Property Rates Bill: public service infrastructure submissions

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Cooperative Governance and Traditional Affairs

05 August 2003
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Meeting report

PROVINCIAL COMMITTEE FOR PROVINCIAL AND LOCAL GOVERNMENT
6 August 2003.
PROPERTY RATES BILL & PUBLIC SERVICE INFRASTRUCTURE

Chairperson:
Mr Y I Carrim (ANC) Co Chairperson: Mr J M Ngubeni (ANC)

Relevant Documents:
Local Government: Property Rates Bill [B19-2003]
Department of Local Government Property Rates Bill: Public Service Infrastructure

SUMMARY
The Committee were taken through a summary of the Public Service Entity submissions and the Department provided a response to the submissions from Public Service Entities. SALGA and Telkom provided specific input on the issue of Public Service Infrastructure.

MINUTES
Mr Y Carrim (ANC) introduced his co-chairperson, Mr Ngubeni. He outlined the objectives of the meeting. The Committee was to conclude deliberations on the Environmental Sector. Mr Mark Botha from the Conservation caucus would be called to present again to give more clarity. Mr Ngubeni would take the Committee through a discussion of Public Service Infrastructure (PSI). This discussion was to be framed around Clause 15 of the Bill. He said that a subcommittee would be created to deal with PSI with Telkom offering a tour of their PSI to substantiate their submission.

He asked the ODA to present the debates on the expansion of the definition of PSI and he asked Telkom to present in order to give more clarity. He said that the Committee could take steps forward but it would be hard to reach conclusions today on some issues. On the issue of schools and religious and welfare organisations a decision could be reached because the Committee was in agreement.

Department's response to submissions from Public Service Entities
Ms Jackie Manche pointed out the constitutional basis for exclusions, which was Section 229 (2) (a) of the Constitution, which allows for rates in a way that does not materially and unreasonably prejudice national and economic policies and activities across municipal boundaries, or the national mobility of goods, services, capital or labour.

Ms Manche said that the criteria used to determine public service infrastructure was based on compliance with constitutional requirements. The other factors that they took into account was commercialisation and the meaning of a public entity - balancing the need for revenue with the public good of a service. They had met with parastatals in order to iron out the problems. This was apparent in the defining of towers and the exclusion of masts.

Ms Manche noted that ancillary infrastructure had to be looked at specifically because some entities used this infrastructure to provide a service to another unit and not to the public. She argued that it should be seen as normal business because it has nothing to do with the end user. She pointed out that the Bill was consistent with the Telkom Act. She highlighted that consistency with the definition of telecommunications infrastructure does not imply that the exclusion must cover all telecommunications infrastructure. Ms Manche said that the department was clear that only the portion of telecommunications infrastructure that meets the criteria would be excluded. She explained that the definition was consistent because the Property Rates Bill did not define telecommunications infrastructure but only referred to a portion of it.

She said that exchanges were housed in buildings and that in terms of rating they should be seen as a building and treated in the same way as other structures owned by parastatals and government. On the issue of masts she said that masts are functionally similar to towers but on revisiting the matter it appeared that towers do not meet constitutional requirements. Telecommunications and electricity transmission lines cross municipal boundaries and are excluded since they meet the constitutional requirements.

On the issue of land on which rights of way exist, Ms Manche said that the rights, easements and servitudes in connection with PSI are excluded but not the land around it.

The usage of the term "across municipal boundaries" was derived directly from Section 229 (2) (a) of the Constitution. Exclusions with regard to PSI are directly connected to economic activities across municipal boundaries and national mobility, which implies a crossing of municipal boundaries and not to national economic policies. Ms Manche concluded that there was no constitutional basis for removing the term "across municipal boundaries" from the definition as this would substantially alter the meaning and intention.

Mr Carrim said that the ODA should make an input because PSI entities have raised other issues. He gave an example of Telkom who had raised the issue of PSI on privately owned land - raising the question as to whether part of the private land should be excluded. Telkom also raised the issue of special rates for PSI.

Summary of Public Entity Submissions by the ODA
Ms Zora Ebrahim said that Telkom had specifically motivated that there was a high probability that there would be a negative impact on their cost structure. Telkom had also submitted that serving the public good should be internal to municipal boundaries because across municipal boundaries serves the same purpose as within the municipal boundaries. Telkom had also motivated for a special rate for PSI. She said that the company also supported the lessee paying arrear rates. She pointed out that Telkom also wanted a provision for physical inspection.

Ms Ebrahim defined Transnet's issues around the need for a more relevant definition of the term 'infrastructure' and the recognition of the underlying base of the supporting structure with reference to exclusions. For Transnet all port infrastructure formed the national harbour system, therefore it should be excluded.

She said that Eskom wanted a broader definition of the term 'infrastructure' to include power stations and telecommunications infrastructure. Eskom wanted the test to not only be based on goods and services but also what the service was to be eligible for exclusions. She said Venn Diagnostics were concerned with the definition and that public entities such as SANPARKS and GRAINSA felt that they were contributing to PSI.

She highlighted the counterproposals from the South African Local Government Association (SALGA) for the rating to be based on structures and not on service. COSATU and the International Land Value Association were concerned about the issue of privatised public goods being exempted.

Ms Ebrahim brought up the issue of international best practice. She said that an issue that needed to be looked at was what would it cost the state to replace that utility structure. She pointed out that replacement cost is based on lack of comparative sales data, which is further limited by other factors such as location. She closed by saying that one has to value according to the public good nature of the infrastructure and not on the blanket conclusion that all PSI should be excluded.

Discussion
Mr Carrim questioned the use of 'municipal boundaries' derived from Section 229 and if they are not national economic boundaries. He asked three questions, why can boundaries be used as a basis of defining PSI and why exclusions were to take place solely based on Section 229l. The Bill's framework may limit how municipalities might want to work with rates. He said that he would welcome interventions not all linked to Section 229. He pointed out that as it stands the Bill was moving towards a prescribed exemption. He repeated his question about why it was not possible to use national economic boundaries as the basis for exclusions.

Mr P Smith (IFP) noted that he had an issue with the department's reading of Section 229(2)(a). He did not see the link between the Section and exclusions. According to his reading, municipalities could apply rates to everything as long as it was not unreasonable. The Committee was creating exclusions based on this Section but there was no link to exclusions.

Mr J Ngubeni (ANC) said that the Committee should be clear about terms. He raised the issue of the term 'municipal boundaries' and the provisional powers of municipalities. He repeated Mr Smith's question s to whether the Committee could add exclusions to Section 229. He said that to assist them on the issue of the usage of municipal boundaries, the department and the ODA should make submissions.

Ms Manche explained that municipal boundaries was an issue in the way that it was being read. She said that Mr Smith is correct in questioning original power as to who can rate and collect. She said that the Constitution was there to regulate power. Based on legal advice, they did not have the regulating power to tell municipalities what to include or exclude. The only way is to use national legislation to have exclusions through Section 229(2)(a). Ms Manche pointed out that the only way for national legislation to have authority was from Section 229. National economic policies are covered by Clause 15(3) and (4) and the national minister can come up with ratios. She said that the only way that the country can protect the Minister is to start to limit and it is the only way to limit municipalities. Municipalities have the ability to prejudice economic policies. Ms Manche pointed out that the test is the use of power in an unreasonable manner. She said that the mobility of goods & services across municipal boundaries means that municipalities can apply rates on a railway line from Johannesburg to Cape Town. This in the national legislation, we are able to begin to exclude railway lines to avoid this.

Mr Smith said that in his legal opinion there was no basis for exclusion. He said that creating mandatory exemptions is the same thing as exclusions. He asked the Committee if they had the power to exclude.

Mr Ngubeni observed that you could not have Section 229 as the basis for exclusion. He asked if exclusions could be created through an act of parliament.

Mr Smith pointed out that religious organisations did not fall under Section 229.

Mr B Komphela (ANC) agreed with Ms Manche that Transnet would not be able to pay different municipalities different rates through each boundary. He said that there would be an adverse impact on the people. He felt that it did fall within Section 229 because it would hinder economic growth. He said that Mr Smith should reverse his argument.

Mr S A Mshudulu (ANC) said that Section 229 is sufficient as a basis to dictate exclusions.

Ms Shiva Makotoko (SALGA) commented that exclusions must be done very carefully because there is an exhaustive list of what exclusions can be. Ms Makotoko said that the submission should be based on structure and not what the public good is. National law should prescribe according to the Municipal Systems Bill. She said that you could legislate but questioned whether the Committee could prescribe and if they did what would be prescribed.

Mr Carrim pointed out that none of the Committee had legal skills to adequately debate the issue. He asked what the constitutional basis for limits of exclusions would be. The Chair said that he did not want to send the issue to study groups tomorrow as they did not understand the practical implications of the Bill. He said that the majority of the Committee felt that there should be a level restriction. He felt that the Committee should deal with policy issues first then they could give the department the mandate to go and look at the legal issues. Section 229 can exclude and prescribe - the Committee would just have to get a legal opinion. Section 229 is not the only basis for exclusions because it does not exclude churches and schools. The Chair said that the experts will have to decide what cannot be excluded and they would have to look for framework.

Mr Ngubeni asked the ODA to respond.

Ms Ebrahim said that in all the legal submissions made on this Bill not one of them questioned Section 15. She pointed out that only two municipalities questioned passing on discretionary power to MECs and the Minister.

Ms Manche said that when the department drafted the bill, municipalities did have original power but national legislation does not have any other power except Section 229 (2) (a). She said that if you use it the clause is relevant because it is authorised by legislation. Ms Manche pointed out that Section 15 draws directly from Section 229 (2) (a). She questioned whether national legislation could impose limits and she said that it could. She also asked if you could restrict and impose and she answered yes again because it draws from Section 229. Ms Manche added that there is a provision in national government to do that and that restrictions and limits are already imposed by national legislation.

Ms Manche explained that the second part of Clause 15 gives precise examples on the broad categories. She said that there is an exact list of those categories but it does not exhaust limits. It gave one exact types of issues but it was not an exhaustive list of what the municipality can do. She repeated that the only authority to begin to impose limits was through Section 229.

Mr Ngubeni said that in order to move forward they should put the matter aside until there was a discussion on exact issues. Mr Komphela agreed and reminded the Committee about the ODA argument that this issue was not challenged by any of the legal submissions. He did not think the Committee should stall the process.

Mr Smith asked whether the Committee had the power to exempt and that this issue should have been mentioned before.

Mr Carrim commented that if Section 229 excludes the Committee from exclusions what do they actually want. He felt that the Committee should stop wasting time and that the Committee should send through what they want which will be looked at by the lawyers and what is rejected will be looked at again by the Committee. He pointed out that it was too big an issue to relent. He noted that the department did not convince him and that Section 229 was an academic question.

Mr Ngubeni motivated again that the matter be put aside. He said that in order to deal with PSI the Committee would need to know exactly what public entities wanted, then they would re-look at Section 229 with more understanding. Mr Mshudulu added that Telkom should present so that the Committee could get an idea of what PSI is.

Ms Manche asked the Committee what they wanted the department to do about this matter.

Mr Smith suggested that the department should refine their response to Section 229(2)(a) by answering if the Committee could exclude, if the Bill could use Section 229 for exclusions and if the Bill can use other sections to create exclusions.

Mr Carrim said that there were no lawyers present so the Committee should just deal with the policy issues according to what the Committee wanted to see instead of first going to a lawyer and delaying the process.

Mr Smith said that if the department was going to get a legal opinion, the Committee should wait. He motivated that the constitutional issue should be sorted out first.

Mr Ngubeni observed that both views had compelling arguments but also that they could be done simultaneously.

Ms Makotoko said that she was in support of the ODA when they looked at process and said that the Committee should be looking at policy issues. She said that public good versus service to the end user needed to be debated. From a policy perspective what is the criterion of service to end-user?

Mr Nico Machlalan (ODA) said that the Committee should shift gears and look at policy. He summarised a 5-point framework for policy discussions:
- to ensure optimal local base revenue.
- the outcome should be based on Section 229 granting legal exclusions rather than exceptions to the rule.
- the Committee must assume that all property is central to core business undertakings
- there must be an understanding of current practices because certain PSI are subject to ratings and valuations
- the impact of possible revenue forgone if the Bill grants exclusions.
- when engaging public enterprises one should be aware of the tax status of these entities.

He pointed out that it is important to look at the impact because of issues like negative cost of business. Public entities should submit their current tax status and in the future because public entities can manifest themselves in many different ways. He reminded the Committee that they should look at what is central to core business or not.

Mr Carrim commented that the Committee should write to parastatals to get the information that they did not have. The crucial principle was the notion of state owned versus private owned. He pointed out that for the majority party in a social democracy they wanted to ensure optimal level of funds for local government and this must be balanced. He was not impressed with the threat from public entities that rates would result in charging the public. He questioned whether all PSI goes into the category of public good. In a social democracy an unfettered free market is not on the cards. The issue was centred on state ownership versus private ownership and the good of the state versus social good. Exclusions as an exception was an ideological debate. He pointed out that the Committee had to balance the approach of optimum revenue base taking into account the consequences of excluding exclusions.

Mr Ngubeni said that the Committee should go through the SALGA and Telkom submission. He said that in the arguments presented by PSI entities the submissions should cover why the definition of PSI needed to be expanded, why they were calling for total exclusions and the cost to business and the threat to pass on the cost to consumers.

Mr Carrim added that Telkom should cover the issue of physical inspection. From his reading the Committee was opposed to physical inspection. He said that to be fair Telkom should motivate strongly for physical inspection. He added that the issue of recovering the cost from the lessee should be discussed. He pointed that there was a general feel of a willingness to negotiate which was positive.

Mr Smith agreed with the Chair and questioned why physical inspection was not on. He asked about the market value of PSI. He pointed out that in order to have a market value you would have to have a physical inspection. He asked how you determine the market value and on what basis.

Mr A Lyle (ANC) asked that Telkom give a tax report and explain the status of the company.

Mr Komphela asked that parastatals all submit their tax status in their submissions. He said that the Committee should give them the benefit of the doubt.

Mr Ngubeni ruled that the issue was on hold until the submissions had been given. He asked SALGA to make their input followed by Telkom.

SALGA Submission
Ms Makotoko reported that the key question for SALGA was 'what are we excluding?' She said that for many municipalities their income was derived from equitable share. Exclusions if not controlled could limit the revenue of municipalities especially the smaller ones. SALGA supported the department but that exemptions should be based on structures and not on the goods and services provided. She asked that the department define what they meant by PSI more clearly.

Telkom Submission
Ms Cassandra Gabriel, Telkom Regulatory & Public Policy, submitted that there was a constitutional basis for exclusions. She said that Telkom was not nitpicking but was concerned about the actual intentions of exclusions. Telkom did see an impact on national economic activities and national policies. The department could not ignore that Telkom was governed by the national telecommunications policy and the restructuring of state assets and the needs of a developing country. Furthermore the history of Telkom had to be taken into account. Telkom's relationship with government also had to be taken into account. Their mandate to 'roll out' had a negative impact on profit. She brought up the notion of balanced competition. She said that Telkom had to roll out phones because private entities would not do that. She motivated that because of this, state owned enterprise had to be protected because the infrastructure is beneficial in assisting government in developmental plans.

She submitted that Telkom is a basic service that assists all forms of development. Ms Gabriel said that there should be an understanding that PSI should not be rated because it is prejudicial to the national good. She pointed out that the Committee should translate that. She explained that for Telkom their main concern was an exorbitant rates bill. Currently she said that Telkom have to deal with erratic municipal ratings therefore what are the rates going to be based on? She submitted that Land & Improvements would have an adverse effect on the company because that rating system will cause astronomical rates bills. Municipalities would want to get maximum benefit from rates thus there should be an acknowledgement of PSI in the Bill.

She noted that Telkom was happy to compromise on the basis of exclusions. She questioned the intention of the Constitution. She followed this up by pointing out that the definition was very subjective. She said that the definition must be taken from the Telecommunications Bill. She explained that Telkom did not want to be totally exempt from paying rates in fact they did want to pay rates for their commercial infrastructure. The Bill should either exempt or give a framework that would allow for a positive as opposed to a negative impact. She pointed out that in the future all communications would be linked and what implications would that have on the Bill. She motivated that the Committee should support what national economic policies are pushing. Local government should not be detrimental to the actions of national economic policies. She concluded by saying that the department should speak to the Department of Communications.

Discussion
Mr Ngubeni said that the issues were - the extension of the definition, to what extent did Telkom want to pay property rates, Telkom's treatment in the various provincial ordinances, how Telkom's properties were valued, how Telkom currently paid rates, what Telkom considered fair, what the public entities current and future tax requirements were and their views on what SALGA was saying.

Mr Carrim commented that the Committee could not expect Telkom to respond to all the questions now. Issues such as physical inspections could be dealt with now. The Committee could not constantly defer issues, they had to make decisions. The Committee was having abstract discussions and not making any decisions. He pointed out that lighthouses had been dealt with by being inserted as PSI.

Mr Ngubeni agreed that Telkom did not have to answer all now but that certain areas could be responded to.

Ms Gabriel said that she was not too sure what the Committee wanted.

Mr G Grobler (DA) asked about land valuation. Did Telkom pay different rates in different areas? He also asked if valuation included houses of employees.

Ms Gabriel explained that they paid different rates across the country. In some municipalities it was land and improvements and in some cases just land. She pointed out that there was no national system so the Bill assists in that respect. Ms Gabriel explained that the basis of the problem was the exact meaning of land and improvements and what does it mean for Telkom. She noted that the valuation did not include private homes of employees but only operation and core network properties. She repeated that they had no issue with income generating properties. She highlighted the problem of core network properties that include a tower and a mast together with exchanges that houses equipment to direct calls.

Mr Smith wanted a detailed argument to substantiate that Telkom should get a special rate. He pointed out that just because there might be land and improvements valuation, did not mean that Telkom would pay more. He said that it was a building versus content issue. He was not convinced by the arguments and agreed that Telkom was using 'scare' tactics. There was no problem in paying rates rather the issues was rates on PSI.

Ms Gabriel said that Telkom had a regulator ICASA that ensured that costs remained low because they were the ones who decided what core networks elements were. ICASA decides what can be charged as a cost of a call and they were not allowed to include commercial costs in this. She said that land and improvements was not specific about how the rate would be calculated. It was reasonable if the rating was based on land and improvements if it did not include equipment.

Mr Komphela added to Mr Smith's point by questioning to what extent that Telkom was losing out. They cannot assume that the impact will involve an increase. On the issue of physical inspection the Committee had to be consistent in saying no to physical inspection based on the capacity of municipalities. Only in the case of a dispute should physical inspection be allowed.

Mr Mshudulu said that it was encouraging to see Telkom move away from wanting to pay no rates at all. He said that the input was confusing not withstanding a questionnaire being sent out to public entities. He asked that the questions also be answered by SALGA.

Mr Ngubeni asked about the expansion of the definition to include telecommunications. He asked the entity what they suggested.

Ms Gabriel questioned how one values what is market value because who wants to buy an exchange? She said that the position on physical inspection was reasonable. The elaboration of the definition should include critical communications because that wording catches everything. She explained that PSI and core network elements perform national economic services across national boundaries. There should be an alignment of the Bill with other acts and there should be clarity between different acts. She asked what the impact would be in rands and cents.

Mr Grobler asked what Telkom's experience was with land versus land and improvements and asked what their payment difference was. He asked which one was higher.

Mr Smith pointed out that if Telkom was doing an assessment it was based on false assumptions. He repeated that just because one uses the land and improvements value method, does not mean higher rates. Those assumptions will result in an incorrect outcome. He said that Telkom should work with the department.

Ms Dudu Thwala (SALGA) commented that the questions that had been asked of Telkom should be disseminated to all municipalities to assist municipalities to serve the purposes of legislation. She said that currently there are erratic systems of rating and a uniform system would be more helpful. She pointed out that the questions were useful.

Mr Carrim asked the Committee to agree on what is core network elements and what is not. Secondly he asked about Clause 15(3) of the Bill and its use as a safety valve. He pointed out that the battle was not just the definition of PSI but rather strengthening other areas of the bill to be protected by the Minister. A further issue was the uncertainty as to whether PSI serves the public good and you cannot give a rands and cents value to that. Clause 15 (3) would protect Telkom because the Minister could come to their aid. He questioned whether they were competent as politicians to include or exclude masts or towers. The department should work more closely with Telkom.

Dealing with process, the Chair said that the sub-committee should arrange to meet with Telkom in the next two weeks to discuss the questions posed to it. The Committee should look for "safety valves" and that they should go through the points and deal with issues now. He noted that there were two views about physical inspections.

Mr Komphela repeated that physical inspection was not necessary. The capacity of local government was limited. If there were any dispute, then the appeals board that deals with property inspection would resolve the matter. This approach gave consideration to the huge financial cost implications to municipalities.

Mr Carrim asked what the department had to say. He pointed out that property information was tricky. The Committee might want to value to see what they are working with. He said that the Committee could not make it a precondition.

Ms Manche said that as the bill is currently formulated it allows for property inspection but it is optional. She emphasised that it is not precluded but nor is it obligatory. Ms Manche explained that once it was made mandatory, every property would have to be inspected. She asked the Committee to think of the implications of that. It makes more sense to make it optional and to only inspect if there is a dispute.

Mr Carrim said that no one wanted to prescribe. He asked if they could not slot it in gently. He also asked if it was problematic to report to Parliament.

Mr Grobler said that property inspection was good for information purposes for municipalities and bigger municipalities do have the capacity.

Mr Smith said that a firm instruction should be put in. Initial valuation was important - but that the issue was rather meeting the payment of the private valuer.

Mr Komphela said that physical capacity had no relevance, it was financial capacity that was an issue. He said that some small municipalities have huge Telkom infrastructure.

Mr Carrim pointed out that they were debating the wrong issue. He said that the issue is simple, send the report to Parliament and municipalities. It cannot be left the way it is. He emphasised that they were not forcing municipalities to do it - rather they were encouraging them to do it because municipalities need property information. He said that he would draft the wording for this proposal.

Mr Smith said that another approach was a Valuers General's Office which would enable uniform valuation. The Committee should run with that approach as each municipality values PSI in a different way and how would one structure that?

Mr Carrim asked what the government was saying. He pointed out that there was a massive public sector investment based on managed privatisation. No one knew the future of public entities - it was an uncertain sphere that the Committee was dealing with. The Bill not only had an impact on property rates but also an impact across the board. He noted that the Committee would deal with outstanding issues for an hour at the next meeting.

Mr Ngubeni said that there was an issue outstanding of Section 15(3). He asked what the issue was and about the expansion of the definition.

Ms Manche said there was a lot of work that the department needed to do before the bill was passed and that they would use the deliberations as guidelines.

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