to the revenue
(reflected in a higher interest rate) than the city’s capital and cost structures and cash flows to be generated by the
hurdle rate. Provided that the project has a low revenue yield, project.
the required higher rate of return may cause the project not
to be financially viable.
Capital financing is a complex discipline in its own right. It is not the intention of this toolkit to provide authoritive or complete
advice on how to deal with this subject. This section is limited to providing a basic understanding and some key pointers on
project finance. Here are some pointers – presented in no particular order:
1. Consider all available sources of financing, not just 3. The most appropriate source of funding will depend on
grant funding. For example, also think about developer factors such as the regulatory framework, ability of the
contributions, issuing municipal bonds or entering into a project to generate revenue, the project risk profile, and who
public-private partnership. In general there are the following ultimately pays. Who pays in part depends on government’s
categories of financiers: or the municipality’s approach where discretion exists, and in
• Tax payers in the form of cash financing part on the regulatory framework. The approach to who pays
generally relies on either the benefit principle (end users
• Lenders to government (e.g. commercial banks) in the
pay) or the ability-to-pay principle (financed by tax payers).
form of loans or guarantees
In short, there are ultimately four possibilities on who pays:
• Development agencies (e.g. the World Bank or the DBSA)
• End users
in the form of concessionary finance (soft loans), loan
guarantees or grants (conditional and unconditional) • Tax payers
• Developer contributions in the form of either cash • Donors
contributions or developer funded and constructed assets • Some combination of the above
• Private investors in the form of either loans or equity 4. When tax payers (in the municipal context these are rate
investment payers) or end users are expected to pay, it is good practice
• Donors in the form of capital grants to test for both willingness to pay and affordability.
2. Loans can be taken up for individual projects, or for a portfolio 5. Also consider whether the project can be redesigned or
of projects. repackaged to improve access to attractive funding, such as
funding for green initiatives or green job creation.
6. In general, non-income generating projects and assets
should be financed from grants or internal sources. Loans
and bonds, that are interest-bearing, should generally only
“
be used to fund income generating project and assets.
Planning for municipal infrastructure services
7. Long life assets should be funded from long term loans
and municipal revenue is normally done on or other financial instruments when grant funding is not
the basis of households.” available. Loan periods should be matched to the life of the
asset to be created. This ensures inter-generational equity
and continued solvency.
8.33
8.4.3 Prepare or adjust cash flow forecast
The cash flow forecast now prepared only considers cash inflows and cash outflows from the municipality. The objectives of this
exercise are to:
• Determine the municipality’s cash flow position at the end • Assess the impact on municipal charges and tariffs, and
of each year of the life of the project, to assess the financial therefore the impact on the municipality’s customers.
performance and liquidity of the project. • Determine the accumulated cash position of the project
throughout its life.
Elements for inclusion in the financial forecast were noted in Section 8.4.1, and an example of such a forecast is included in Box 8.8.
Note that the financial forecast includes funding arrangements as well as depreciation. Also note that tariff impacts are specifically
considered, as are both the annual and cumulative cash flow impacts on the city’s finances.
In this example, provision has been made for annual increases, and this has been clearly stated in the project financial appraisal.
8.4.4 Conduct sensitivity analysis and analyse results

As was the case with the discounted cash flow analysis, it is good
practice to conduct sensitivity analysis on the annual financial
cash flow forecast. Typical variables tested for sensitivity
include:
1. Change in number of customers.
2. Where loans are taken up, changes in interest rates, where
these are not fixed.
3. In revenue-generating projects, the cash flow impacts at
various debtor payment levels.
4. In revenue projects with large upfront investment costs
where capacity is created for full built-out, test for the impact
of changes in the rate of uptake of capacity on cash flow.
8.34
PROJECT: ESTABLISHMENT OF WATER RETICULATION NETWORK FOR A NEW MIXED-INCOME TOWNSHIP OF 3 500 HOUSING UNITS
Nr of residents 3 500,00 Funding 10 192 000,00 Developer contributions Discount rate 9%
8.35
37 110 500,00 Municipality takes up a loan Other opex % 2%
Capital outlay per 4 325,00 Bulk mains

customer
6 278,00 Distribution Loan period 30,00 years Base year tariff 11,57
1 505,00 Reservoirs Interest rate 0,09 Rate increase 6% pa
340,00 Pump stations Deposit -
1 067,00 Connections
13 515,00 Total unit cost
Bulk purchase costs: base year 7,71 R/kl
Surplus target 0,15
Total capital outlay 47 302 500,00
Assumed network life 30,00 Once-off housing unit connection cost 1 227,05 R
Household water consumption/annum 480,00 kl
Revenue: Net annual Bulk

Nr of Revenue: water Capital Capital & Bulk purchase Tariff Cumulative
Fin year new Annual revenue Interest Other OPEX revenue NPV R Depreciation Tariff purchase
residents sales payment interest costs impacts cash flow
connections position rate
2015/16 1 750 2 147 338 9 715 373 11 862 710 3 339 945 272 256 3 612 201 6 476 400 196 327 1 850 038 1 697 283 788 375 908 908 908 908 11,57 7,71
2016/17 1 200 1 472 460 17 359 983 18 832 443 3 315 442 296 759 3 612 201 11 572 402 297 757 3 646 843 3 069 475 1 328 975 -2 649 408 2 649 408 12,26 8,17
2017/18 550 674 878 21 832 386 22 507 263 3 288 734 323 467 3 612 201 14 553 766 356 850 4 307 914 3 326 500 1 576 750 -4 399 158 4 399 158 13,00 8,66
2018/19 - 23 142 329 23 142 329 3 259 622 352 579 3 612 201 15 426 992 373 732 4 081 983 2 891 780 1 576 750 -5 714 187 5 714 187 13,78 9,18
2019/20 - 24 530 869 24 530 869 3 227 890 384 311 3 612 201 16 352 612 391 610 4 558 758 2 962 880 1 576 750 -7 100 317 7 100 317 14,60 9,73
2020/21 - 26 002 721 26 002 721 3 193 302 418 899 3 612 201 17 333 768 410 541 5 065 110 3 020 159 1 576 750 -8 543 727 8 543 727 15,48 10,32
2021/22 - 27 562 884 27 562 884 884 3 155 601 456 600 3 612 201 18 373 794 430 588 5 602 901 3 064 979 1 579 750 -10 031 955 10 031 955 16,41 10,94
2022/23 - 29 216 657 29 216 657 3 114 507 497 694 3 612 201 19 476 222 451 815 6 174 114 3 098 580 1 576 750 -11 553 785 11 553 785 17,37 11,59
2023/24 - 30 969 657 30 969 657 3 069 714 542 486 3 612 201 20 644 795 474 290 6 780 857 3 122 095 1 576 750 -13 099 130 13 099 130 18,43 12,29
For a water reticulation network for a new township of 3 500 households
2024/25 - 32 827 836 32 827 836 3 020 890 591 310 3 612 201 21 883 483 498 087 7 425 375 3 136 559 1 576 750 -14 658 939 14 658 939 19,54 13.03
2025/26 - 34 797 506 34 797 506 2 967 672 644 528 3 612 201 23 196 492 523 283 8 110 059 3 142 914 1 576 750 -16 225 103 16 225 103 20,71 13,81
2026/27 - 36 885 357 36 885 357 2 909 665 702 536 3 612 201 24 588 282 549 959 8 837 451 3 142 021 1 576 750 -17 790 374 17 790 374 21,96 14,64
2027/28 - 39 098 478 39 098 478 2 845 437 765 764 3 612 201 26 063 578 578 200 9 610 263 3 134 662 1 576 750 -19 348 286 19 348 286 23,27 15,51
2028/29 - 41 444 387 41 444 387 2 777 518 834 683 3 612 201 27 627 393 608 098 10 431 377 3 121 553 1 576 750 -20 893 089 20 893 089 24,67 16,44
2029/30 - 43 931 050 43 931 050 2 702 397 909 804 3 612 201 29 285 037 639 749 11 303 868 3 103 342 1 576 750 -22 419 681 22 419 681 26,15 17,43
FINANCIAL APPR AISAL
2030/31 - 46 566 913 46 566 913 2 620 514 991 686 3 612 201 31 042 139 673 253 12 231 007 3 080 621 1 576 750 -23 923 551 23 923 551 27,72 18,48
2031/32 - 49 360 928 49 360 928 2 531 262 1 080 938 3 612 201 32 904 667 708 719 13 216 280 3 053 928 1 576 750 -25 400 729 25 400 729 29,38 19,59
BOX 8.8: EXAMPLE OF A PROJEC T
2032/33 - 52 322 583 52 322 583 2 433 978 1 178 223 3 612 201 34 878 947 746 259 14 263 400 3 023 751 1 576 750 -26 847 731 26 847 731 31,14 20,76
2033/34 - 55 4611 55 4611 2 327 938 1 284 263 3 612 201 36 971 684 785 992 15 376 324 2 990 536 1 576 750 -28 261 517 28 261 517 33,01 22,01
2034/35 - 58 789 655 58 789 655 2 212 354 1 399 846 3 612 201 39 189 985 828 047 16 559 269 2 954 685 1 576 750 -29 639 452 29 639 452 34,99 23,33
2035/36 - 62 317 034 62 317 034 2 086 368 1 525 833 3 612 201 41 541 384 872 555 17 816 727 2 916 564 1 576 750 -30 979 265 30 979 265 37,09 24,73
2036/37 - 66 056 056 66 056 056 1 949 043 1 663 158 3 612 201 44 033 867 919 658 19 153 487 2 876 503 1 576 750 -32 279 019 32 279 019 39,32 26,21
2037/38 - 70 019 419 70 019 419 1 799 359 1 812 842 3 612 201 46 675 899 969 505 20 574 656 2 834 805 1 576 750 -33 537 074 33 537 074 41,68 27,78
2038/39 - 74 220 585 74 220 585 1 636 203 1 975 997 3 612 201 49 476 453 1 022 253 22 085 675 2 791 738 1 576 750 -34 752 062 34 752 062 44,18 29,45
2039/40 - 78 673 820 78 673 820 1 458 363 2 153 837 3 612 201 52 445 041 1 078 068 23 692 348 2 747 550 1 576 750 -35 922 862 35 922 862 46,83 31,22
2040/41 - 83 394 249 83 394 249 1 264 518 2 347 683 3 612 201 55 591 743 1 137 125 25 400 863 2 702 462 1 576 750 -37 048 574 37 048 574 49,64 33,09
2041/42 - 88 397 904 88 397 904 1 053 227 2 558 974 3 612 201 58 927 248 1 199 609 27 217 820 2 656 672 1 576 750 -38 128 495 38 128 495 52,62 35,08
2042/43 - 93 701 778 93 701 778 822 919 2789 282 3 612 201 62 462 883 1 265 716 29 150 261 2 610 361 1 576 750 -39 162 106 39 162 106 55,77 37,18
2043/44 - 99 323 885 99 323 885 571 884 3 040 317 3 612 201 66 210 655 1 335 651 31 205 695 2 563 689 1 576 750 -40 149 045 40 149 045 59,12 39,41
2044/45 - 105 283 318 105 283 318 298 255 3 313 946 3 612 201 70 183 295 1 409 631 33 392 137 2 516 803 1 576 750 -41 089 099 41 089 099 62,67 41,78
TOTAL 3 500 4 294 675 1 523 207 539 1 527 502 214 71 255 520 37 110 500 108 366 020 1 015 390 908 21 732 929 419 122 857 87 355 449 46 266 350
8.5 ORGANISATIONAL OPTIMISATION
By this point all departments will have developed multiple viable project proposals for inclusion in the municipality’s capital
budget. Whilst there is scope for most cities to both increase levels of capital spending and accelerate infrastructure, the basic
economic problem remains universal. There will always be more needs to satisfy than there are resources with which to satisfy
those needs. In practice this means that there is an absolute capital budget ceiling in any given financial period, and there will
be more budget requests than there is available capital funding. This requires capital rationing through a process of cross-
asset organisation optimisation: budget needs are prioritised and the ones with the greatest benefit for the organisation as
a whole are included in the capital budget, and the remaining project proposals are deferred, redesigned or rejected in the
event that they fail to prove worthy.
8.5.1 Corporate-level prioritisation using a multi-criteria analysis framework

Ultimately all capital project proposals compete for inclusion
in the city’s capital budget. A multi-criteria analysis (MCA)
framework contains defined outcome areas and key
performance indicators of importance to the city as a whole,
against which all projects are scored on a consistent basis. Each
project is assessed against the MCA framework, accorded a
score and ranked in order of highest to lowest score. The value
of projects with the highest scores are then selected which fit
the available capital budget, and the remainder of projects are
then deferred, reconfigured or rejected.
The benefits of a structured MCA system for a city include the

following:
1. Selection of capital proposals in accordance with strategic
objectives, outcomes and values desired by the city.
2. Robust consideration of projects and their impacts,
both positive and negative, whether they accrue to the
municipality as an organisation or the city at large.
3. Projects that deliver multiple benefits are more likely to pass
selection, ensuring maximum value for money.
4. Projects are evaluated and selected on a consistent basis,
and the impacts of personal bias and personal interest are
limited.
5. The ability to evaluate different types of investment activities
(e.g. service expansion, infrastructure upgrades or renewal)
across multiple asset portfolios (e.g. roads, water, electricity
distribution or public amenities).
8.36
8.37
Social Forging an
Economic Financial Organisational
Level of Spatial Environment upliftment unifying
development health and effectiveness
discretion efficiency sustainability and city
Project CAPEX Project Function Project Regional and prosperity sustainability and efficiency Budget
Fund segment inclusion identity MCA score MCA ranking
description requirement NPV segment segment segment decision
10% 15% 15% 10% 15% 15% 10% 10%
Project 1 4 780 000 478 000 Water USDG New Region D 3 3 1 0 1 3 0 0 1,5 6 Proceed
distribution
Project 2 2 900 100 145 005 Water Internal funds Renewal CBD 4 5 5 0 1 1 0 2 2,4 3 Proceed
distribution
Project 3 44 100 000 13 230 000 Electricity Loan New Region B 2 3 3 1 2 3 0 7 2,65 1 Proceed
Project 4 24 995 000 -14 090 000 Roads ICDG Upgrading Corridor 01 4 4 4 -1 -5 4 0 0 1,35 7 Proceed
Project 5 8 223 000 657 840 Water Loan Upgrading CBD 3 5 5 0 1 2 0 2 2,45 2 Proceed
distribution
Project 6 3 312 000 -2 200 100 Stormwater USDG New Region C 2 2 1 1 -2 3 0 0 0,9 10 Reject
Project 7 7 455 000 -2 350 000 Roads Internal funds Renewal Region B 3 2 0 0 -2 2 0 2 0,8 11 Reject
Project 8 19 000 000 380 000 Sanitation USDG New Region A 3 1 0 0 1 3 0 0 1,05 9 Defer
Project 9 9 000 100 2 520 028 Electricity ICDG Renewal CBD 4 5 5 0 1 1 0 2 2,4 3 Proceed
Project 10 2 567 700 128 385 Parks MIG New Region A 2 2 0 2 1 2 1 1 1,35 7 Proceed
ANALYSIS SYSTEM
Project 11 2 300 000 122 100 Parks Internal funds Upgrading Region C 3 2 1 4 1 3 2 1 2,05 5 Proceed
Project 12 3 800 000 -1 980 000 Stormwater USDG New Region D 3 1 0 0 -2 1 0 0 0,3 12 Reject
132 432 900 -2 958 742
Capital budget limit R 100 00 000 Value of approved projects R 98 865 900
BOX 8.9: EXAMPLE MULTI-CRITERIA
Net value to be generated from implementation of capital budget R 3 191 358

Box 8.9 provides an example of a MCA system. In this example (maintaining a positive NPV of the total capital budget to
we have a municipality with the capacity to implement a capital be implemented). The capital budget committee met and
budget of R 100 million. Various departments submitted capital evaluated all capital budget proposals against pre-defined
budget proposals, but there are two problems. The value of outcome areas of importance to the municipality, using its
all capital budget proposals exceed the capital budget limit MCA system. These outcome areas range from spatial efficiency
by R 32 432 900. The second problem is that implementing through to organisational effectiveness and efficiency. Each
these projects as one package will place the municipality in a project was scored and ranked based on its MCA score, and the
worse position than it found itself in prior to adoption of these projects with the highest scores were included in the available
proposals, since their combined NPV stands at a negative R 2 capital budget of R 100 million. Using the MCA system, a capital
958 742. Decision makers now need to identify the most worthy budget was developed that will deliver a NPV benefit of about
projects for inclusion in the capital budget, whilst ensuring R 3.2 million.
that the financial performance of the municipality is preserved
8.5.2 Elements of a MCA system

A well-constructed MCA system consists of the following elements:
• Defined outcome areas of importance to the city • Amalgamation rules, which is the rule set that determines
• Key performance indicators per desired outcome area. the weighing accorded to individual outcome areas and
performance indicators.
• Project ranking criteria reflecting project impacts, arranged
on a scale that ranges from (left) high cost to low cost, to
neutral, to low benefit, to high benefit (right).
These elements, and how to construct an MCA system, are discussed in the following sub-sections. The process of constructing an
MCA system is summarised as follows:
1 DEFINE OUTCOME AREAS 2 DEFINE IMPACTS FOR EACH OUTCOME AREA
An outcome area is a grouping of related impacts such as Impacts are measurable changes, whether benefits
economic development or social upliftment - these should (positive) or costs (negative) in the status of defined
link to the vision and strategic objectives of the city outcomes. Define relevant impacts per outcome area
DEVELOP BENEFIT AND COST PARAMETERS

3 DEVELOP THE MCA RANKING SYSTEM 4
FOR EACH IMPACT
Develop the impact rating scale and descriptors, and

Define the range of benefits and costs for each impact in
align to the city’s risk management framework, materiality
accordance with the MCA ranking system adopted
framework and spatial development framework
5 FORMULATE AMALGAMATION RULES
Decide the importance of each impact area and specific

impacts per outcome area, and attach weights to each
FIGURE 8.2: Process to develop a MCA system
8.38
8.5.3 Define outcome areas
01 SUSTAINABILITY OUTCOMES 03 SPATIAL EFFICIENCY

Outcome areas of importance will ideally have been articulated in All South African cities are in process of spatial transformation,
the city’s long term growth and development strategy, whether aiming for more compact footprints as well as functional and
in the form of strategic objectives or outcomes. These strategic social integration (see Module 1). Some projects may have
objectives or outcomes will ideally include all dimensions strong merits when considered in isolation, but may or may not
of sustainability, including social, economic, environmental, support the spatial efficiency objective. A proper metropolitan
cultural and financial perspectives. Social, economic, municipal MCA system should include a spatial efficiency
environmental and cultural outcomes are typically those outcome that penalises project proposals which do not support
benefits that the municipality wish to deliver to its community this objective, and reward those that do.
(the city at large), or adverse impacts that the municipality wish
to protect its citizenry from. Financial outcomes are impacts on
the municipality as an organisation.
02 BUSINESS AND OPERATIONAL

CONSIDERATIONS
There are however other impact areas outside of the various
dimensions of sustainability. These can be classified as impacts
relating to business and operational concerns, and include
considerations such as:
1. Level of project commitment. A city does not always
have full discretion in deciding whether to undertake
projects. Some projects must be implemented to meet
legal requirements, and noncompliance can lead to
imprisonment of the accounting officer, a fine, withholding
of grant funding or other forms of sanction, such as public
protest or disinvestment. There are various levels of project
commitment, ranging from political commitments expressed
in say the approved IDP, to contractual commitments, to
regulatory compliance. When evaluating and scoring project
proposals, any existing project commitments to be honoured
must be taken into account.
2. Improved productivity and cost efficiencies. This outcome
area is focused on ensuring that municipal staff are
capacitated and productive, and that assets and processes
are cost-effective and efficient. This outcome area focuses on
the municipality as an organisation.
3. Health and safety. The city has a legal obligation to provide a
safe and healthy working environment to its employees and
04
contractors, as well as members of the public with right of
access to municipal facilities. This outcome area measures FOUNDATION OUTCOME AREAS
these health and safety impacts, and is largely focused on the Based on the above, the following outcome areas are
municipality as an organisation. recommended for inclusion in a city’s MCA system:
8.39
MEASURES…
OUTCOME AREA DESCRIPTION
COMMUNITY ORGANISATIONAL
IMPACTS IMPACTS
Level of project Considers the flexibility the municipality has in

discretion deciding to implement the project
Assesses whether the project contributes to the city’s
Spatial efficiency
strategic spatial transformation agenda
Measures whether projects contribute towards a
growing, competitive economy that attracts fixed
Economic development
capital investment and deliver business opportunities
and jobs
Protection and enhancement of the natural
Environmental
environment to deliver multiple, sustained benefits
sustainability
to society
Financial health and Measures whether a project will add financial value
sustainability to the municipality as an organisation
This outcome areas focuses on service delivery
Social upliftment impacts and opportunities for community upliftment
initiatives such as economic skills development
Forging a unified
Focuses on social integration across all demographics
city identity whilst
as well as the protection and strengthening of culture
celebrating diversity
Organisational
Ensuring that projects employ best-fit technology
effectiveness and
and are resource efficient
efficiency
Focuses on attracting and retaining human capital,
A safe, capable and
whilst specifically ensuring a safe and healthy
empowered workforce
working environment
05 OTHER OUTCOMES
TABLE 8.9: Proposed foundational outcome areas
A city may define outcome areas in its MCA system in any

way it wishes and may add additional outcome areas, but
implementing the following advice will ensure best benefit
and greatest usability:
1. There should be a clear link between the strategic objectives
of the city and the MCA system, thus ensuring that capital
projects are selected which achieve the city’s objectives.
2. Outcome areas should be defined in the city’s corporate asset
management policy and strategy.
3. Try not to adopt too many outcome areas, only those ones
that are critical for the city as a whole. Adding more outcome
areas may reduce the weight of outcomes to the point where
little priority is given to specific outcome areas.
8.40
8.5.4 Define impacts for each outcome area
Key performance indicators are measures indicating the extent to which the project under consideration contributes towards
each outcome area. Put in different words, they indicate the extent to which the project creates benefits in each outcome
area. But where there is benefit, there is usually also a cost, so the indicator selected usually also has a negative dimension.
There are often a great many indicators that can be used per can evaluate many hundreds of projects for inclusion in the
outcome area. When selecting indicators, be careful again capital budget. It is therefore necessary to select the right type
not to overburden the MCA system. Remember that the MCA of performance indicator. To understand this, read the discussion
must evaluate all types of capital projects across all functional in Box 8.10 on performance indicators for the outcome areas of
elements (services such as water distribution), and that a city environmental sustainability.
8.41
BOX 8.10: SELEC TING PERFORMANCE

INDIC ATORS
FOR THE ENVIRONMENTAL SUSTAINABILITY OUTCOME AREA

There are various focus areas for performance or impact in environmental sustainability. One can broadly consider impacts on
the extent of natural assets, the ability of the natural environment to provide ecosystem services, or changes in risk status (e.g.
change in problem species status or veld fire risks). Let’s for a moment delve into ecosystem services. These are the goods and
services which nature bestows upon us. Ecosystem services in turn can be grouped into four distinct categories, each with a
set of benefits and performance indicators, as follows:
REGULATING SERVICES: CULTURAL SERVICES:

• Flood regulation • Cultural, such as the inspiration nature provides for the arts
• Purification of water and air • Recreational experiences including ecotourism, outdoor
• Carbon sequestration and climate regulation sports and leisure activities
• Waste decomposition and detoxification • Science and education including use of school trips to learn
about nature
• Pest and disease control
• Spiritual and historical including the use of nature for
PROVISIONING SERVICES: religious or heritage value
• Energy e.g. biomass fuels
SUPPORTING SERVICES:
• Food
• Primary production
• Medicinal materials
• Nutrient recycling
• Minerals
• Soil formation
• Ornamental resources including handicraft,
jewellery and souvenirs
• Raw materials e.g. wood
• Water
Now clearly the list of potential impacts has become very long indeed. And we have only considered one category of impact in just
one of several outcome areas. This is why we need to limit the number of performance indicators.
We can overcome this problem by collapsing, where appropriate, several indicators into one. Instead of having 19 different indicators
for ecosystem services, we include one in the environmental sustainability outcome area that reads as follows: “Availability and
quality of ecosystem services”.
8.42
OUTCOME AREA SPECIFIC IMPACTS MEASURES THE FOLLOWING IMPACTS (BENEFITS AND COSTS)
Level of project Level of commitment to Compliance with commitments (policy commitments, regulatory
discretion implement the project compliance etc.)
Average gross residential density/ha, redevelopment of greyfields and
Compact city footprint
land use intensification
Spatial efficiency Greater transport connectivity
Commuting time, use of public transportation and % of household
and more effective and
income spent on transport costs
efficient movement
The level of fixed capital investment/disinvestment enabled by the
Fixed capital investment
project, expressed in R’ million
Positive indicators include % increase in serviced Gross Leasable Area
(GLA) and sqm of serviced informal trading space created. Negative
Economic Business opportunities indicators include % of local businesses having to relocate or % of
development business opportunities lost due to construction activity which limits
customer and business interaction
% increase/decrease in the land value of property zoned for economic
Land value capture
purposes (business, commercial and industrial)
Employment creation Number of annual equivalent jobs created or lost
Measures the carbon impact of the project on a range of negative
Carbon mitigation
impact (net carbon generator) to positive impact (net carbon store)
Environmental Availability and quality of Assesses the project’s impact on the ability of the natural environment
sustainability ecosystem services to deliver ecological services
Measures the impact on fauna and flora by considering the increase/
Protection of fauna and flora
loss of quality, protected natural space
Overall value of investment
Measures the discounted BCR of the investment proposal
Financial health and proposal
sustainability Investment efficiency Measures the IRR of the project
Value of the investment Measures the NPV of the project
Measures the number of residential customers receiving municipal
Service delivery impact
services following implementation of the project
Positive indicators measure the number of households benefiting from
an increasing set of options for housing in sustainable human settings.
Inclusionary housing
Negative indicators measure the number of households forcibly
Social upliftment resettled for reasons other than illegal settlement
Measures the severity by which the project creates (negative impact) or
Community health mitigates against (positive impact) health and safety impacts. Impacts
range from minor health impacts through to fatalities
Measures the number of people who obtain new skills as a result of
Community empowerment
the project being implemented
Measures the project’s impact on the cultural heritage and wealth
of a city. Positive impacts range from protection and restoration of
Forging a unified community assets, through to the creation of cultural wealth that
Protection of cultural heritage
city identity attracts national interest and bolsters the tourism potential of the city.
whilst celebrating Negative impacts range from limited impairment of cultural wealth
diversity through to loss of cultural wealth of national importance
Creation of inclusionary public The emphasis here is on creating public spaces that are multifunctional
spaces and meeting places and, more importantly still, which encourages social integration
8.43
OUTCOME AREA SPECIFIC IMPACTS MEASURES THE FOLLOWING IMPACTS (BENEFITS AND COSTS)
Opportunity to improve
productivity and cost Measures efficiency gains or losses in R’ million
efficiencies
Measures the severity by which the project creates (negative impact) or
Organisational Promote health and safety mitigates against (positive impact) health and safety impacts. Impacts
effectiveness and range from minor health impacts through to fatalities.
efficiency Retain employees through an
Focuses on hygiene factors and staff morale
attractive environment
Resource efficiency in this context refers to the efficient use (or not)
Resource efficiency of scarce natural resources with specific reference to land, water and
energy
TABLE 8.10: Specific impacts per outcome area
8.44
8.5.5 Develop the MCA ranking system
Project impacts can vary greatly. Project A may deliver 300 annual equivalent jobs, whilst project B delivers less than 10. There
are also multiple instances where two projects deliver different baskets of benefits, such as the following:
PROJECTS BEING CONSIDERED PROJECT BENEFITS
Delivers a once-off employment dividend of 85 annual equivalent jobs during construction,

and thereafter 4 annual equivalent jobs for the lifecycle of the eco-housing estate
Project A: Provides mixed-income housing to 48 households in a sustainable green setting
Mixed income eco-housing
development Enables inter-regional open space connectivity and serves as a net carbon trap
Development employs green technology that in comparison with typical household
benchmarks saves 28% on water consumption and 35% on coal-based energy
Enables fixed capital investment by a large industrial concern in the order of R 230 million
Project B: Delivers 37 annual equivalent jobs over the next twenty years
Provision of infrastructure to
enable the construction of a new Expected annual contribution of R 495 million to the city’s GVA, with further spin-offs across
factory the economic value chain expected
Project NPV of R 9.9 million
TABLE 8.11: Projects delivering different baskets of benefits
So if we could only choose one project, which would we select? The choice may not seem too difficult. But how would we choose
the best 700 projects of, say, 1 200 capital project proposals submitted?
Any robust MCA system requires a ranking for the following reasons:
To weight the benefits and costs To appropriately consider the To compare the benefits of
of the range of impacts of a risks and materiality of each projects against each other, and
particular project proposal project proposal, in line with the to rank projects for inclusion in
city’s corporate risk framework, the capital budget
materiality limits and risk appetite
8.45
A mature city MCA ranking system will allow for the ranking of both benefits and costs, and will make provision for the severity
or intensity of impact, the indicative spatial scale of impact, as well as the indicative financial loss/gain, as follows:
IMPACT TYPICAL SPATIAL FINANCIAL GAIN/

COST – BENEFIT
QUALITATIVE IMPACT RATING SCALE OF IMPACT LOSS (R’ MILLION)
RANGE
DESCRIPTION (1) (2) (3)
Major – extreme Regional to city-wide

-5 > 30
negative impact impact
Moderate negative Township-wide

Costs -3.5 20 – 30
impact impact
Insignificant – minor Suburb or district

-2 0 – 19
negative impact level
Neutral No impact 0 No spatial impact 0
Insignificant positive Neighbourhood/

1 0 – 19
impact village
Minor positive Suburb or district

2 20 – 39
impact level
Township or trunk
Moderate positive
3 public transport 40 – 59
impact
facility
Benefits
Integration zone,
major
Major positive impact 4 60 – 120
arterial road or
region
CBD, primary nodes,

Extreme positive
5 corridors or special >120
impact
economic zones
Notes:
1. Align the impact scale (2nd column) to that used in the city’s corporate risk management framework.
2. Align the spatial scale (4th column) with the spatial hierarchy adopted in the city’s spatial development framework.
3. Align the financial loss/gain scale (5th column) with the materiality framework of the city.
TABLE 8.12: MCA ranking system
Also note that the impacts of costs are proportionally penalised to a greater extent than those of benefits, e.g. a moderate negative
impact scores a minus 3.5 whilst a moderate positive impact scores a 3. This is to protect both the municipality and the community
against adverse impacts. For this same reason, there are only three levels of cost impacts as opposed to five levels of benefit impacts.
8.46
8.5.6 Develop benefit and cost parameters for each impact
The next step involves the development of benefit and cost parameters for each impact. This is a two-step process. The first
involves selecting an impact, say “Fixed capital investment” within the outcome range “Economic development” (see Table
8.10). The second step involves defining benefit and cost parameters for that specific impact in accordance with the ranges
provided in the MCA ranking system (see Table 8.12).
An example of benefit and cost parameters for impacts in the “Economic development” outcome area is shown in Table 8.13.
MCA RANKING SYSTEM SELECTED ECONOMIC IMPACTS
IMPACT FINANCIAL
IMPACT TYPICAL SPATIAL FIXED CAPITAL LAND VALUE EMPLOYMENT
QUALITATIVE GAIN/LOSS
RATING SCALE OF IMPACT INVESTMENT CAPTURE CREATION
DESCRIPTION (R’ MILLION)
Estimated decrease
Major – Discourages or causes
Regional to in market value of Loss of employment
extreme disinvestment of fixed
-5 citywide > 30 properties zoned for opportunities of
negative capital of R 30 million
impact economic use of 20% more than 300 jobs
impact or more
or more
Discourages or causes
Estimated 11 - 19% Loss of employment
Moderate disinvestment of fixed
Township-wide decrease in market opportunities of
negative -3.5 20 – 30 capital of between
impact value of properties between 101 - 300
impact R 20 million - R 29
zoned for economic use jobs
million
Insignificant Discourages or causes Estimated 1 - 10% Loss of employment
– minor Suburb or district disinvestment of fixed decrease in market opportunities of
-2 0 – 19
negative level capital of upto R 19 value of properties between 1 - 100
impact million zoned for economic use jobs
No impact 0 No spatial impact 0 No impact No impact No impact
Enables fixed capital Estimated 1 - 5%
Insignificant Creation of between
Neighbourhood/ investment of increase in market value
positive 1 0 – 19 1 - 50 annual
village between R 1 - R 19 of properties
impact equivalent jobs
million zoned for economic use
Creation of between
Minor positive Suburb or district investment of increase in market value
2 20 – 39 51 - 100 annual
impact level between R 20 million - of properties
equivalent jobs
R 39 million zoned for economic use
Moderate Township or trunk Creation of between
investment of increase in market value
positive 3 public transport 40 – 59 101 - 200 annual
between R 40 million - of properties
impact facility equivalent jobs
Integration zone, Creation of between
Major positive investment of increase in market value
4 major arterial 60 – 120 201 - 300 annual
impact between R 60 million - of properties
road or region equivalent jobs
Estimated increase
CBD, primary
Extreme Enables fixed capital in market value of Creation of more
nodes, corridors
positive 5 >120 investment of R 120 properties zoned for than 300 annual
or special
impact million or more economic use of over equivalent jobs
economic zones
20%
TABLE 8.13: Examples of benefit and cost parameters for selective economic development impacts
8.47
8.5.7 Formulate amalgamation rules
Amalgamation rules are the set of rules applied to the results of an investment study when different sets of result are
combined in a multi-criteria analysis. There are two layers of rules. The first is at the level of outcome areas, and the second is
at the level of specific impacts. The first layer of rules define the importance of each outcome area relative to other outcome
areas, by according a weight to each outcome area. Consider Table 8.14: each outcome area is accorded a weight, in this
case a percentage. Spatial efficiency has been given a weight of 15%, and environment sustainability a weight of 10%. Both
outcome areas are considered important to the municipality, which is why both have been included in the MCA system, but
spatial efficiency is considered the more important outcome area.
The second layer of rules couple weights to all specific impacts within each outcome area. For consistency’s sake, each impact is
accorded a maximum percentage, and the weights of all impacts in a particular outcome area sum to 100%.
OUTCOME AREA SPECIFIC IMPACTS PER OUTCOME AREA
DESCRIPTION WEIGHT DESCRIPTION WEIGHT
Level of project
15% Level of commitment to implement the project 100%
discretion
Compact city footprint 50%
Spatial efficiency 15%
Greater transport connectivity and more effective and efficient movement system 50%
Fixed capital investment 30%
Economic Business opportunities 30%
15%
development Land value capture 10%
Employment creation 30%
Carbon mitigation 20%
Environmental
10% Availability and quality of ecosystem services 50%
sustainability
Protection of fauna and flora 30%
Overall value of investment proposal 34%
Financial health and
15% Investment efficiency 33%
sustainability
Value of the investment 33%
Service delivery impact 40%
Inclusionary housing 40%
Social upliftment 15%
Community health 15%
Community empowerment 5%
Forging a unified city Protection of cultural heritage 30%
identity whilst 5%
celebrating diversity Creation of inclusionary public spaces and meeting places 70%
Opportunity to improve productivity and cost efficiencies 30%
Organisational Promote health and safety 30%
effectiveness and 10%
efficiency Retain employees through an attractive environment 10%
Resource efficiency 30%
TABLE 8.14: Amalgamation rules
8.48
The weights indicated in Table 8.14 are purely for

demonstration purposes. Each city should decide the
weighting for each outcome area and each impact, in line with
its perceived importance to the city. In deciding weightings
for outcome areas and impacts, consider the following:
1. Cities have a developmental mandate. Service delivery lies at
the core of this mandate. Accordingly weights accorded to
the “Social upliftment” outcome area and impacts related to
it, such as service delivery, should reflect this constitutional
imperative – meaning a higher weight should be given to the
outcome area “Social upliftment”.
2. Funding is required to finance or subsidise social upliftment.
This requires that the city must be in good financial health,
maintained through revenues earned from a strong city
economy. Therefore a robust, growing city economy is
essential for enabling the city to service the needs of the
poor, and for the economy to create employment to alleviate
poverty and so reducing the need for the city to provide
poverty support. Therefore the outcome areas “Economic
development” and “Financial health and sustainability”
should also be given higher weightings.
Amalgamation rules should be established with full participation

of the political leadership, and once agreed, should be submitted
to Council for approval.
8.49
8.6 APPROVAL OF MC A SYSTEM
The MCA system, inclusive of its amalgamation rules, should be approved by way of Council resolution, and documented in
the city’s strategic asset management plan.
8.50
8.7 CONCLUSION
Investment proposals are responses to problems or opportunities. In most instances there are several possible alternative
solutions in responding to problems and opportunities which include a range of non-asset and asset solutions.
Whatever solution is selected, it will most likely come at some An upfront understanding of what society and providers of funds
cost, whether to the municipality, the community or the value and dislike can help design attractive, value-for-money
environment. It will also draw on a limited pool of available capital proposals more likely to succeed. Investment appraisal
capital, leaving less for other worthy initiatives. Investment therefore isn’t a particular point in the process of identification,
appraisal is a means for decision-makers, whether Councillors, development and approval of projects, it should be viewed as a
National Government, lenders, development agencies or means to both plan and select the best possible solution.
donors to determine whether proposed projects are viable.
Traditionally, public sector projects were considered viable when This module provides tools and techniques for project design,
they technically responded to the problem or opportunity to be infrastructure investment appraisal, project financial planning
addressed, and were affordable. Today, public sector projects are and the prioritisation of capital projects for inclusion in the
considered viable when they deliver net benefits to society. The capital budget. It presents a firm foundation for infrastructure
most attractive projects are those that deliver benefits across investment and financial planning. The user of this toolkit’s
a range of sustainability outcomes, and that limit or eliminate attention is however drawn to the fact that there are multiple
negative externalities. types of specialised investment cases that are not dealt with
in this module, though these are likely to be included in future
versions of this toolkit.
8.51
ANNEXURES
ANNEXURE 8A: City-level multi-criteria analysis framework
8.52
COST RANGE
MAJOR - EXTREME MODERATE INSIGNIFICANT - MINOR
IMPACT LEVELS:
NEGATIVE IMPACT NEGATIVE IMPACT NEGATIVE IMPACT
-5 -3,5 -2
OUTCOME AREA
TYPICAL SPATIAL SCALE OF REGIONAL TO CITY-WIDE SPATIAL IMPACT LIMITED
TOWNSHIP-WIDE IMPACT
IMPACT: SPATIAL IMPACT AT DISTRICT OR SUBURB LEVEL
FINANCIAL LOSS/GAIN (R' MIL)

(ACROSS); KEY PERFORMANCE 30> 20 - 30 0 - 19
INDICATORS (DOWN):
Level of
discretion Decision flexibility: Legal, political,
15% N/A N/A N/A
to implement contractual or project factors
project
Development within the urban edge, but not in Residential development within the urban not
Development outside the current approved urban
Compact city footprint 50% promixity to a major corridor, public transport contributing towards increased gross dwelling
edge, driving sprawl
route or bulk municipal infrastructure units/ha
Spatial
15%
efficiency
Greater transport Increased commuting time in/or spatial segment Increased commuting time in/or spatial Increased commuting time in/or spatial
connectivity and more or more than 15% reduction in use of public segment or 10% - 15% reduction in use of public segment or 1% - 10% reduction in use of public
50%
effective and efficient transportation or increase of more than 15% of transportation or increase of between 10% - 15% transportation or increase of between 1% - 10% of
movement household income spent on transport costs of household income spent on transport costs household income spent on transport costs
Discourages fixed capital investment of more than Discourages fixed capital investment of between Discourages fixed capital investment of upto R
Fixed capital investment 30%
R 30 million R 20 million and R 30 million 19 million
Expropriation or gentrification forcing 6% - 10%
Expropriation or gentrification forcing more than Expropriation or gentrification forcing upto 5% of
of local businesses to relocate elsewhere or
10% of local businesses to relocate elsewhere or local businesses to relocate elsewhere or
Business opportunities 30% Loss of business opportunities of between
Loss of business opportunities of more than 10% Loss of business opportunities upto 5% due to
Economic 6% - 10% due to construction activity for upto
15% due to construction activity for 6 months or more construction activity for upto 6 months
development 6 months
Estimated decrease in market value of properties Estimated 11 - 20% decrease in market value of Estimated 1 - 10% decrease in market value of
Land value capture 10%
zoned for economic use of over 20% properties zoned for economic use properties zoned for economic use
Loss of employment opportunities of more than Loss of employment opportunities of between Loss of employment opportunities of between
Employment creation 30%
300 jobs 101 - 300 jobs 1 - 100 jobs
Project design employs current carbon-based
Carbon mitigation 20% Net generator of carbon N/A technologies together with limited carbon-offset
measures (e.g. on site tree planting)
Irreparable degradation of the natural
environmental to the extent that it is no
Availability and quality of longerable to provide ecosystem services, or large Moderate loss in the quality of an ecosystem Minor loss in the quality of an ecosystem service
50%
ecosystem services scale reduction in access to ecosystem services. service or in the spatial availability of that service or in the spatial availability of that service
Environmental
10% City liable for environmental penalties and
sustainability
remedial costs, and will likely face public outcry
Loss of protected or problem species, coupled Limited habitat loss not affecting status of
Protection of fauna and flora 30% N/A
with negative media exposure and public outry protected species
Overall value of Negative discounted Negative discounted BCR in the range of minus Negative discounted BCR in the range of minus
34%
investment proposal BCR greater than minus 1 0.5 - 1 0.1 - 0.5
Financial
IRR positive, but more than 3% below cost of
health and 15% Investment efficiency 33% Project does not deliver any financial yield IRR in the range of 3% below cost of capital
capital
sustainability
Value of the investment 33% NPV greater than minus R 5 million NPV in the range of minus R 1 million - R 5 million NPV in the range of minus R 1 - R 1 million
Service delivery impact 40% N/A N/A N/A
Project to result in forced resettlement of more Project to result in forced resettlement of Project to result in forced resettlement of
Inclusionary housing 40% than 300 families for reasons not related to initial between 101 - 300 families for reasons not related between 1 - 100 families for reasons not related to
illegal settlement to initial illegal settlement initial illegal settlement
Social
upliftment and 15%
inclusion
Project creates unattended risks of serious injury Project creates chronic health impacts for the Project creates adverse but non-threatening
Community health 15%
or fatalities for the community community health impacts that impedes quality of life
Community empowerment 5% N/A N/A N/A
Project leads to severe degradation or loss of

cultural assets or cultural wealth of national Project leads to significant loss of cultural assets Project leads to limited degradation of existing
Protection of cultural
30% importance, resulting in mass public outcry, or cultural wealth, resulting in opposition from cultural assets or cultural wealth, not opposed by
heritage
negative national media coverage, possible lobby groups and negative local media converage the broad community
Forging of a litigation and loss of tourism potential
unifying city
identity whilst 5%
celebrating Project delivers unimproved public space that Project delivers unimproved public space that
diversity Creation of inclusionary poses serious security risks, particularly to women, poses minor security risks, particularly to women,
public spaces and meeting 70% the elderly and children or Project consumes N/A the elderly and children or Project consumes
places more than 1 hectare of improved public space upto 1 hectare of improved public space without
without providing alternative public space providing alternative public space
Implementation of project to result in productivty Implementation of project to result in productivty Implementation of project to result in productivty
Opportunity to improve
or cost efficiency losses of more than R 10 million or cost efficiency losses of between minus R 5 or cost efficiency losses of upto minus R 5 million
productivity and cost 30%
compared to the current situation or market million - R 10 million compared to the current compared to the current situation or market
efficiencies
average cost situation or market average cost average cost
Minor injuries or health impacts of temporary

Promote health and Ranging from fatality or multiple major injuries
30% N/A and reversible nature, with no lasting impact on
safety through to multiple fatalities
Organisational employee well-being or operational effectiveness
effectiveness 10%
and efficiency
Staff arranges protests, slow go actions or go on Marginal decline in staff morale, limited to a
Significant decline in staff morale, with staff
Retain employees through an strike. Unacceptably high rates of staff turnover in particular location, may be evidenced through
10% openly displaying negative work sentiments at
attractive environment the professional and management echelons due higher than normal sick leave or consistent low
more than one location
to unsatisfactory physical work environment rates of productivity
Project uses scarce resources in an unsustainable Project results in significant losses in resource Project results in marginal losses in resource
Resource efficiency 30%
way efficiency efficiency
NEUTRAL BENEFIT RANGE

NO POSITIVE OR
INSIGNIFICANT MINOR MODERATE MAJOR EXTREME
NEGATIVE IMPACT
0 1 2 3 4 5
CDB, PRIMARY NODES,
TOWNSHIP OR TRUNK INTEGRATION ZONE, MAJOR
NO SPATIAL IMPACT NEIGHBOURHOOD/VILLAGE DISTRICT/SUBURB CORRIDORS OR SPECIAL
PUBLIC TRANSPORT FACILITY ARTERIAL ROAD OR REGION
ECONOMIC ZONES
0 0 - 19 20 - 39 40 - 59 60 - 120 >120
Project is committed by policy of

Project is required to coordinate Project is committed for either
No requirement to Council or in the municipality's Project must proceed to meet
Project is discretionary with or support a higher priority contractual reasons or project
implement the project strategic plan, or is required to statutory requirements
committed project staging requirements
achieve non-statutory accreditation
Development causes or contributes Development causes or contributes Development causes or contributes Development causes or contributes
Development causes or contributes
towards increase of between towards increase of between towards increase of between towards increase of over 20% of
Redevelopment, upgrading towards increase of upto 5% of
5% - 10% of current average 10% - 15% of current average 15% - 20% of current average current average gross residential
or renewal in existing current average gross residential
gross residential density/ha, or gross residential density/ha, or gross residential density/ha, or density/ha, or redevelopment of
built space (no increase in density/ha, or redevelopment of
redevelopment of greyfields and/ redevelopment of greyfields and/ redevelopment of greyfields and/or greyfields and/or
spatial footprint, density or greyfields and/or Development that
or Development that causes land or Development that causes land Development that causes land Development that causes land
intensification in land use) causes land use intensification for
use intensification for more than use intensification for more than use intensification for more than use intensification for more than
more than 8 hrs/day
8 hrs/day 8 hrs/day 12 hrs/day 12 hrs/day
Reduced commuting time in/or Reduced commuting time in/or Reduced commuting time in/or Reduced commuting time in/
spatial segment or spatial segment or spatial segment or or spatial segment or more than
1% - 5% increase in use of public 6% - 10% increase in use of public 10% -15% increase in use of public 15% increase in use of public
Project necessary to achieve city-
No impact transportation or transportation or transportation or transportation or
wide public transport integration
reduction of between 1% - 5% reduction of between 6% - 10% reduction of between 10% - 15% reduction of more than 15%
of household income spent on of household income spent on of household income spent on of household income spent on
transport costs transport costs transport costs transport costs
Enables fixed capital investment of Enables fixed capital investment of Enables fixed capital investment of Enables fixed capital investment of Enables fixed capital investment of
No impact
between R 1 - R 19 million between R 20 million - R 39 million between R 40 million - R 59 million between R 60 million - R 120 million more than R 120 million
Either: Increase in serviced GLA of
Either: Increase in serviced GLA of Either: Increase in serviced GLA of Either: Increase in serviced GLA of Either: Increase in serviced GLA of
1-5% of spatial scale or:
1-5% of spatial scale or 1-5% of spatial scale or: 1-5% of spatial scale or: 1-5% of spatial scale or:
No impact Increase in serviced informal
Increase in serviced informal Increase in serviced informal Increase in serviced informal Increase in serviced informal
trading space of between 51 -
trading space of between 1 - 50m2 trading space of more than 150m4 trading space of between 1 - 50m5 trading space of between 1 - 50m6
150m3
Estimated 1 - 5% increase in market Estimated 6 - 10% increase in Estimated 11 - 15% increase in Estimated 15 - 20% increase in Estimated increase in market value
No impact value of properties zoned for market value of properties zoned market value of properties zoned market value of properties zoned of properties zoned for economic
economic use for economic use for economic use for economic use use of over 20%
Creation of between 1 - 50 annual Creation of between 51 - 100 Creation of between 101 - 200 Creation of between 201 - 300 Creation of more than 300 annual
No impact
equavalent jobs annual equavalent jobs annual equavalent jobs annual equavalent jobs equavalent jobs
Project design ensures full
Carbon neutral/ Project delivers a carbon store
sequestration of the carbon it N/A N/A N/A
no carbon production greater than the carbon it produces
generates
Project enhances the ability of the
Restoration or enhancement of the
Limited local restoration or Restoration or enhancement of the Restoration or enhancement of the natural environment to deliver
No change in the ability of ability of the natural environment
enhancement of the ability of the ability of the natural environment ability of the natural environment multiple ecosystem services
the natural environment to to deliver one or more ecosystem
natural environment to deliver one to deliver one or more ecosystem to deliver one or more ecosystem e.g. provisioning, supporting,
deliver ecological services services with township-wide
or more ecosystem services services with district-wide benefits services with regional benefits regulating and cultural services at a
benefits
city-wide scale
Project provides natural green
Project provides quality natural
space of regional significance Project enhances the quanity or
space of at least 1.5 hectares, or
Project provides quality natural Project provides quality natural and contributes towards the richness of species or enables the
No impact on fauna and flora contributes towards connecting
space of at least 500m2 space of at least 1 hectare establishment of green corridors creation of a city-wide linked open
natural corridors within the
within that region, or to other space system
township
regions
Discounted BCR in the range of Discounted BCR in the range of Discounted BCR in the range of Discounted BCR in the range of
Discounted BCR of 1 Discounted BCR greater than 4
1.1 - 1.5 1.6 - 2.5 2.6 - 3.5 3.6 - 4
IRR in the range of 1% - 3% above IRR in the range of 3.1% - 5% above IRR in the range of 5.1% - 7% above IRR in the range of 7.1% - 10% IRR greater than 10.1% above the
IRR equals cost of capital
hurdle rate the hurdle rate the hurdle rate above the hurdle rate hurdle rate
NPV in the range of R 1 - R 19 NPV in the range of R 20 million - R NPV in the range of R 40 million- R NPV in the range of R 60 million - R
NPV equals 0 NPV greater than R 120 million
million 39 million 59 million 120 million
Project delivers municipal services Project delivers municipal services Project delivers municipal services Project delivers municipal services Project delivers municipal services
No impact
to less than 1 000 customer units to 1 001 - 5 000 customer units to 5 001 - 10 000 customer units to 10 001 - 20 000 customer units to more than 20 000 customer units
Project delivers a range of Project delivers a range of
Single product housing delivery Project delivers a limited range Project delivers a range of
housing products for households housing products for households
project catering for a single market of housing products, without housing products for households
with varying lifestyle needs and with varying lifestyle needs and
No impact segment, without provision for provision for the conditions with varying lifestyle needs and
affordability, with no attention affordability, with limited attention
the conditions assocated with assocated with sustainable human affordability in a sustainable human
paid to creating the conditions for paid to creating the conditions for
sustainable human settlement settlement settlement
sustainable human settlement sustainable human settlement
Project mitigates against non- Project mitigates against non-
threatening health impacts threatening health impacts that Project mitigates against chronic Project mitigates against the risks of Project mitigates against the risks of
No impact
that impedes quality of life at impedes quality of life at district/ health impacts injury by members of the public fatality by members of the public
neighbourhood scale suburb scale
Project creates opportunities for Project creates opportunities for Project creates opportunities for Project creates opportunities for Project creates opportunities for
No impact skills development of between 1 - skills development of between 51 - skills development of between 101 skills development of between 201 skills development of more than
50 community members 100 community members - 200 community members - 300 community members 300 community members
Project creates or enhances Project creates or enhances
Protection or restoration of existing the cultural wealth of the city the cultural wealth of the city
Protection or restoration of existing Protection or restoration of existing
cultural assets e.g. historic grave sufficiently to attract provinc-widel sufficiently to attract national
No impact cultural assets e.g. historic grave cultural assets e.g. historic grave
sites of cultural value broader than interest and media coverage, interest and media coverage,
sites of local cultural value sites of city-wide cultural value
the city limits and cultural tourists outside the and cultural tourists outside the
city limits city limits
Project delivers celebrated public
Project creates public space for space for multi-cultural enjoyment
Project creates public space of Project creates inclusionary public
Project creates neighbourhood regional enjoyment by people by people of all dispositions (class,
suitable quality and utility that space of suitable quality, utility
No impact space for enjoyment by local of different walks of life, offering race, gender and age), of a nature
people travel across a district to and capacity for the benefits of all
residents multiple functionality, capacity and that enhances the urban character
make use of it people in a suburb
design for social inclusitivity and strengthens the city's tourism
potential
Implementation of project to
Implementation of project to result Implementation of project to result Implementation of project to result Implementation of project to result
result in productivity increases or
No impact in productivity increases or cost in productivity increases or cost in productivity increases or cost in productivity increases or cost
cost efficiencies of more than R
efficiencies of R 1 - R 10 million efficiencies of R 11 - R 20 million efficiencies of R 21 - R 40 million efficiencies of R 41 - R 60 million
60 million
Supports best practice in
Improvement limited to reduction Improvement in health & safety Improvement in health & safety Enhancement of health & safety
preventing/limiting widespread
of minor incidences. Will not conditions lead to an improvement conditions sufficiently robust to conditions in line with legal
or repetitive major health & safety
No impact improve operational effectiveness, in lost time due to injury-related reasonably limit life-threatening requirements with potential to
incidences of a type that includes
but will demonstrate commitment sick leave and/or other financial events, disability or other prevent or limit extreme or large
limited fatalities or multiple major
to employee wellbeing claims irreversible injuries scale health & safety incidences
injuries
A noticable improvement towards A noticable improvement towards A noticable improvement towards
Create or support workplace or
Marginal improvement in staff a conducive work environment a conducive work environment a conducive work environment
employment conditions required
No impact morale, or meeting of basic or employment conditions, with or employment conditions, with or employment conditions, with
by law and accepted industry
workplace hygiene requirements improved staff morale expected in improved staff morale expected in improved staff morale expected in
practice benefiting most staff
a particular location more than one location most or all locations
Project delivers marginal Project delivers significant Project delivers major Project employs novel new Project employs recognised
No impact improvements in resource improvements in resource improvements in resource technologies promising high levels best-in-class resource efficiency
efficiency efficiency efficiency of resource efficiency gains techonology or operations

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Investment appraisal and planning MODULE 8

TOOLKIT EDITION 1 2018

KEY RELEVANT NATIONAL REGULATIONS, POLICIES AND STRATEGIES:

8.1 INTRODUCTION TO INFRASTRUCTURE INVESTMENT APPRAISAL AND PLANNING 8.1

8.2 IDENTIFY PROBLEMS OR OPPORTUNITIES AND DEVELOP POTENTIAL SOLUTIONS 8.4

8.3 INVESTMENT APPRAISAL 8.23

8.4 FINANCIAL PLANNING 8.32

8.5 ORGANISATIONAL OPTIMISATION 8.36

8.6 APPROVAL OF MCA SYSTEM 8.50

8.7 CONCLUSION 8.51

Tables that appear in this toolkit

8A: City-level multi-criteria analysis framework 8.53

8.1 INTRODUC TION TO INFR ASTRUC TURE

• They need capital outlay or funding to implement. Most

In practice there are several economic realities to contend

Investment appraisal and planning, therefore, is about:

8.1.2 Lay-out of this module

8.2 IDENTIFY PROBLEMS OR

8.2.2 Identification of a problem or opportunity

01 COMPLIANCE REQUIREMENTS 03 SERVICES BACKLOG OR COMMITMENT TO

02 UNACCEPTABLE RISK EXPOSURE

Opportunities can generally be classified as follows:

Having identified a problem or opportunity, a clear project

Good practice dictates that the project objective(s) demonstrates

8.2.3 Identify potential solutions

The process of identifying solutions to a problem or opportunity should be an honest attempt to

TABLE 8.1: Asset and non-asset solutions

8.2.4 Sift potential solutions

Accordingly, potential solutions should be sifted at this

8.2.5 Process summary: identification of problem or opportunity

8.2.6 Determining benefits and costs

CAPITAL PROJECT PROPOSALS PRESENT BASKETS OF

When infrastructure is constructed for a newly proclaimed

Any worthwhile project will however generate benefits. In the

BOX 8.1: DE TERMINING THE NE T BENEFITS

Pipe distribution network: Diameter sizes, volumes and water losses

≥900 165 6 070 0 58 425 0 64 660 1 000 50 758 100 11

Next, distribute the benefits and costs in a cash flow projection:

Cash flow forecast

Renewal 1 000 000 - - - - - - -

POTENTIAL BENEFITS AND COSTS PER TYPE OF INFRASTRUCTURE PORTFOLIO

TABLE 8.3: Potential benefits per type of infrastructure portfolio

Business relocation costs

Capital investment costs

TABLE 8.4: Potential costs per type of infrastructure portfolio

CATEGORIES OF BENEFITS AND COSTS

CLASSIFICATION DESCRIPTION BENEFITS COSTS

01 GENTRIFICATION 02 A SECOND MUNICIPAL AIRPORT

8.2.7 Preparing cash flow forecasts

1. Distribute revenue and expenditure over the analysis period

“ Financial appraisal employs discounted

BOX 8.2: C ALCULATING PRESENT VALUE

OPPORTUNITY COST IS DEFINED AS:

The following are key rules and considerations in the

1. The discount rate is set annually by the Chief Finance Officer,

“ The discount rate is set annually by

04 INVESTMENT ANALYSIS PERIOD

BOX 8.3: MORE ON LONG INVESTMENT