New bill will add to cost burden, property sector warns
Amendment is intended to standardise charges for rolling out infrastructure, but association fears it will be a money-raising exercise for councils
The property industry has cautioned that a new bill aimed at standardising the development charges municipalities can levy on property developers and owners could amount to little more than a means for cash-strapped councils to augment revenues, if it goes ahead in its current form.
The proposed Municipal Fiscal Powers and Functions Amendment Bill compounds a range of other challenges faced by the sector, including already “abnormally” high municipal rates and taxes, according to Neil Gopal, CEO of the SA Property Owners Association (Sapoa).
The bill, released by the Treasury for public comment in January, is aimed at ensuring property developers and owners pay for the costs local governments incur to install new infrastructure or upgrade existing infrastructure to service new developments. This includes provision of water, sewerage, electricity, municipal roads, stormwater drainage, gas and solid waste removal.
Though these charges are levied by some municipalities — often referred to by another term such as “bulk contributions” — they are not uniformly applied.
One of the association’s concerns is the question of the “user pays” principle underpinning the legislation.
“The cost of repairing and upgrading infrastructure is, in general, borne either through rates or municipal tariffs, both of which include budgeted amounts for capital repairs and maintenance,” Gopal said.
“The principle of ‘user pays’ in relation to new capital infrastructure must therefore be understood in the narrow sense that if, to accommodate the services generated by a development, a municipality must increase its infrastructure, the developer must pay the amount, and no more, that it will cost to accommodate those services.”
Sapoa did not support “an additional source of funding to municipalities under the ‘development charges’ categorisation, which will find its way either into general revenues or as a ‘refund’ for infrastructure actually paid for by the public through other revenue sources in the past, he said.
“It also does not support the idea of ‘refunding’ the municipality for the cost of infrastructure already built and paid for,” he added.
Though the bill is a welcome attempt to introduce a uniform methodology for calculating development charges, there remained “significant concern” that municipalities, using development charges, would treat property developers as a “handy means to augment their revenues”.
The bill comes against the backdrop of ever increasing municipal levied costs for the commercial property industry, while the quality of service delivery has grown patchy.
“Given the weak state of many local governments’ finances, it is likely that council rates and taxes, and municipal charges components of property operating costs will be a key property ‘theme’,” FNB property strategist John Loos said in a recent note.
The costs of council rates, taxes and charges per square metre have risen by a cumulative 559% from 2000 to 2018, according to operating cost data from MSCI, noted Loos, while economywide inflation during this period was a far lower 220.2%.
As a result, total municipal rates, taxes and charges rose from 21.8% of all property operating costs per square metre in 2000 to 32.4% by the first half of 2019.
“Property development is the mainstay of economic development,” said Gopal. “The cost of holding and developing property, if increased thoughtlessly, will impede the economic recovery this country so desperately needs.”
The Treasury, however, said development charges are not intended as an additional revenue source. Instead they are an existing instrument levied by metropolitan municipalities, secondary cities and a few other municipalities. The bill will ensure they are consistently applied.
The bill will also introduce transparency on how municipalities use their development charges and require them to be accountable for the money that is collected, the Treasury said.
It will ensure that those who are going to benefit from a new development pay for the infrastructure associated with that development.
“If that is not done it means the payment of the new infrastructure will be subsidised by the rest of the rates base in the municipality,” Treasury said.
“Development charges therefore allow the beneficiary of the new/upgraded infrastructure to pay the cost, rather than it being subsidised by the rest of the rates base in the municipality.”