Parliament of the Republic of South Africa Portfolio Committee on Provincial and Local Government Briefings on Property Rates Bill 10 June 2003.

Parliament of the Republic of South Africa

Portfolio Committee on Provincial and Local Government

Briefings on Property Rates Bill

10 June 2003

Purpose of this presentation

To consider policy issues and options in respect of the valuation and rating of public service infrastructure

To consider policy issues and options in respect of conservation land / conservation properties

To consider broader issues raised in respect of exclusions, exemptions, reductions and rebates

Valuation and rating of public service infrastructure Current draft of the Bill

– section 15 (2) (a) disallows rates in respect of public service infrastructure.

– Defines public service infrastructure as;– national, provincial or other public roads– water or sewerage pipes, ducts or conduits, dams and

water supply reservoirs forming part of a water or sewerage scheme

– power stations, power substations or power lines forming part of an electricity scheme

Definition of public infrastructure Pipelines for gas and liquid fuels forming part of

…... Railway lines forming part of …... Telecommunication towers or lines forming part of

….. Runways or aprons at national and provincial

airports waterways at harbours to and from which goods

and service move …..

Definition...

Rights of way, easements and servitudes in connection with infrastructure mentioned in (a) to (h)

Comments raised by major utilities Telkom

– high probability that bill will impact negatively

– costs will rise

– current definition of public service infrastructure excludes substantial part of country’s telecommunications infrastructure, therefore propose to include;

– “all public telecommunications infrastructure including masts, exchanges and the housing used to accommodate exchanges”

Comments …Telkom

Rates policies be made subject to exemptions in section 15

In case of a private property rates be disallowed (fixed % of value of property) containing public service infrastructure

Exempt status to apply in respect of all property used solely for provision of public telecommunications

Comments …Telkom

Or a special rate be applied to such properties Recovery of arrear rates, Telkom notes arrears

will be recovered from the lessee if lessor fails to meet payment, asks that Bill specifically supersede all other legislation in this regard

Bill must provide for physical inspection Bill must provide for variable rating

Transnet

In terms of current definition stations and ports will be ratable

These are basic facilities needed for growth and functioning of Transnet’s operations

Propose that Definition be expanded to read… “railway lines and all railway infrastructure

required for the functioning of the national railway system” as well as...

Transnet...

All port infrastructure and lighthouses required for the functioning of the national harbour system

Further propose that infrastructure be defined as …

(a) an underlying base or supporting structure

Transnet ...

b) the basic facilities, equipment, services and installations needed for the growth and functioning of a country, community, operation or organisation.

Eskom

Definition must substituted with … “power stations, substations, ancillary related

telecommunication infrastructure, water pipelines, coal conveyer belts, dams, water supply reservoirs, railway lines required for the generation and supply of electricity or power lines forming part of an electricity grid or scheme serving the public”

Public service infrastructure research and best practice Sandy Bond and Peter Dent, Journal of Property Valuation

and Investment, Volume 16 (1998) Extensive practical and literature assessment of valuing non-

market, non-investment properties in the public sector One of the basic issues…public sector institutions fail to keep

comprehensive record of their land/ property holdings Within public sector property holdings a likely conflict

between profit- motivated property management and socially responsible property management

Basis of “performance” of public assets needs to be clear

Research and best practice

Single point monetary valuation of public infrastructure may fail to recognize and realize the social benefit of public infrastructure

Effective performance of public infrastructure has to reflect both qualitative issues and hard measures (social responsibility and financial measures)

Often public assets are limited by restricted rights Yet asset ownership by the public sector is widely regarded as an

economic issue in the widest sense Valuation of public infrastructure is often complicated by

unresolved issues such as which assets to include in financial reports

Research and best practice

Valuation criteria to meet … relevance of the measure and reliability of the measure

No one best set of valuation practices exist Conventional valuation approaches have limited relevance and

reliability in respect of public infrastructure Good practice pre-requisites include…

– recognition of relationship between public sector asset and private sector comparable

– inclusion of the value of any trading potential of the asset– a quantification of the worth of the asset in social terms– an appreciation of the quality of the building from both a maintenance

and cost perspective, as well as potential flexibility in use

Research and best practice

Some scholars view valuation and rating of public infrastructure as “largely an exercise in futility”

Others argue that public infrastructure can be valued and that exact market values are not required unless sales are anticipated

NZ uses government value as opposed to sales (market) value in respect of public infrastructure

This shows a 14% national average discrepancy Most countries place public infrastructure assets into three

categories, namely specialized properties, non-specialized properties and plant and equipment

Research and best practice

Common valuation problems are … lack of sales comparisons, ie difficult to apply simple market value

approach monopolistic nature of services rendered by public utilities makes it

difficult to apply net income approach use of cost based approach is popular but limited, because many value

determining factors such as location are ignored

Cooper however points out, that in spite of valuation difficulties very few

governments have difficulty with sale of public assets to private interests

Cooper also states that Corporatisation effectively removes the “public good” nature of public infrastructure

Research and best practice

Literature indicates that the replacement cost approach has been traditionally relied upon where no active market exists or the assets are non-income generating

It enables the valuer to determine what the market price

would be, if there were to be a market

Valuation and Rating of Conservation Land and

properties

Policy issues and options

11 June 2003

Current draft of the Bill

15 (2) (e) any state owned land declared as a national or provincial protected area, excluding any such part of such area which is used for commercial or business purposes

Three fundamental issues…

Definition of protected area Private land earmarked for conservation/

bio-diversity purposes Effect of rates on conservation

Specific issues and concerns raised by conservation bodies Definition of protected area must accord

with definition in Protected Areas Bill (draft 10)

This includes Forests, World Heritage sites and Mountain Catchment areas protected areas, and by implication private and communal land on which a protected area is created

Specific issues and concerns...

The Bill (should) “exempt” any land in a protected area from municipal rates, ie not just state owned land

Also no exemptions for any other conservation areas, eg (private) areas not included in Protected Areas Bill

Important to limit applicability (of exemptions) to only the most deserving areas and not the range the bill currently includes

Important to include those (private) landowners whose rights would be curtailed by being contracted into a protected area

Specific issues…rates policy

Municipalities must be forced to consider the effect of rates policy on natural resource conservation and sustainable land management (eg alien clearing)

Municipalities must consider the effect of rates policies on Threatened Ecosystems as defined and listed in the Bio-diversity Bill

Proposals on how to implement ..

Concern: Exemption provision in current draft of the bill may be open to abuse by a wide range of actors

Proposal: National Bio-diversity Framework can ID areas for conservation action or inclusion in protected areas

Land owners can pick up these costs Other properties can only become eligible for inclusion if

located in an area identified in bio- regional plan, subject to

approval by the MEC or Minister

bound by a management agreement with the MEC or

Minister in terms of Protected Areas Bill

Proposals on how to implement (2). Concern: Municipalities cannot quantify their

exposure to rates relief for private land contracted into protected areas

Proposal: Conservation authorities can do most of the administration involved in identifying private land that qualifies in terms of Protected Areas Bill

Perspective: Preliminary studies indicate that the revenue foregone may be as low as 2% nationally

Proposed changes to Bill

Adoption of Rates Policy (Section 3) ... add (h) to 3(2)... take into account the effect of

rates on encouraging conservation of natural resources and sustainable land use; and

(i) take into account the effect of rates on promoting the conservation of Threatened Ecosystems as listed in the National Environmental Management: Bio-diversity Bill

Proposed changes to Bill ...

Principle …rates should not be used to penalize landowners committing land for public benefit in protected areas

One of strongest incentive to get landowners to “effectively donate” the conservation use rights of their properties is exemption from rates

Note (1) …no exemption for buildings or commercial activities is requested

Note (2) No request that private game farms or any type of

informal conservation area be exempted

Proposed changes to Bill ...

Definitions “protected area” means any area listed in

terms of section 9 of he National Environmental Management: Protected Areas Bill (2003) as an area for the conservation of biological diversity in the area or the preservation of the ecological integrity of the area

Proposed changes to Bill...

Changes to Section 15, Part 3, Limitations on levying of rates

15 (2) (e)… any State Owned land declared as a national or provincial protected area, excluding any such part of such area on which improvements have been erected is used for commercial or business purposes

Research and emerging practices

Approaches to Valuation and rating of conservation land/ land earmarked for conservation purposes has an impact (positive or negative) on conservation / bio-diversity management

Some proof that valuation and rating practices may enhance achievement of conservation objectives

Some policy options...

Some policy options

National Government bears the costs of income forgone for a period of time

Allow rates to be deducted from income of landowners who enter into legally binding conservation agreements

Exempt from rates all land that is covered by a binding conservation agreement

Value (high value) conservation land on the basis of current use rather than basis of development potential

Exclusions, exemptions, reductions and rebates

A framework for discussion

11 June 2003

Towards a common understanding of terms Exclusion …excluded from valuation and rating by

means of legislation, municipality cannot levy rates on excluded properties

Exemption…municipality may decide to value but to exempt from rates or may decide exempt from valuation and rating

Reduction…property is valued and rated, but rates are reduced

Rebate…a % discount granted by the municipality

Key considerations

All of the aforementioned result in (1) a reduction in total realizable municipal revenue, and (2) a distortion of the local revenue base

Need to assess the application of the above against the objects of the Bill

Need to be clear on impact of the application of the above on the IG fiscal dispensation

Key considerations...

Need to be clear on who (what sphere of government) should decide on / exercise discretion over what, eg is it appropriate for national legislation to set / predetermine elements of local policy?

Asked differently what belongs in a national framework….what belongs at local level?

Some suggestions

Set framework by being clear on what will be excluded

Set framework by being clear on what needs to be valued

Set framework by being clear on what needs to be rated

Leave optimal discretion about what to exempt, what to reduce and what to rebate to local decision makers