Development charges in South Africa – the case of in-kind payments and subsidisation of certain categories of land development (Part 2)

Development charges have now received attention in the Municipal Fiscal Powers and Functions Amendment Bill. The Bill contains a new chapter 3A that regulates the power of municipalities to levy development charges from developers in a uniform manner. Part 1 of the series on the Municipal Fiscal Powers and Functions Amendment Bill introduced the Bill and provided a general analysis of its provisions on development charges. In this article (Part 2 of the series), the focus is on the provisions regulating the in-kind payment of development charges, the subsidisation of categories of land development and the permissible uses of revenue from development charges. The article concludes with some reflections on the Bill.

Can a developer opt to install infrastructure as payment of development charges (in-kind payment)?

Where a municipality elects to levy a development charge, the developer will be required to proffer the payment before undertaking the proposed land development (whether making a monetary payment or payment-in-kind). The development charge will be calculated to approximate the actual costs of the bulk external engineering services. If a municipality and developer agree to a payment-in-kind for all or part of the bulk engineering services required, the costs of installation must be set off against the calculated development charges.

The Bill also empowers municipalities to request developers paying in-kind to install bulk engineering services or link engineering services that accommodate greater capacity, to support future development, than the capacity required for the proposed land development. Such a provision is important and forward-looking, it allows a municipality to plan future construction without the burden of having to install engineering infrastructure. In an ideal world, this would allow municipalities to develop their communities at a quicker pace. Also, municipal engineering infrastructure is needed for service delivery and having additional capacity may promote uninterrupted service delivery. A municipality must repay the developer for the additional infrastructure installed or deduct the costs of the additional infrastructure from the development charges paid by the developer on a fair and reasonable basis. When a payment-in-kind is made, the infrastructure installed by a developer becomes the property of the municipality and the developer must register the transfer of any rights in the infrastructure to the municipality.

The Bill also proposes an amendment to section 49 of the Spatial Planning and Land Use Management Act of 2013 (SPLUMA), which has a similar in-kind provision to the one mentioned above. The ability to request for additional capacity actually amounts to the municipality procuring the infrastructure from the developer without compliance with supply chain management processes provided in chapter 11 of the Municipal Finance Management Act of 2003 (MFMA). Whilst this approach is good for ensuring effective and timely delivery or installation of bulk or link infrastructure, it does leave room for corrupt activities by municipal officials and some developers who may inflate the cost of the infrastructure. The municipality will have to uphold the principles of transparency, fairness and equity to reduce opportunities for corrupt behaviour.

When can a municipality subsidise a land owner?

As much as municipalities are encouraged to drive local economic development in their communities, they also have to prioritise social investment and development in the form of social infrastructure. Because development charges make a development more expensive, a municipality may elect to subsidise land use applications that encourage the construction of low-cost housing, hospitals, libraries and sporting facilities, for example. Furthermore, granting subsidies for social infrastructure is beneficial to municipalities because developers take over the construction of infrastructure that would otherwise have to be built by municipalities and developers, in turn, perform the function in a timeous and effective way. The Bill caters for the aforementioned and sets out categories of land developments that may be considered for subsidisation and these are land developments for the purposes of providing low-income and subsidised housing. It also covers land developments that benefit people using social grants, indigent persons, people living in an area affected by a disaster, as well as people facing adverse social or economic conditions, or people temporarily without an income. The Bill also exempts land developments serving the public (for example, public parks), community (for example, community halls for social meetings or gatherings), educational (for example, crèches or schools), conservation (for example, construction that protects the Cradle of Humankind site) or institutional (for example, old-age homes) purposes set out in Schedule 2 of SPLUMA.

A subsidisation must be granted in line with an approved municipal policy framework and by-law that is applicable to development charges. The development charges by-law and policy framework must set out the criteria for granting subsidies, as well as establish categories of properties or categories of landowners for the purposes of granting subsidies. A municipality must calculate the development charge as if it were payable and then identify an alternative source of revenue to fund the subsidised development. If the bulk engineering services for the land development have (already) been budgeted for through a grant from another sphere of government, the subsidy granted must be limited to what the grant funding provides for and the developer pays the remainder of the calculated development charge. If the grant funding is equivalent to or is more than the development charge, that then results in an exemption of that land development from paying a development charge. It is important for municipalities to ensure transparency in the calculation or allocation of costs and also to have a definite alternative source to fund the subsidisation. The Minister responsible for finance may also make regulations for the manner in which subsidies are granted by a municipality.

What can a municipality use the income from development charges for?

Development charges must be spent for the infrastructure for which it is collected. The money received must be used to cover the actual costs associated with the provision of essential engineering service(s) to a proposed land development. National Treasury has advised that development charges should not be used for operating costs or costs associated with repairs, maintenance or rehabilitation of infrastructure, as development charges are limited to capital costs for new infrastructure. As such, development charges must be recorded as a liability in a municipality’s financial statements. Only when the municipality uses the development charges for the provision of external engineering infrastructure, it is then recognised as revenue. Development charges should also not be used to address historical backlogs in service delivery created by the neglect of service provision and apartheid-era inequity.

National Treasury has also advised that where a municipality has borrowed to provide infrastructure in advance of a development, development charges can be used to repay this debt. This will reduce the finance charges in rates and tariffs and reduce the cost burden on existing residents.

Support to municipalities and other State parties affected by the Bill

Development charges have existed for some time but have not been widely levied by all municipalities. This suggests that a lot of work will have to be done to equip municipalities with the knowledge and skills to start levying them. Since the publication of the Bill on 8 January 2020, National Treasury has been carrying out national and provincial workshops to provide technical clarity on the Bill. The first workshop took place on the 25th of February 2020 in Parliament and more workshops may follow.

Once the draft Bill is enacted, there are indications that National Treasury will develop regulations and implementation guidelines to assist municipalities with the implementation of the Act. National Treasury will also provide training to municipalities to ensure that they are equipped with the necessary tools, skills and knowledge to implement the proposed chapter 3A of the Bill. The training will be provided through capacity building initiatives, much like the training that was provided for Municipal Public Accounts Committee (MPAC) and Generally Recognised Accounting Practices standards (GRAP standards).

Reflections

The Bill introduces a number of important aspects regarding the levying of development charges. Although the systematised regulation of development charges should be welcomed, this does not remove the fact that the levying of development charges will remain a complex process. Whereas metros and big cities may be better placed to implement the Act, other municipalities may experience challenges in implementing the Act. Thus, once the Act is enacted, there may be a need for regulations and implementation guidelines that will give more explanation and guidance on the purpose and implementation of development charges.

Also noteworthy is the severe strain on infrastructure providing electricity, water, wastewater treatment and landfill, amongst others. With the COVID-19 pandemic, the expanded provisioning of services has further increased the strain on infrastructure. Approving land development applications, subject to the levying of development charges, may present municipalities with the opportunity to increase the installation of bulk external engineering infrastructure and link engineering infrastructure in a timely and effective manner, and alleviate the increased strain on municipal infrastructure.

In addition, in a bid to revive the local economy post the COVID-19 pandemic, and fulfill the obligation to promote social and economic development as required by section 152(1)(b) of the Constitution, municipalities may be eager to increase economic infrastructure and, thus, approve land development projects subject to levying development charges. Once the Bill is enacted, supporting regulations and implementation guidelines may also be helpful in providing certainty on the calculation of development charges. This is necessary to eliminate the negative financial impact municipalities may face when they approve land use applications that do not take sufficient account of the impact of the proposed land developments on the municipal fiscus.

Another noteworthy aspect is the in-kind payment proposed in section 9G(6) and (7) of the Bill, read together with the proposed amendments to section 49 of SPLUMA (set out in the Schedule to the Bill). These provisions permit a municipality to request a developer to install link engineering services that accommodate a larger capacity than required by the approved land development. The proposed amendment to section 49 of SPLUMA goes even further by empowering a municipality to contribute towards the costs of link engineering services so as to create a larger capacity for future developments in a vicinity. This “procurement” of additional infrastructure capacity could allow municipalities to use their Municipal Infrastructure Grant to construct social infrastructure in the same vicinity as approved land developments, as greater capacity for future development will already be available. If the reasoning or exemption provided in section 49(5) of SPLUMA is adopted, the supply chain management system set out in the MFMA would be circumvented. This is worrying – weaknesses in municipal capacity, multi-billion rand development contracts and the absence of tender processes is a fertile ground for corruption. Thus, the drafters of the Bill should be cautious of potential opportunities for corrupt behaviour which could be facilitated or enabled by gaps or weaknesses in certain legislative provisions.

In ending, while the Bill goes a long way in providing consistency and uniformity in the levying of development charges, one should question whether development charges and their use thereof, respond directly to local circumstances in South Africa. Put differently, does the proposed chapter 3A of the Bill respond adequately to local circumstances in South Africa, such as the pressing issues of housing and unequal spatial patterns? The answers to these questions will be seen in the way municipalities structure their policies on development charges and by-laws, but most importantly how they implement these instruments to direct change in spatial planning.

 

by Thabile Chonco

 

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