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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


Introduction 

The Local Government Municipal Systems Act, Chapter 5, Section 26, prescribes the core 
components of the Integrated Development Plan. Section 26 (h) requires the inclusion of a 
financial plan which should include a budget projection for at least the next three years. This 
financial plan aims to determine the financial affordability and -sustainability levels of the City 
over the medium term. 

A municipality’s financial plan integrates the financial relationships of various revenue and 
expenditure streams to give effect to the Integrated Development Plan (IDP). It provides 
guidance for the development of current budgets and assesses financial impacts on outer 
years’ budgets by incorporating capital expenditure outcomes, operating expenditure trends, 
optimal asset management plans and the consequential impact on rates, tariffs and other 
service charges. The City has developed a financial model namely the Long Term Financial 
Plan (LTFP), which aims to determine the appropriate mix of financial parameters and 
assumptions within which the City should operate to facilitate budgets which are affordable 
and sustainable at least 10 years into the future. In addition, it identifies the consequential 
financial impact of planned capital projects on the City’s operating budget. 

The LTFP model is reviewed annually to determine the most affordable level at which the 
municipality can operate optimally taking the fiscal overview, economic climate, National and 
Provincial influences, IDP and other legislative imperatives, internal governance and 
community consultation into account in its deliberations. 

The key budget assumptions of the 2018/19 MTREF include a discussion of the sources of 
information used to develop assumptions for revenue and expenditure that drive the 3-year 
MTREF of the City under the following headings: 

• Financial Strategic Approach 

• Financial Modelling and Key Planning Drivers 

• Economic outlook / external factors 

o National and Provincial influences 

• Expenditure analysis - a three-year preview 

• Revenue analysis - a three-year preview 

• Local Government Equitable Share and Fuel Levy 

2.5.1 Financial Strategic Approach 

The 2018/19 MTREF was prepared in the midst of the City facing a critical challenge in the 
water crisis which created significant impact on the organisation’s operations. This coupled 
with a fairly new implementation of the Organisation Development Transformation Plan 
(ODTP), which requires investment, ensuring alignment with the IDP and affordable revenue 
parameters made this MTREF a difficult balancing act. 

The Budget brief issued by the Executive Mayor in November 2017 highlighted this and 
stressed that the year’s planning cycle is definitely not business as usual. Budgetary 
proposals had to demonstrate alignment of the City’s 11 transformational priorities as set out 
in the IDP as well as alignment to the City’s strategies all the while remaining financially 
sustainable. 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

The New Water Plan required capital and operating investment over a few years starting with 
the 2017/18 financial year. During this year the City Manager issued a directive calling for a 
budget intervention to support the financial impact of the drought relief actions. This was 
followed through in the 2018/19 financial year with further reprioritisation of the operating 
expenditure budget across the organisation from Rates and Other Trading Services to Water 
& Sanitation. 

Subsequent to the tabling of the budget in March 2018 amendments to the budget were made 
after considering input received via the public participation process e.g. inputs from 
Subcouncils, Portfolio Committees and other technical fora and stakeholders as well as impact 
of the updated the New Water Plan. The changes between the tabled and approved budget 
are included in the assumptions below. 


2.5.2 Financial Modelling and Key Planning Drivers 

The principles applied to the MTREF in determining and maintaining an affordability envelope 
included: 

• Measures to absorb the financial impact of the New Water Plan included: 

o Permanent reduction to certain expenditure items - operating efficiencies 
implemented to absorb reductions; 

o Introduction of a budget principle of only providing 95% for employee costs; and 
o Savings identified by introducing these measures contributed to Water Service; 

• A 100% capital expenditure implementation rate assumed; 

• Credible collection rates based on collection achievements to date and incorporating 
improved success anticipated in selected revenue items; 

• National - and Provincial allocations as per the 2018 Division of Revenue Bill and 2018 
Provincial Government gazette. 

2.5.3 Economic outlook/external factors 

Developments on the political front triggered a series of events that favourably influenced the 
domestic economy over the last few months. These changes led to an improvement in the 
current economic position. National Treasury, however, highlighted that there are various risks 
which may still influence the economic outlook. These risks include policy uncertainty and the 
impact of the drought on agriculture, tourism and jobs in these sectors. 

The year commenced with the Rand strengthening against the US Dollar due to the favourable 
domestic political developments. Over the last few months the Rand started to depreciate 
which is mainly as a result of global factors. The Rand is currently fluctuating at levels below 
R13/US$. According to BER, the R/$ exchange rate is expected to end 2018 at levels of 
R12.02/US$. 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

The average Brent Crude oil price increased over the last few months reaching a three-year 
high of $70.36/bbl during May. The price increase is mainly due to supply concerns. The 
shrinkage in the supply is as a result of the Organisation of Petroleum Exporting Countries 
(OPEC) indicating that the reduction in the supply will be sustained until the end of the year 
and the US plans to reintroduce sanctions against Iran. The cost of Brent crude oil is expected 
to average R63.5/US$ over the next three years. 

Real GDP is expected to grow by an average of 1.8% over the next three years. The 2018 
Budget Review indicated that the improved outlook flows from strong growth in agriculture, 
higher commodity prices and recovery in investor sentiments. 

The Finance Minister’s announcement of the 1 percentage point increase in VAT is expected 
to have an impact on the future inflation outlook. According to BER this increase should raise 
the average price of consumer goods and services but estimating that consumer inflation will 
remain below the 6% upper ceiling of the South African Reserve Bank’s (SARB) range. The 
outlook on CPI fluctuated over the last few months. The City’s CPI projection was based on 
BER projection during the budget planning phase and is 5.50% for the first two years of the 
MTREF and 5.55% for 2020/21 per municipal financial year. 

National and Provincial Influences 

a) National Treasury MFMA circular No. 89 issued in December 2017 

The objectives of this budget circular is to demonstrate how municipalities should 
undertake annual budget preparation in accordance with the budget and financial reform 
agenda and associated “game changers”. 

Some of the key points from the circular: 

• 2018/19 MTREF to be drafted in version 6.2 of mSCOA; 

• Municipalities must reconcile data on the valuation roll, billing system and the deeds 
office - this may become formal disclosure item in the near future; 

• Water tariff increases - important to improve demand management, infrastructure 
maintenance, loss management, meter reading and tariff setting iro water services 
and ensure tariffs charged are able to cover the cost of bulk purchases, ongoing 
operations and provision of future infrastructure; and 

• Ability for customers to pay for services are declining, municipalities must consider: 
o Improving the effectiveness of revenue management processes and procedures; 
o Pay special attention to cost containment measures; 

o The affordability of providing free basic services to all households; 
o Curb consumption of water and electricity by indigents to not exceed their 
allocation; and 

o ensuring value for money through the procurement process. 

b) National Treasury MFMA circular No. 91 issued in March 2018 

This circular was the follow up to Circular No. 89 issued in December. It reiterated 
guidelines provided in the previous circular with the main focus being the grant allocations 
per the 2018 Budget Review and the 2018 DORb. 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


Circular highlights: 

• A review of the economic outlook and inflation targets; 

• Local government grants were reprioritised and reduced. The average reduction over 
the medium term are 3.5% of the local government allocations; 

• That government is committed to managing available water supply to ensure basic 
needs are met and is prepared to provide financial assistance; 

• Section 22 of the 2017 DoRA requires that unspent conditional grants must revert 
back to the National Revenue Fund unless the unspent funds is proved to be 
committed in which case the funds may be rolled over. This circular provides the 
criteria for such roll overs and unspent grant funds; 

• Application to the Office of the Chief Procurement Officer (OCPO) to participate in the 
RT15-2016 transversal contract account management service offering for smart 
meters should comply with the required process which will be communicated via a 
circular; 

• To remind municipalities that VAT will increase from 14% to 15% and that it’s a tax 
increase as a result of tax legislation that municipalities must implement, not an 
increase of tariffs by municipalities; and 

• That the budget document should be aligned to the requirements of the MBRR 
Schedule A (mSCOA) format and that mSCOA data strings should be uploaded to the 
LG upload portal. 

c) National Treasury released the version 6.2 of mSCOA grid for preparation of the 2018/19 
MTREF in December 2017. 

d) The latest Division of Revenue Bill (DoRB) and Provincial Gazette as well as the Fuel 
Levy allocation was incorporated in the 2018/19 MTREF. 

2.5.4 Expenditure analysis - a three year- preview 

The required expenditure investment to provide a sustainable provision of water led to a full 
review of the City’s expenditure budget. The budget was prepared with a combination of 
interventions that aimed to ensure that the City give effect to its strategies and the crucial new 
reality of sourcing alternative water supply. The interventions included budget reprioritisation, 
budget cuts, applying differentiated parameters and budgeting for salaries at 95%. 

a) General inflation outlook and its impact on municipal activities 

The City’s budget was not primarily driven by CPI this year given the budget cuts and the 
differentiated parameters applied. 

The annual consumer price inflation ended 2017 with an average of 5.3%. This outcome 
was mainly due to a decrease in food & non-alcoholic beverages, which can be attributed 
to the recovery in agriculture. The City’s CPI projection is 5.50% for the first two years of 
the MTREF and 5.55% for 2020/21, per municipal financial year. National Treasury’s CPI 
projection was reviewed to 5.3% for 2018/19, and 5.4% and 5.5% for 2019/20 and 2020/21 
respectively over the national financial years. These levels are within the SARB inflation 
targeting range of between 3% to 6%. 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


b) Contracted services, overtime and operational cost 

The underlying budget theme remains cost containment and budget efficiencies and to 
give effect to this a combination of a zero-based budgeting and a differentiated approach 
was adopted based on the nature of expenditure and previous years’ expenditure 
performance. This approach included reducing the base and applying differentiated 
parameters to elements in the above mentioned categories of expenditure over the 
2018/19 MTREF. In addition, budget reprioritisation was also implemented to assist with 
the cost of providing new sources of water supply. 

c) Interest rates for investment of funds 

The City’s investments are done in terms of the Cash Management and Investment policy, 
which aims to secure the sound and sustainable management of the City’s surplus cash 
and investments. An average investment rate of 7% is forecasted over the 2018/19 
MTREF. 

d) Collection rate for Property rates and service charges 


Services 

Base Budget 

Budget Year 

Budget Year +1 

Budget Year +2 

2017/18 

2018/19 

2019/20 

2020/21 

Rates 

96.0% 

96.0% 

96.0% 

96.0% 

Electricity 

98.0% 

98.0% 

98.0% 

98.0% 

Water 

82.0% 

70.7% 

70.7% 

82.0% 

Sanitation 

86.0% 

86.0% 

86.0% 

86.0% 

Refuse 

93.0% 

93.0% 

93.0% 

93.0% 


The Property Rates collection rate remains at 96%, which is supported by previous years’ 
outcomes. 

Electricity collection rate remains at 98% over the 2018/19 MTREF. This is mainly 
attributed to the continuous role out of prepaid meters and revenue protection initiatives. 

The actual collection rate outcome for Water and Sanitation over the past years was 
lower than anticipated. The projected budgeted collection rate was therefore reduced to 
a more realistic collection rates for the 2018/19 MTREF. The projected collection rate for 
Water is 70.7% for the first two years of the MTREF, in 2020/21 it is expected to improve 
to 82%. Sanitation collection rate is projected at 86% over the 3-year MTREF. The lower 
collection rate is predominantly driven by non-paying high water users during the period 
of water restriction where tariffs are much higher than the standard tariff (to reduce 
consumption). 

The projected Refuse collection rate for the 2018/19 MTREF remains constant at 93%. 
This is due to ongoing debt management initiatives implemented. 

e) Salary increases 

During the preparation of the 2018/19 MTREF no salary and wage collective agreement 
was in place, a similar methodology of previous’ agreements were applied to the MTREF 
i.e. average CPI for the period 1 February of the previous year to 31 January of the current 
year, with a 2% added in the first year and 1% for the subsequent years. 


5 



City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

The following salary increases were proposed by the Facilitator’s Draft Agreement 
(“Facilitator Proposal”) signed on the 18th April 2018: 

- 2018/19: An increase of 7% plus 0.5% wef 1 January 2019 for basic salary of 
R9000 or less; 

- 2019/20: Projected CPI for 2019 financial year plus 1.5%.; and 

- 2020/ 21: Projected CPI for 2020 financial year plus 1.25%. 


This agreement is subject to all parties reverting back to the SALGBC on or before 16 May 
2018 on whether the proposal is accepted or rejected. 

The City’s provision for 2018/19 of 7.1% is sufficient to cover all the other increases 
proposed in the agreement e.g. homeowner allowance, medical aid etc. 

A further provision of 2% was made for an incremental allowance to cater for performance 
and other notch increases. The salary increases included in the budget are graphically 
shown below. 


8.00% 

7.00% 

S' 6.00% 




Percentage ( c 

O ^ M W ^ U1 

o o o o o o 

o o o o o o 

\P -vP vP >nO sO sO 

CT' CT' O n O n CT' CT' 







Base Budget Budget Year Budget Year +1 Budget Year +2 

2017/18 2018/19 2019/20 2020/21 

Salary Increases 

7.36% 7.10% 6.60% 6.40% 

CCT's CPI projection 

5.70% | 5.50% | 5.50% | 5.55% 


In addition to the above, the City instituted a change in the method of budgeting for 
salaries. Previous years’ outcome showed a constant under performance on salaries. 
Based on this it was decided that salaries will be budgeted at 95% over the MTREF period. 

f) Ensuring maintenance of existing assets 

As per 2017/18, a differentiated approach was applied to the expenditure elements relating 
to repairs and maintenance for the 2018/19 MTREF. This approach considered the nature 
of the work that individual services provide. The following varying parameters were 
applied: 

• 10% reduction to 2017/18 base with no increase over the 2018/19 MTREF for 
services that are supportive in nature; 

• A CPI increase to services whose main function is not providing repairs & 
maintenance, however the nature of their business and facilities is such that it 
requires proper maintenance provision; and 

• CPI + 1% applied to services that needs to secure the health of their assets 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


National Treasury circulars 55 and 70 set the ratio of operational repairs and maintenance 
to asset value (write down value of the municipality’s property, plant and equipment (PPE) 
at 8%. The City averages 7.6% over the 2018/19 MTREF. The lower ratio outcome is as 
a result of the reprioritisation of the budget and the accelerated capital investment in new 
water supply initiatives. This new capital investment would not require immediate repairs 
and maintenance. 

g) Operational financing for capital 
Depreciation 

Calculation of depreciation on new capital expenditure is based on variables such as asset 
class and lifespan, depending on the nature of the asset. An annual capital expenditure 
implementation rate of 100% was assumed. Depreciation of existing assets is calculated 
based on simulated SAP data that reflect actual values per annum. Assets under 
construction (AUC) are calculated based on asset class lifespan and projected 
capitalisation dates. 

Credit rating outlook and Borrowing 

The City needs a credit rating to demonstrate its ability to meet its short- and long-term 
financial obligations. Potential lenders also use it to assess the City's credit risk, which in 
turn affects the pricing of any subsequent loans taken. Factors used to evaluate the 
creditworthiness of municipalities include the economy, debt, finances, politics, 
management and institutional framework. 

On 29 March 2018, Moody’s Investors Service provided an update to the City’s credit 
analysis. The City’s global and national scale ratings were confirmed with a negative 
outlook. The City’s outlook was not upgraded to “Stable” in line with the action taken on 
the sovereign rating due to challenges associated with the current water crisis. 

The City’s national scale rating is currently Aaa.za/P-I.za, which reflects the City’s credit 
profile of strong financial performance characterised by annual operating surplus, strong 
financial debt management, low debt and diverse economic profile. The City’s credit profile 
is, however, constrained by the water shortage, the direct impact it has on water revenue, 
the indirect economic and societal effects and the increased capital expenditure required 
to ensure the supply of water. The City’s rating over the last period was as follows: 


Category 

Currency 

Current Rating 

29 March 2018 
Following action 
on sovereign 
rating 

Current Rating 

15 February 
2018 

Previous Rating 

1 December 2017 
Following action 
on sovereign 
rating 

Previous Rating 

14 June 2017 
Following action 
on sovereign 
rating 

Outlook 

- 

Negative 

Global rating 
under review 

Global rating under 
review 

Negative 

NSR Issuer Rating 

Rand 

Aaa.za 

Aaa.za 

Aaa.za 

Aaa.za 

NSR ST Issuer 
Rating 

Rand 

P-I.za 

P-I.za 

P-I.za 

P-I.za 

NSR Senior 
Unsecured 

Rand 

Aaa.za 

Aaa.za 

Aaa.za 

Aaa.za 


Stable Outlook - reflects that a credit rating assigned to an issuer is unlikely to change; 

• Negative Outlook - reflects that a credit rating assigned to an issuer which may be 
lowered; 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

• Rating under Review - a review indicates that a rating is under consideration for a 
change in the near term; 

• NSR Issuer Rating - Aaa.za - Issuers or issues rated Aaa.za demonstrate the 
strongest creditworthiness relative to other domestic issuers; 

• NSR ST Issuer Rating - P-I.za - Issuers (or supporting institutions) rated Prime-1 
have the strongest ability to repay short-term senior unsecured debt obligations 
relative to other domestic issuers; and 

• NSR Senior Unsecured - Aaa.za - Issuers or issues rated Aaa.za demonstrate the 
strongest creditworthiness relative to other domestic issuers. 

The City’s borrowing is done in terms of chapter 6 of the MFMA as well as the City’s 
borrowing policy, in terms of which a long-term loan will only be entered into if it’s 
affordable and sustainable. The City’s loan requirements are determined by the capital 
investment requirement (excl. Transfers Recognised: Capital) and the projected cash 
position. The City primarily borrows against future revenue generating assets. 

It is projected that the City will have a favourable cash position over the 2018/19 MTREF 
thus reducing the borrowing requirement as opposed to the capital requirement. 
Borrowing over the MTREF is calculated on an interest rate of 11% based on the annuity 
method. 

The table below reflects the proposed borrowing over the 2018/19 MTREF. 



2018/19 

2019/20 

2020/21 

Borrowing (R’ 000) 

4,000,000 

5,700,000 

6,000,000 

Borrowing Interest Rate %) 

11% 

11% 

11% 


2.5.5 Revenue analysis 

a) Growth 

Electricity 

Electricity projected shrinkage in sales revenue over the 2018/19 MTREF, shrinkage of 
2.68% is projected for 2018/19 and 2% for the two outer years. The shrinkage is as a result 
of continued energy saving plans which results in reduced consumption. 

Property Rates 

Service growth for Rates is projected at 0.5% for 2018/19, 1% for 2019/20 and 0.5% for 
2020/21. The projected growth is based on the current property valuations. A one percent 
is projected in 2019/20 to account for the change expected as a result of 2018 General 
Valuation (GV) to be implemented in 2019/20. 

Water & Sanitation 

Water volumetric growth for base calculations is expected to shrink by 20% in 2018/19. 
The projected shrinkage is due to the expected permanent reduction in water usage as a 
result of the water restrictions and permanent water saving measures implemented by 
consumers. The Sanitation revenue budget is aligned to water volumes, thus the same 
water shrinkage projections was applied for Sanitation. 


8 




City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

No growth is projected for the two outer years of the MTREF as it is expected that 
consumer’s ability to save water would have plateaued out. It would also be prudent for 
the new base to be established before making further projections. 

Refuse 

The average revenue growth over the last 3 years shows that a 2% growth for Refuse is 
sustainable over the 2018/19 MTREF. The growth is driven by the growth in the 
requirement for this service. 

b) Major tariffs and charges 

MFMA circular 89 and 91 states that “National Treasury encourages municipalities to 
maintain tariff increases at levels that reflect an appropriate balance between the 
affordability to poorer households and other customers while ensuring the financial 
sustainability of the municipality. The Consumer Price Index (CPI) inflation is forecasted 
to be within the upper limit of the 3 to 6 per cent target band; therefore, municipalities are 
required to justify all increases in excess of the projected inflation target for 2018/19 in 
their budget narratives, and pay careful attention to the differential incidence of tariff 
increases across all consumer groups. In addition municipalities should include a detail of 
their revenue growth assumptions for the different service charges in the budget narrative.” 

The circular further acknowledged that “municipal own revenue sources are shrinking due 
to widespread drought and households opting for alternative sources of energy”. Electricity 
services are urged to work towards achieving fully cost-reflective tariffs and Water tariffs 
should cover for the cost of bulk purchases, ongoing operations as well as provision for 
future infrastructure. 

Considering the above and to ensure future financial sustainability, the following revenue 
increases are applied for 2018/19 MTREF. 


25.00% 



ra 

re 


c 20.00% 

o> 


15.00% 


10 . 00 % 


5.00% 



Base Budget 
2017/18 

Budget Year 
2018/19 

Budget Year+1 
2019/20 

Budget Year +2 
2020/21 

Properly Rates 

5.00% 

6.50% 

7.70% 

8.16% 

Electricity 

3.34% 

8.14% 

9.56% 

9.96% 

Water 

19.25% 

19.90% 

39.70% 

16.80% 

m Sanitation 

19.25% 

19.90% 

39.70% 

16.80% 

Refuse 

6.51% 

5.70% 

7.90% 

8.00% 

City's CPI projection 

5.70% 

5.50% 

5.50% 

5.55% 


9 






City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


Electricity 

Last year was the end of the Multi-Year Price Determination (MYPD) agreement. Eskom 
thus applied to the National Energy Regulator of South Africa (NERSA) for an increase 
for the 2018/19 financial year. In this regard NERSA approved an average percentage 
price increase of 5.23% to Eskom for the 2018/19 financial year, which translated into a 
7.32% increase for municipalities. There is currently no longer term price increase 
agreement in place i.e. only an increase for the 2018/19 financial year of the MTREF was 
approved. 

The nature of business for the Electricity service is the purchasing and redistribution of 
electricity, where bulk purchases averages 61% of the service’s total budget. The 
Electricity revenue increase is therefore partly attributed to the NERSA-approved Eskom 
increase on bulk purchases, which is 7.32% for the 2018/19 financial year. In the absence 
of a longer term price increase agreement, a 10% increase was applied for the two outer 
years. In addition, the higher than CPI increases on other expenditure items, the reducing 
Electricity sales and investments in new infrastructure further contribute to the revenue 
increase requirement. 

Based on the above, the electricity average revenue increases are 8.14%, 9.56% and 
9.96%, respectively over the 2018/19 MTREF. 

Rates 

A revenue increase of 7.2% was proposed with the tabled budget for the 2018/19 financial 
year, 7.7% and 8.16% is projected for the 2019/20 and 2020/21 years respectively. The 
higher than CPI increase is as a result of reduced revenue received from the sharing of 
the Fuel Levy, higher capital cost, new budget realities and the increased cost of capital 
investment. 

Subsequent to the tabling of the budget and after the amending of the New Water Plan, 
the finance cost of a reduced loan take-up, the 2018/19 proposed Rates revenue increase 
is 6.5% for the 2018/19 financial year with 7.7% and 8.16% projected for the 2019/20 and 
2020/21 years respectively. 

Water and Sanitation 

MFMA Circular 89 states that “municipalities must ensure that the tariffs charged are able 
to cover for the cost of bulk purchases, ongoing operations as well as provision for future 
infrastructure”. The subsequent MFMA Circular 91 reiterated this view stating that “the full 
costs of new schemes will eventually have to be recovered from water users through 
tariffs”. 

In light of the above, the average revenue increase for Water and Sanitation, based 
primarily on the negative volumetric growth and other factors, was projected at 26.96% 
for 2018/19, 30.45% and 22.04% for the two outer of the MTREF respectively in the tabled 
budget. 

Subsequent to the tabling of the budget and after the amending of the New Water Plan, 
the finance cost of a reduced loan take-up, the 2018/19 proposed revenue increase is 
19.9% for the 2018/19 financial year with 39.7% and 16.8% is projected for the 2019/20 
and 2020/21 years respectively. 


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City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


Factors contributing to the high revenue parameters include: 

■ Various initiatives are planned over the next few years in light of the current severe 
drought condition to ensure sustainability and resilience in the provision of water for 
the City which in an effort to ensure water security includes investment in desalination, 
underground extraction from aquifers and water reclamation / reuse initiatives; 

■ The continued investment in asset replacement programmes to ensure proper asset 
management; 

■ Acceleration of repairs and maintenance programmes as well as staffing strategy to 
ensure that service delivery and responsiveness expectations are met; 

■ Further roll out of water demand management initiatives to limit the abuse of water; 
and 

■ Significantly lower collection rate. 

In addition, due to the current climatic conditions, level 6b water restriction will continue 
for the 2018/19 financial year and level 6 restrictions tariff will still be applicable from 1 
July 2018. 

Refuse 

Solid Waste consists of 3 services of which two are Tariff funded and one funded by 
Property Rates. The tariff funded services consists of Disposal and Refuse. 

The Disposal average increase for 2018/19 is at 14.83% while the increases for the two 
outer years are 10.87% and 14.24% respectively. This increase is required for capital 
investment and its related operating expenses. The capital investment includes the 
development of material recovery facilities and regional landfill sites, upgrading of transfer 
stations and landfill sites, and the purchasing of land for the regional land fill site. 

The Refuse average increase is 5.7% for 2018/19 and 7.9% and 8% for the two outer 
years respectively. The average increase will allow, inter alia, for amongst other, the 
service to comply with the NEMWA waste minimisation requirements by increasing the 
removal of recycling at the source and upgrading of solid waste depot facilities. 

Housing rental (Council rental properties) 

The monthly rental charge for the City’s housing rental properties is based on a rate per 
square meter applied to the size of the unit being rented coupled with a set of 
premiums/deductions based on the location, maintenance level, facilities et al of the 
specific property for which the rent is charged. 

Through addressing the economic challenges faced by many poorer communities 
residing in, particularly, the City’s rental stock, the average total monthly rental charge 
percentage increase associated with the City’s rental properties has been retained at an 
affordable level and is based on an annual increase of 7.02% (where the unit has a 
separate water meter) or 14.30% (for those units which include water in the rental charge) 
for 2018/19. 


ii 



City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 

The annual rental charge percentage increase, acknowledging the ongoing multi-year 
implications of inflation on the costs associated with the management of rental properties 
including, inter alia, maintenance of the properties, administrative costs is not directly 
aligned to the full economic cost of operating the rental units and operates on a City of 
Cape Town subsidized basis for the financial differential between the economic cost 
recovery based rental (CPI linked) and the actual amount charged. 

Tenants who were in occupation of the City’s rental properties in 2007 receive a subsidy 
of 20% of the rental charge being the final portion of the phase out program which was 
not fully implemented by the City to facilitate affordability of long standing tenants. This 
key initiative, reflected within the City’s Housing Debt Management Policy, supports 
affordable rentals to many poor communities and supports the City’s initiatives in terms 
of its housing debt collection drives whilst supporting the City’s housing debtor book that 
it does not unduly increase due to, potentially, unreachable charges. 

The proposed 2018/19 housing rental charge is in line with previous annual rental 
increases and is again aimed at ensuring affordability for the City’s poorer communities. 
The rental rate (per square meter per month) is R10.37 (where the unit has a separate 
water meter) or a rental charge (including water charge where applicable) of R16.87 per 
square meter per month. 

The City’s housing premiums and deductions charge structure addressing the variations 
in the City’s diverse rental properties remains as follows: 

Discounts on account 

• Outside toilet (R20 per month) 

• External Water (R30 per month) 

• No ceiling (R15 per month) 

Premiums on account 

• Saleable unit (R4,50 per month) 

• Well maintained (R5 per month) 

• Local environment (R3,50 per month) 

• Well located (R5 per month) 

• Hot water cylinder (R4 per month). 

A surcharge for tenants earning a monthly income above the rental income threshold (R3 
500) is charged as follows at a stepped rate of 8% for those earning R3 501 - R7 500 and 
10% for those earning R7 501 - R10 000. Tenants who earn more than R10 000 per 
month will pay a surcharge of 25% of any amount above R10 000. A two (2) year lease 
agreement will be signed which will not be renewed if the income remains more than 
R10 000. 


12 



City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 


c) Capital funding 

The total capital budget included over the MTREF is: 


Funded by: 

Budget Year 
2018/19 

R' 000 

Budget Year+1 
2019/20 

R' 000 

Budget Year +2 
2020/21 

R' 000 

Transfers recognised - capital 

Public contributions & donations 

Borrowing 

Internally generated funds 

2,067,896 

76,200 

4,000,000 

2,263,460 

2,118,842 

78,600 

5,700,000 

1,917,880 

2,296,333 

112,100 

6,000,000 

1,698,351 

Total 

8,407,556 

9,815,321 

10,106,785 


2.5.6 Local Government Equitable share and Fuel levy 
Local Government Equitable share 

In terms of section 227 of the Constitution, local government is entitled to an equitable share 
of nationally raised revenue to enable it to provide basic services and perform its allocated 
functions. The local government equitable share is an unconditional transfer that supplements 
the revenue that municipalities can raise themselves (including revenue raised through 
property rates and service charges). 

The equitable share provision included in the budget is based on the 2018 Division of 
Revenue Bill. The following equitable share amounts were allocated to the City: 

2018/19-R2 575 million 
2019/20-R2 816 million 
2020/21 - R3 092 million 

Sharing of the General Fuel levy 

The sharing of the general Fuel Levy with metropolitan municipalities was introduced in 
2008/09 as a replacement for the RSC levies previously collected by municipalities. The 
general Fuel Levy is legislated by the Taxation Laws Amendment Act (Act 17 of 2009), which 
provides that each metropolitan’s share should be announced in the government gazette. 

The Fuel Levy allocation is based on the 2016 fuel volume sales. The following amounts were 
allocated to the City as per the 2018/19 allocation letter (subject to approval of the Minister of 
Finance): 

2018/19-R2 558 million 
2019/20-R2 640 million 
2020/21 - R2 746 million 


13 




City of Cape Town - 2018/19 Budget (May 2018) 


Annexure 19 - Overview of budget assumptions applied to the 2018/19 MTREF required to be included in 

Annexure 18 (IDP) 



Budget Year 
2018/19 

Budget Year +1 
2019/20 

Budget Year +2 
2020/21 

CPI 

5.50% 

5.50% 

5.55% 

| COLLECTION RATES i 

Rates 

96.00% 

96.00% 

96.00% 

Electricity 

98.00% 

98.00% 

98.00% 

Water 

70.70% 

70.70% 

82.00% 

Sanitation 

86.00% 

86.00% 

86.00% 

Refuse 

93.00% 

93.00% 

93.00% 

REVENUE PARAMETERS 




Rates 

6.50% 

7.70% 

8.16% 

Electricity 

8.14% 

9.56% 

9.96% 

Water 

19.90% 

39.70% 

16.80% 

Sanitation 

19.90% 

39.70% 

16.80% 

Refuse 

5.70% 

7.90% 

8.00% 

Disposal 

14.83% 

10.87% 

14.24% 

| GROWTH PARAMETERS | 

Rates 

0.50% 

1.00% 

0.50% 

Electricity 

-2.68% 

-2.00% 

-2.00% 

Water 

-20.00% 

0.00% 

0.00% 

Sanitation 

-20.00% 

0.00% 

0.00% 

Refuse 

2.00% 

2.00% 

2.00% 

| EXPENDITURE PARAMETERS: ! 

Salary increase 




Salary increase (SALGBC Agreement) 

7.10% 

6.60% 

6.40% 

Increment provision 

2.00% 

2.00% 

2.00% 

Operational cost 

Differentiated 

Differentiated 

Differentiated 

Repairs & Maintenance 

Differentiated 

Differentiated 

Differentiated 

Interest Rates 




Interest paid 

11.00% 

11.00% 

11.00% 

Interest on investment 

7.00% 

7.00% 

7.00% 

Other: | 

Capital Borrowing expenditure 

R4.000bn 

R5.700bn 

R6.000bn 

Equitable Share Allocation 

R2.575bn 

R2.816bn 

R3.092bn 

Fuel levy 

R2.558bn 

R2.640bn 

R2.746bn 


14