Municipal Property Rates Bill: deliberations

Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
5 February 2004
MUNICIPAL PROPERTY RATES BILL: DELIBERATIONS

Chairperson: Mr Y Carim (ANC)

Relevant documents
Working draft of the Municipal Property Rates Bill (2 February 2004)
Local Government: Property Rates Bill [B19 - 2003 as originally tabled]
Memorandum on Supplementary Issues in the Bill by Venn Diagnostics

SUMMARY
A tentative offer on the table is that all public service infrastructure must be rated - which is international practice. However, public service infrastructure would be entitled to an automatic 30% exemption. The Minister would after consultation with stakeholders reduce the exemption to 20% in the course of time.

In the debate to decide if exclusions should be subject to valuation, the Department pointed out that national government would not guarantee funding for the exclusions. It would be the responsibility of municipal authorities to meet the cost for such valuation. The Department noted that the Municipal Finance Management Bill only obligates municipalities to keep an asset register. Municipalities that can afford valuation for all properties in their jurisdictions are at liberty to do so. Thus the Department is opposed to a blanket obligation. SALGA's view was there would be no point in withholding funds for such an important process as valuation. The Committee was divided on the issue.

MINUTES
The Chair said the Committee has tentatively agreed that exclusions should be subject to valuation.

Mr Mzilikazi Manyike (Department Director: Municipal Finance Policy) pointed out that the national government would not guarantee funding for the exclusions. This would be the responsibility of municipal authorities to meet the cost for such valuation.

Mr Ben Dorfling (South African Local Government Association) said if one understands the rationale for a valuation exercise there would be no point in withholding funds for such an important process. Valuation is not only important but also imperative for the following reasons:
- one needs to estimate the foregone income
- it is important for protected areas in case such restrictions lapse and there is a need to immediately bring the property into the rate bracket
- there should be a basis upon which exemption to rate is sought from the National Treasury
- general policy considerations
- where a municipality is experiencing cash flow problems which would indicate that there are many properties within its jurisdiction that have not been duly rated

The Chair said the Committee is moving towards the view that there is a strong case for rating exclusions. The Committee was left with two choices:
- municipalities should bear the cost of valuation and where there are no adequate funds,
- approach the Minister for funding consideration
The Chair noted that the second option is not feasible given its financial implications to the exchequer. The item has not been budgeted for.

Mr Grobler (DA) agreed that indeed exclusions need be valued. The only quagmire was how to do it.

The Chair suggested a provision whereby the Minister would be approached for valuation but that this should not create an obligation on the Minister to deliver.

Adv Grove (Department drafter) said that the problem is that it is not possible to legislate a provision with financial implications in this piece of legislation.

The Chair insisted that the best approach is for municipalities to approach the Minister to exempt them for undertaking such valuation where funds are not available.

Mr Lyle (ANC) said a valuation roll would serve as an information repository for the municipalities. The argument for valuation is therefore most compelling.

Mr Sithole (ANC) said due to the difficult process of transformation it is important to assist municipalities especially previously disadvantaged ones to update their asset register.

Mr Komphela (ANC) said he would side with the Department to the effect that should such a valuation become necessary, municipalities should bear the costs.

Adv Grove said that law obligates each municipality to rate all rateable properties. If the intention is otherwise, then the legislation should clearly state so.

The Chair noted that in practice one municipality could decide to give an exemption while others could rate similar properties. There was a case for uniformity.

Deliberations
Adv Grove said 'exemptions' would replace 'exclusions' in Clauses 14(2)(a) and (b) as well as 14(3) and 20(3)(a). There is a consequential amendment at 27(1)(a).

Mr Dorfling referred to Clause 20(3) and made the point that the rate must indicate the basis for the rating.

Mr Vaz (Department resident advisor) said that Clause 3(2)(c) only provides for an identification and not quantification.

The Chair noted that a quantification process is too onerous and costly.

Ms Jackie Manche, Department Deputy Director-General: Institutional Reform and Support, agreed that it is a complex process.

Mr Vaz said if one was to step up the exemption regime then quantification is obligatory.

Adv Grove noted that the initial draft had provided for quantification but it was taken out.

Mr Vaz referred to exemptions in Clause 15C and wondered why the provision in Clause 15A(hA) was not included.

The Chair replied that the Committee had debated the issue and passed the same due to policy considerations.

The Chair reminded the technical team to pick up areas of inconsistency when updating the draft so as to tighten up the Bill.

Ms Manche said that Clause 27(2) obligates municipalities to value properties they intend to rate

Adv Grove disagreed with this interpretation.

The Chair said that where the law makes provision for valuation of exclusions, municipalities should value their own properties whenever there is an intention to rate. It is purely a question of consistency.

Mr Vaz disagreed as there is no consistency issue there. In the latter case there is no income foregone for the municipality but rather the valuation is purely for rating purposes.

Ms Shiva Makotoko (SALGA) clarified that municipalities are not obligated to value all properties within their authority.

The Chair proposed that the issue be flagged for the subcommittee to consider it afresh.

Mr Dorfling said that if the principle is to value all assets, such valuation should also cover municipal properties as well.

Ms Manche said it is practical for municipalities to keep a record of all their properties. To obligate them to value all assets within their jurisdiction is committing them to huge financial bill for which they may not have made budgetary provision. This massive exercise may turn out to be frivolous in many instances and in any case this is not the trend internationally. The new Municipal Finance Management Act (MFMA) only obligates municipalities to keep an asset register. Municipalities that can afford valuation for all properties in their jurisdictions are at liberty to do so. The Department is opposed to a blanket obligation.

The Chair said Ms Manche's arguments were sound. In cases where a municipality does not intend to rate but it wish to value, it should be welcome to do so.

Ms Makotoko said the importance of valuing exclusions is that where a municipality wishes to remove the exemption and sell the property, it is easy to determine the market value.

Mr Dorfling reminded the Committee that there is a trend towards activity costing and feasibility study. A valuation report is critical in such dealings.

Adv Grove clarified that one need not value the property in order to comply with the Municipal Finance Management Act (MFMA).

Mr Grobler (DA) agreed with Ms Makotoko that when a municipality wishes to dispose of some of its properties a valuation report would come in handy.

Mr Sithole (ANC) reiterated that the valuation process would help some poor municipalities update their asset register.

The Chair noted that the politicians seem to largely agree with SALGA's position. But Mr Komphela pointed out that the discourse the Department had taken is based on sound principles. It is the issue of practicality that is at stake. The total cost implication is a thorny issue too. Voluntary evaluation is by far preferable to making it obligatory.

The Chair then noted that even politicians are divided on the issue. He ruled that the matter should be kept in abeyance until 9 February to give parties time to reflect on it over the weekend.

Adv Grove agreed that this kind of valuation is an unnecessary costly process and one that can be achieved within the MFMA dispensation.

The following clauses were deferred for further consultations:
- Clause 28(2)(b) : because it is a technical issues for SALGA and the Department to reach consensus
- Clause 30(1)
- Clause 31A : subject to some technical amendments
- Clause 32
- Clause 33(2)(b)(ii)
- Clause 35A : Adv Grove undertook to effect some amendments

The Chair asked why the municipal valuer has been given discretion at Clause 31A(5) instead of an obligation to fire those in the wrong.

Adv Grove explained that the discretion is necessary as some of the wrongdoing might not be that serious to warrant a summary dismissal.

The Chair asked why powers of delegation have been given in Clause 31C.

Adv Grove explained that it is a rule of law that a public official cannot delegate official functions to an outsider and that is why an assistant has been drawn in.

The Chair questioned why Clause 30(2) has been moved.

Adv Grove said that it is a technical issue in that when a municipality is employing its own people and resources it does not need to go through the rigours of a competitive tender. Such a tender process is however necessary where services are outsourced to an independent contractor. The tender process is also exempted where another municipality has been contracted to do the work.

The Chair wanted to know why Clause 36(5) has been deleted.

Adv Grove explained that similar provisions are to be found elsewhere hence this was aimed at removing repetition.

Deliberation on Public Service Infrastructure
The Chair welcomed representatives from the various institutions involved with Public Service Infrastructure (PSI). He said it was difficult for politicians to comprehend the precise issues at play here. It would have been helpful if a technical person who is independent from SALGA and the Department were present to assist the Committee. A general invitation had not been sent to PSI people as such. The invitation would be processed for next week. The Chair then summarised the issues:

- Why have the PSI been accorded a special dispensation from that of the departments. The Committee came to these conclusions in this case:
· should rates be raised for the PSI, there is a high probability that the cost factor would be passed unto the consumer
· unlike the PSI, departments are at liberty to approach National Treasury for support where they are faced with financial difficulty. This does not however follow that National Treasury would necessarily intervene. But also in certain instances some PSI have been significantly been bailed out by the National Treasury.
- Why should local authorities bear the brunt of PSI's financial burden
- It is important to encourage the participation of the private sector hence such support to the PSI is discriminatory in application
- The PSI sector is profit oriented hence it would be unfair to the competitors to grant them a rate exemption
- Subsequent legal opinion has clarified that it was erroneous to base the rate exemption to PSI on section 229(a) of the Constitution.
- There is a distinction between state and private PSI in that only the former gets sympathetic treatment. There is a need to anticipate change from public to private ownership.

The Chair noted that it is generally agreed that PSI plays a central role in assisting government deliver on its mandate. It has been shown that where government has intervened through the PSI vehicle, service delivery has been enhanced. The conclusion of the matter is that indeed PSI are distinctively different from state departments. This distinction is however not significant enough to warrant rate exclusion.

The Chair said that the offer that has been put on the table is that all PSI must be rated. In any case this is the international practice. PSI would be entitled to an automatic 30% exemption. The Minister would after consultation with stakeholders reduce the exemption to 20% in the course of time. This is only a tentative offer.

The Chair noted that PSI have claimed that they have had to deliver services in absurd situations where municipalities charge varying rates. In reply to this query, the Department has been instructed in section 39 to set out the framework on how valuation should be done. This seeks to introduce a uniform system. The Department would also put in place a rates policy and this is a major protection for the PSI. In some municipalities, PSI would be newly rateable properties. The phase-in period would take up to four years and in some instances seven years. This would give PSI more than ample time to prepare for the new dispensation. The Minister would formulate regulations and guidelines on how valuation should be undertaken. A consideration would be made as to whether the Minister should consult stakeholders before promulgating regulations.

The Chair noted that property rates are deductible. PSI would therefore recoup some of their expense. There are several in-built provisions in the Bill that empower the Minister to cap rates where such impede economic activity or cause impermissible differentiation. Indeed any sector is free to petition the Minister for rate relief where it is faced with a particular difficulty. He noted that the PSI issue would be reflected in the Committee Report to Parliament.

The Chair said copies of the above summary of the PSI issue would be sent to the PSI institutions together with an invitation for them to meet with the subcommittee on 11 February to point out issues they strongly feel would jeopardise their operations. This was not an invitation to make fresh submissions.

The PMG monitor left at 5.30pm. The meeting progressed to 10.00pm