Property Rates Bill: briefing on public service infrastructure

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Cooperative Governance and Traditional Affairs

09 June 2003
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Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
10 June 2003
PROPERTY RATES BILL: PUBLIC SERVICE INFRASTRUCTURE

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Property Rates Bill and Public Service Infrastructure: briefing by ODA
Local Government Property Rates Bill (B19 of 2003)
Eskom submission
Telkom submission
Transnet submission
Draft Committee Report on Provincial and Local Government Budget
Supplementary Report: Draft Resolution on Report on Study Tour of Municipalities

SUMMARY
The Committee continued the debate on conceptual issues arising from the Property Rates Bill with a briefing on public utilities and the criteria for exempting aspects of their infrastructure from property rates. The Eskom, Transnet and Telkom submissions were considered.

MINUTES
ANC Study Group report-back
The Chairperson summarised the discussion on Land-and-Improvements by saying that Land and Improvements was prioritised as the first option for base valuation. He did add that site value rating has value but that every Municipality should choose whether site value rating is possible under its set of circumstances. The Committee needed to confer with Municipalities and invite them to present what it means for them.

The ANC study group had come up with 3 considerations for the criteria to offer either Option 1 or both. The three considerations were that property rates:
- should take cognisance of the legacies, contexts, locations of different classes - for example, property rates should not undermine the steps that the upper working class has made.
- need to racially desegregate space and
- should recognise the majority party's broader society manifesto on non-racialism.

He pointed out that the department must take into that it is not fair to base property rates solely on the income that people have. There was no international conclusive evidence to support basing property rates on people's ability to pay.

The Committee must be clear about what the criteria and basis for decisions on property rates are. It must be clear why the Committee is in favour of land-plus-improvements. Their aim was to structure their decisions and make up a framework for the Bill.

Discussion
Mr Sithole (ANC) mentioned that according to the Business Day there are 14 different types of Property Rates. He asked that the 14 different rates be identified and asked that the department be included in this discussion.

Mr Carrim agreed that the 14 different rates should be itemised because there has been a clustering of the rates in regards to the discussion. He highlighted that through the unpacking a good critique of annual value and municipal cost depreciation needed to be done.

Mr Doman (DA) asked for clarity on the three points that made up the criteria.

Mr Carrim named these as ensuring that the Rates Bill was in line with the manifesto of the majority party on non racialism, take cognisance of that fact that valuation must not prey on newly emergent classes and promote the racial desegregation of municipalities.

Mr Sithole (ANC) pointed out that it was important that all participants agree that the point that the committee has reached is appropriate because it was not helpful when participants who were not there throughout the whole process, sabotage what has been done thus far due to misinformation.

Briefing on Property Rates for Public Service Infrastructure
Mr Nico Machlalan (Organisation Development Africa) emphasised that the presentation would deal only with Public Service Infrastructure (PSI) - that is the major utilities - Telkom, Transnet and Eskom. The presentation was a summary of the wealth of research available in this area and he suggested that a meeting between the committee and the experts in this field would be beneficial.

He defined the context of the presentation within the realm of big utilities and diagnostics. The purpose of the discussion was to consider policy issues and options in respect to:
- the valuation and rating of PSI
- conservation land and conservation properties
- exclusions, exemptions, reductions and rebates.

Mr Machlalan explained that the definition of PSI was very specific in section 15 (2) (a) in the Bill.

He summarised the proposals for amendments raised by the major utilities:

Telkom states that there is a high probability that the Bill will have a negative impact with costs rising. The problem is that the current definition of PSI excludes substantial parts of the country's telecommunications infrastructure and they proposed the inclusion of "all public telecommunications infrastructure including masts, exchanges and the housing used to accommodate exchanges" into the definition.

Telkom also wanted rates policies to be made subject to exemptions in section 15. If there were to be no exemptions then a special rate should be introduced solely for properties containing public service infrastructure. An area of concern was the recovery of arrears rates. Telkom noted that arrears are to be recovered from the lessee if the lessor failed to meet payment Telkom asked that the Bill supersede all other legislation in this regard. The final concern for Telkom was that provision must be made for physical inspection and for variable rating.

Transnet notes that under the current definition, stations and ports will be rateable. Transnet's concern with this is that their facilities are basic facilities, which are needed for growth and functioning of Transnet's operations. It proposed that there be an expansion of the definition to read "railway lines and all railway infrastructure required for the functioning of the national railway system" as well as all port infrastructure and lighthouses required for the functioning of the national harbour system". Transnet further proposed that the word 'infrastructure' be defined as (a) "an underlying base or supporting structure and (b) as "the basic facilities, equipment, services and installations needed for the growth and functioning of a country, community, operation or organisation".

Eskom had asked for a substitution in the definition so that it read as "power stations, substations, ancillary related telecommunications 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".

Mr Machlalan explained that there are different practices throughout the world regarding PSI. His remaining presentation highlighted the research around PSI and best practice in order to assist the Committee in the choice of criteria. The valuation criteria should meet the relevance of the measure and reliability of the measure. Conventional valuation approaches have limited relevance and reliability in respect of public infrastructure. In order to achieve this factor one needed to have good practice prerequisites which include:
- the recognition of the relationship between the public sector asset and the private sector comparable,
- the inclusion of the value of any trading potential of the asset
- a quantification of the worth of an asset in social terms
- an appreciation of the quality of the building from both a maintenance, cost perspective, as well as the potential flexibility in use.

Mr Machlalan explained that most countries placed public infrastructure assets into 3 categories: specialised properties, non-specialised properties and plant and equipment

He highlighted the common valuation and rating problems as:
- the lack of sales comparisons so it is difficult to apply the simple market value approach
- the monopolistic nature of services rendered by public utilities made it difficult to apply the net income approach
- the use of cost based approaches was popular but limited because many value determining factors such as location are ignored.

Mr Machlalan pointed out that it should be remembered that in spite of valuation difficulties very few governments had difficulty with the sale of public assets to private interests. He also stated that corporatisation effectively removed the 'public good' nature of public infrastructure. He concluded that the literature indicates that the replacement cost approach had been traditionally relied upon where no active market exists or the assets were non-income generating. It enabled the valuer to determine what the market price would be, if there were to be a market.

Ms Z Ebrahim (ODA) added that according to diagnostics the factors that needed to be taken into consideration were the definition of property, cost boundaries of regional and local railway systems, the meaning of cross municipal boundaries and the meaning of 'right of way' as it meant different things to different municipalities.

Discussion
Mr Carrim highlighted the fact that the issue being dealt with was very technical but what needed to be focused on was what criteria should be used. The Department would be given a chance to input and respond the next day.

Ms Ebrahim of ODA wanted to know if the definition of property referred to the whole or part of the urban property with public infrastructure on it. She also pointed out that right of way was not properly defined as it might mean different things in different municipalities.

Mr Manyike (DPLG) said that all property was subject to rating but took account of Section 229 of the Constitution.

Ms Manche stressed that their departure point was that all property is subject to tax. The second thing was to determine what legal and mandatory exclusions were applicable. Thirdly, they take into account the fact that Telkom, Transnet and Eskom perform public services and it was important to ensure that this duty was not compromised. The fourth point was to look at service providers such as airports and determine which of their infrastructure would prejudice the commuters if levies were imposed despite the fact it a commercial entity.

The Chair wanted to know how section 229 was being used. Could it be said that simply because public goods was being used for commercial use, that it was undermining section 229.

Mr Lyle (ANC) commented that, in these parastatals, people were reaping profits and using the public infrastructure argument to avoid paying rates.

Ms Manche pointed out that it was not easy to determine what was a public good especially in commercialised services.

Ms Ebrahim pointed out that minor definitions such as toll road had to be clarified to avoid problems. In terms of the definitions, a toll road would be excluded.

Ms Manche pointed out that this was not a national road but a concession. It only becomes a national road when it goes back to the government.

The Chair agreed that definitions had to be clarified to avoid confusion.

The next issue was to determine what is "public goods"

Mr Durand said that the impression was that it is public goods in public hands. On the other hand, the moment any public goods fall into private hands, someone makes a profit. This issue needed clarification.

Ms Manche said it was not so neat because you have some entities that are still in the process of commercialising and it is not clear where they belong. The difficulty was also that these entities had a large degree of autonomy as regards the profits they made and such related decisions.

Telkom
The Chair wanted clarity on the issue of physical inspection proposed by Telkom

Mr Manyike said that in terms of their definition they excluded all their property from taxation. He said that this theoretically caused problems.

The Chair wanted to know why TeleKom should be treated any differently from other entities providing public services. He also wanted to know why there was a need for variable rating as requested by Telkom.

Mr Sithole (ANC) asked what categories of rating Telkom had nationally. From their submission, the impression was that government had a mandate to deliver, but now Telkom was doing government's work. Under what circumstances does Telkom pay rates, and if they do not, what criteria was used to determine this. Secondly, how has valuation been done?

On physical inspection, the Chair noted that the mood of the committee was that this should not be compulsory. It was agreed that physical inspection is ruled out as being compulsory. However he wanted to know why Telkom wanted it and why they should be treated differently from anyone else.

The Telkom representative replied that the uniform rating system did not take into account specialised areas. Some of the Telkom houses are only used to store equipment such as switches and that these could not be treated the same as residential property in the same area.

Mr Solo (ANC) said that if it is a house used to store equipment for transporting messages, it is serving a commercial objective and thus generating income. It should not be rated any differently from the surrounding property.

Mr Sono (ANC) said that varying standards are going to make the issue of rating cumbersome. He said the Bill has made provision for objections and that Telkom should make objections in terms of the Bill.

Mr Sithole pointed out that physical inspections will also impact on issues of capacity and that some municipalities may not be able to afford this.

The Chair said that physical inspection was not ruled out but that it was also not compulsory. Further, if Telkom were to be exempt, others would also feel they should be. The implication also is that the exemption would apply to the Second Telephone Operator.

Given the mood of the Committee, Telkom decided not to pursue the issue of physical inspections further.

Mr Sithole wanted a full picture on what was currently being done at Telkom regarding the issue of rating.

Telkom replied that currently certain infrastructure was excluded from rating but that they were paying for all others. Equipment-related sites were the only issue. Only some were paying rates.

The Chair said Telkom should at a later stage bring back answers to the following questions:
- What they mean by equipment
- Cost of such equipment
- International experience in this regard.
Further, he stressed the point that Telkom provides a vital economic and social service. The more it is commercialised the more this is going to have an impact on the community. The Department of Provincial and Local Government and Telkom needed to meet to iron out some of the problems raised and especially those related to definitions.

Mr Sithole said it was important to have a holistic picture of the issues. One must take into account history and the principles that led to the decision to have this Bill. Government is losing revenue and this must be addressed.

Transnet
Not much was debated as Transnet was not represented.

Ms Manche said that with Transnet the exclusion from rates would be those areas that move people such as rails. The property situated at stations was not excluded.

Mr Sithole pointed out that there are many properties belonging to Transnet that are lying vacant and decaying. He wanted to know if these are paying rates.

Ms Manche agreed and said that there is an arm that has been created to manage Transnet properties. They have more property than they have infrastructure. She wanted clarity on the definition of "railway infrastructure " given by Transnet.

The Chair proposed that the proposed definition be rejected, as it is too wide. He suggested that the DPLG and Transnet should meet during parliamentary recess to iron out such issues.

Eskom
The Chair pointed out that Eskom seems to have the strongest case from their submissions and much thought had gone into their preparation.

Mr Machlalan (ODA) pointed out that Eskom does not talk about their commercial interests which gives the impression that they would not have a problem if rates are levied from them, unlike Telkom.

Moving along, the Chair asked for confirmation that the rates being levied in residential areas was in fact different from that in the CBD (Central Business District). He said that from now on everything that is too general or suspicious in submissions would be excluded. The onus will be on those advocating for its inclusion to convince the committee.

Supplementary Report: Draft Resolution on "Report on Study Tour of Municipalities"
This report was adopted with amendments. It will be up for adoption in the House on 12 June 2003.

Report of the Portfolio Committee on Budget Vote 5: Provincial and Local Government, The Committee agreed that instead of going through the document line by line, the Chair could highlight the amendments that needed to be made and that members of the committee could point out any concerns with the document. Technical and grammatical amendments were made. The Report was accepted. The Democratic Alliance noted that they had reservations about the budget and were going to oppose it.

Meeting was adjourned.

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