Municipal Fiscal Powers and Functions Amendment Bill: National Treasury briefing

Meeting report

The Chairperson welcomed the Members and the officials from Treasury (NT) to the meeting. The Chairperson handed over to Treasury to make the presentation.

Briefing by National Treasury on the Municipal Fiscal Powers and Functions Amendment Bill

Ms Malijeng Ngqaleni, Deputy Director-General: Intergovernmental Relations, NT, led the delegation from Treasury which briefed the Committee on the Municipal Fiscal Powers and Functions Amendment Bill. These amendments were meant to better regulate the municipal development charges. Development charges are one of the instruments that municipalities can use to finance the provision of infrastructure. Development charges are a once-off charge levied by a municipality on the applicant as a condition for approving land development applications. They are imposed to cover the costs incurred by the municipality when installing new infrastructure or upgrading existing infrastructure. It had been identified that it was not well-regulated in the country. Its use was not standardised. The Act was trying to standardise its use so that there was some degree of uniformity and transparency that would ensure it was applied across all jurisdictions in a more equitable, predictable, and fair manner. The general concept of a development charge is that the urban growth and expansion of new land use development creates the need for additional infrastructure services. These services, which are an essential part of land use development, are a direct cost generated by that development and should therefore be paid for by the applicant. This will avoid the financial burden being imposed on municipalities or existing communities.

What should municipalities do to prepare for the passing of the legislation:

• If a municipality decides to levy development charges, its municipal council must adopt a resolution for the municipality to levy the development charges, and thereafter the municipality must comply with the Bill, once enacted.
• A municipal council must adopt a policy consistent with this Act on the levying of development charges in the municipality.
• A municipality must adopt and publish by-laws, in terms of sections 12 and 13 of the Municipal Systems Act, to give effect to the implementation of its policy on development charges.
• A municipality's by-laws on development charges may be integrated into other by-laws relating to municipal planning or a related area of municipal legislative competence.
• A municipality that levies development charges in terms of a pre-existing policy or by-law, as at the date of commencement of the Act, must ensure that it complies with the Act within 36 months after the date of commencement of this Act.

The presentation discussed the objectives and key reforms introduced in the Bill, the benefits of development charges, key concepts in the Bill, and a summary of the provisions in the Bill.

(See Presentation)

Discussion

Dr D George (DA) discussed the energy problem that South Africa had at the moment from the financial perspective of municipalities. Municipalities relied heavily on the income from selling electricity. Given the current problems, the revenue would be less because there was no energy to sell. It was not going to be resolved in the shorter run. Had Treasury considered that? Or was that not something to be worried about? If so, why not?

Ms P Abraham (ANC) said that the remarks by Ms Fanoe were quite telling in terms of what was happening in municipalities. Did Treasury think that municipalities were empowered enough to deal with the Bill as it was? For example, the presentation spoke of the power to levy and the powers of council. She was happy that regulations were mentioned at the end. She had been worried that in some cases some municipalities did not have the necessary capacity. She wondered if there were any guidelines to give direction on how the power to levy should be implemented. She discussed the granting of exemptions and rebates to applicants. The Committee needed to get a glimpse of what was happening in the Municipal Act and in the various sections. Treasury needed to be certain that there was going to be uniformity in the various municipalities. Her concern was about the capacity within municipalities. She was worried that there would be a risk if a lot of decisions to be taken were left at a point. Should Treasury not stick to legislation that would bind municipalities? In her view, there seemed to be a lot of openness in terms of what each municipality could do in dealing with the levies.

Ms W Alexander (DA) said that Treasury did excellent work when it came to supporting, with guidelines and regulations. Municipalities could fund themselves through various means, like conditional grants, selling of services rendered, and now the development charge. In this stagnating economy, municipalities needed to be generating their own income. The Auditor-General said that less than 20% of the municipalities in South Africa were getting clean audits and functioning well. In the big municipalities, it was often the case that conditional grants were reduced year on year. That was not necessarily because there was no money in Treasury. It was because an administrative process was not followed in the municipalities in order to get those grants. It severely hampered the municipalities’ ability to deliver services, infrastructure, and housing. Was there a plan for Treasury to support municipalities for them to make better use of conditional grants in order to fund this? All municipalities, according to the Constitution, were independent and made their own decisions. They are also interdependent and often these policies were influenced by other spheres of Government. How were they going to align local, provincial, and national Government in order to make these things a reality? Year after year there were missed opportunities because planning cycles were incorrect or budget cycles were missed. People were losing out on the delivery of basic services. What was being done to capacitate municipalities in order to make better use of the systems available and make use of the grants available? The Auditor-General said that these things were not working and that municipalities were failing. Was Treasury going back to the drawing board to see how to set up municipalities to do better? 

Mr E Buthelezi (IFP) asked if the Bill was going to discourage investment. The government needed to provide that enabling environment and needed to provide the basic infrastructure for businesses to be protected and to grow. If people were going to be required to pay for particular services, even though they should, was that not going to be counterproductive? He provided an example of a business that had paid money and started to do business in that particular area. What would happen if those businesses could no longer continue because the same municipality could not service them properly, in a manner that would ensure that their business would continue to operate? He discussed the rebate. Was this not going to be open for abuse? Some people may be exempted by municipalities for the wrong reasons, just because someone had a friend working in the municipality. Was this Bill going to ensure that there were no leakages of that nature?

Mr G Skosana (ANC) welcomed the presentation. He noted that municipalities were struggling financially and asked if it was really an issue because of a policy gap or if it was an issue because municipalities did not have the capacity to collect revenue. Some of the municipalities that he knew did have a development levy as part of the services that were supposed to be paid by the residents. The development levy was also part of those services that the residents did not pay for, even by those who were qualifying to pay. Was it because of a policy gap that Treasury wanted to introduce this legislation, to strengthen the hand of municipalities to collect the development levy? Or was it an issue of capacity, that municipalities were unable to collect? Everyone that could pay was meant to pay. If someone could afford to pay for water but that person decided not to pay for water, did Treasury think that if it introduced a development levy then that person would start to pay for it?

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, NT, replied that there were municipalities that performed well and there were many municipalities that did not perform well. The Bill was a specific intervention. There were many other interventions in place in order to deal with the challenges currently experienced by municipalities. She discussed the issue of a number of municipalities not being fully capable of collecting their own revenues. Treasury had initiatives in place to assist municipalities in that regard. Treasury was working with municipalities to improve their tariff-setting processes and to assist with their collection processes. There were a number of initiatives underway to assist municipalities with their general operations. She discussed what made development charges different from property tax and other tariffs. This was a specific levy that was targeted at developers. It was done at one specific point. It was not a normal municipal bill that was given monthly. It was a specific levy that became liable at land applicable. For example, where land was classified as agriculture that was close to an urban edge. Cities were growing at a phenomenal pace. There would be one connection for water and one connection for electricity. A developer would identify that land and want to have it reclassified as residential. When an application was made by a developer to have the land reclassified from agricultural to residential, at that point the development charges became applicable. It then enabled the municipality to put in place the bulk infrastructure that was needed for that development. It was to the benefit of the developer and to the benefit of the municipality. It enabled the developer to use that land to put residential properties in place. The costs that were incurred to put that infrastructure in place were then reflected in the market value of the property that was sold. The municipality also benefited from the process because then it had access to property rates and other tariffs. There was definitely a policy gap in the system because currently there were a number of provincial regulations in place that were all differently structured. It would now be standardised across the country. It would include the full country. Development charges would be more consistently applied than how it currently was. It was not new. Development charges were currently being levied, but very few municipalities did it. The few that levied it were mostly the larger urban municipalities. A lot of intermediate municipalities were also looking at levying development charges. They were actually waiting for this piece of legislation to come into place. She discussed the issue of flexibility in the system. She discussed a stipulation in the Constitution. The Constitution did not refer to ‘must’. When it referred to property tax, it referred to ‘may’. The Constitution made it clear that it could be regulated in terms of national legislation, but Treasury could not make it a must. The choice of levying development charges would always remain with the municipality. What Treasury could do from its side was regulate it through national legislation. The autonomy and flexibility that was given to municipalities to levy their own taxes needed to be respected. This was what development charges were trying to do. It was trying to make it as uniform as possible, but still allowing municipalities the necessary flexibility to deal with their own circumstances. She noted that a number of concerns were raised regarding rebates and exemptions. There was a concern that there could be quite a bit of leakage in the system in that regard. One needed to look at the benefit of having the development charge in place. She provided the example of some mixed development projects. There was a part where people could pay for the services and a part of the service was also social, where people were indigent and could not pay for the services. The indigent part was funded through the grants that were in the system and the rest of the portion was funded through the development charges. There could be a mix of revenues funding a development project. In certain cases then the rebate should be applicable. In the case where the social infrastructure was in place, a full rebate or zero payment was required for that side of the development. Development charges were not applicable to the indigent, but where the customer was able to pay it would be subject to development charges. The rebate played a very critical role where social relief was necessary. She noted that there were different players in the field in terms of developers. There were well-established developers and then there were upcoming developers as well. One would not want to overcharge an SMME to such an extent that it walked away from the project. There were very specific criteria that would be determined by the municipality that would be applied. The municipality would have to be quite specific. If a business met a certain set of criteria it would get a rebate. If it met certain criteria, then it would get an exemption. Municipalities needed to be aware that in those cases they would be forfeiting revenue. That would need to be put transparently in their books as well. It was not intended for leakage in the system. It was intended to ensure a fair playing field. She discussed the Municipal Systems Act. It prescribed the process in terms of how a dispute should be dealt with. Treasury could provide the Committee with those clauses so that the Members could work through them as well. She discussed stagnating revenue. Treasury needed to be frank with the Committee. Currently what happened was that municipalities had their IDPs and development plans. Municipalities had areas that they targeted for development, where they intended to put in infrastructure and bulk infrastructure. Often developers came where land was cheap, where municipal services were not in place. Currently, that charge was on municipalities to put in place. In these processes, municipalities were the losers. Treasury wanted a fair process of where the expenditure lied. When the development was put in place, the developer recouped those costs. It was to balance the fair playing field. This was a gap in the system that Treasury was trying to address. It was an international practice to levy development charges on these kinds of developments and it was currently not happening. She discussed conditional grants either being reduced or returned to the fiscus. It was an important issue. It was an area that was of concern to Treasury as well. It also did not want to see funds being returned to the fiscus. Those funds were often linked to social infrastructure. The development charges were still a critical funding tool. Under expenditure on conditional grants needed to be dealt with as a separate initiative, but a very important initiative.

Ms Ngqaleni discussed the energy problem and the reliance on it for income. Treasury was worried about the poor performance, particularly in the management of revenue. Even with the current problems of energy shortages and the possibility of many paying customers exiting the grid, it was a problem that came on top of another problem which was the failure to actually manage the system. She noted the revenue losses that came from the losses of energy, and the losses of water. It was huge. If municipalities could plug that hole it would go a long way in protecting the revenue. Many municipalities did not set cost-reflective charges. The revenue was declining because of some of those factors. Treasury found that many municipalities were not applying such charges on electricity. What was important was for municipalities to recover sufficiently on the service so that it was then able to actually pay for the service and maintain the infrastructure. It was a major challenge. It went beyond having a revenue that could be used elsewhere. Treasury had found that the same revenue had not been properly applied to ensure that the infrastructure was functioning properly. That was a worry and a concern for Treasury. Treasury was stepping up efforts in terms of revenue management. It was focusing on its municipal finance improvement programme, within which it had a revenue improvement programme. Treasury was focused on addressing the issues of revenue from the value chain perspective. She noted maintenance and plugging the holes and leakages that came from the loss of the resource, whether it was water or energy. What should not be underestimated was the impact of political instability and dysfunctionality in these municipalities. That often undermined the very efforts that Treasury was trying to make, from the technical aspects to capacitate these municipalities. There was sometimes no political will in the system. Often because the political side determined the nature of the administration, one would find that there were none of the right skills. Yet, they were being paid very well but they could not deliver. There was also the issue of instability with coalition governments. It impacted the metros in a big way. For many of the metros, the banks were not considering them creditworthy because of the political instability. It resulted in the failure of the administration to play its developmental role. The political problem should not be underestimated. It undermined every effort. There was a discontinuity. Treasury believed that it was a major challenge. There was a need for legislative reform in the system that would better regulate the functioning of the coalitions. There should be more of a focus on service delivery but that was not what was being seen. There also needed to be better regulation of the administration. The administration needed to be professionalised and shielded from too much political influence. If those two things could not be addressed then Government would continue to spend huge amounts of money, but the system would continue to collapse. She discussed the capacitating of municipalities to apply development charges. Treasury had put measures in place to help unearth the capacity gaps and by providing more guidelines on what their policies should look like. There was a municipal infrastructure delivery support agency which was under COGTA, which was funded with more than R300 million a year that was meant to capacitate this. There were also sectors that had to oversee the implementation of the infrastructure. Treasury was playing the role of support with the sectors. Treasury would never have the capacity to solve this problem across all sectors, across all municipalities. It was impossible. Treasury was trying to play a role that would be catalytic, that would enable all Government agencies to play their role so that infrastructure was delivered in a way that met the needs.

The Chairperson thanked Treasury for its responses. There were things that he did not understand. Was the development charge going to be a once-off? Or was it going to be every month that a developer needed to pay charges? If so, why because they were already paying for property rates, other services like water, electricity, and other related services? At the time that the country needed investors, the Government was putting up barriers for investors. He did not see how this was going to attract investment. Many investors complained that there were so many regulations in the Government of South Africa. In other countries, they had the one-stop service, where one would register for a company, pay a fee, and then the next day the company could operate. Here in South Africa, every day there were new regulations. Investors would be leaving South Africa unless Government was not alive to that. He did not understand. He wanted to know the rationale for the development charge. Government should be attracting investors, but when investors came more charges were being placed on them. Why was Treasury doing that? What was the rationale for the Bill? He noted that the Constitution should not be amended through any implication of the Bill. The powers of the municipality should be outlined. Treasury should stick to what was in the Constitution and not bring something that was not in line with the Constitution. South Africa was a constitutional democracy. Any Bill that Parliament was going to pass needed to be consistent with the Constitution. He noted that there were other issues, like the issue of engineering services. The definition needed to be left as it was outlined in Spatial Planning and Land Use Management Act (SPLUMA). SPLUMA clearly defined what engineering services were all about, and what it was that municipalities were supposed to do. When this Committee passed the Bill there should be no implication that section 49 SPLUMA should be changed. That was a facilitating legislation. It needed to be remembered how long it took to pass SPLUMA after the Constitutional Court struck off the Development Facilitation Act. For a number of years, from 2011 to 2016, there was no legislation that regulated land use and planning. Municipalities complained. Everything came to a standstill for almost five or six years. Regulations were gazetted sometime in 2017. He did not agree with this Bill changing definitions that were in SPLUMA. The Committee needed to process a piece of legislation that did not contravene other legislation. SPLUMA was not the competency of this Committee. It was the competency of the Portfolio Committee on Land Reform. He discussed the grid. There were companies that said they were getting off the grid. Was it done in other countries? He did not think that it should be done in that manner. He provided an example of a municipality that relied on rates and taxes from the mines. If those mines decided that they would go off the grid, and even in terms of water they would provide their own water, what was going to happen to the Government? He did not think that it could be done in any other country, except in South Africa. There should be serious conditions to get off the grid. Even if the business was off the grid, that business still needed to pay for services. Otherwise, Government would collapse. These were the things that Treasury needed to be alive to. He noted that there was an issue with payment. There was an issue about whether an owner had to pay the full amount of a development charge prior to exercising the rights approved by the tribunal. He asked if that had been corrected. He had been following the Bill. Municipalities had asked why a developer had to pay the full amount whereas there could be an agreement between the developer and the municipalities to pay in tranches. Until the developer paid the full amount, it was then that the municipality would issue the clearance certificate. If the municipality did not issue the clearance certificate then the developer would know the consequences. Having such strict regulations would defeat the spirit of investment and development in municipalities. Treasury needed to convince the Committee that this Bill was going to attract investors and that it would not be repulsive to investment.

Ms Ngqaleni responded that without this Bill, it would chase away investors. This amendment was not introducing development charges. Development charges were already regulated in terms of SPLUMA. It stated that for any approved developments, development charges may be applied. Treasury was trying to plug the gap in how development charges were being applied. What were the conditions for applying them, how they were calculated, and how the money would be used, to ensure that the money went to investments in development? Development charges were already there in the system, they were called different names. However, they were not standardised. It became very unpredictable in terms of how each jurisdiction actually charged them. This opened municipalities up for litigation by developers, because there was no uniformity, there was no fairness, and there was no equity in terms of how they were being applied. That point should be appreciated. Treasury was not introducing development charges. This was not only an issue in South Africa. In all other jurisdictions, development charges were a component of investment financing. Money needed to come from somewhere otherwise people needed to be taxed more for those investments. That would be the challenge if it was decided not to have the development charges. Money needed to come from somewhere. What was being seen in the system was that because of the slowness, the constraint that the fiscus was actually faced with, even the same developers took time for their developments to take off simply because they were waiting for infrastructure. This Bill would enable developers to determine the pace at which the developments could happen because they would be able to pay. The way the developers paid, they would be certain that the money was not going to be lost. The money was going to go to actually unlocking the investments. That was why the Bill allowed that even where there was no capacity, the investor could actually use their capacity to create that bulk infrastructure. So that the issues of capacity and the misuse of development charges could be overcome. This was a once-off payment that the investor would be charged with. From there on, the normal charges and taxes would be paid. This ensured that the municipality would not burden other ratepayers to finance investment in other areas. Treasury needed to ensure that this source that was already there in the system could actually be applied appropriately and that it could unlock the investments. Without this money, municipalities would not be able to unlock investment. The fiscus was so constrained that it was constraining investment. This was something that investors were concerned with. She noted that the issue of getting off the grid was a national conversation, in terms of how to address this problem that the country was faced with. Electricity was constraining development. Energy was having an impact on development. If the country did not solve that problem then there would be a problem in terms of investment. The fiscus was constrained. Part of the debate was about how private investment could be brought in to invest in the supply of energy for the country. That was a bigger debate that was beyond what Treasury was trying to achieve with this legislation. The Bill was not introducing development charges, it was just formalising the implementation and bringing in support for municipalities to be able to optimise this revenue source.

Ms Fanoe responded to the question of whether the developer had to pay in full or if they could pay in tranches. The Bill made provision for payment in tranches. So, as the development progressed, it would be paid in trances, as was agreed between the developer and the municipality concerned. There was no need for the developer to pay for everything in one go. The Bill did not make any changes to the Constitution. It respected all the provisions in the Constitution and was fully aligned with it. That was why it was not that municipalities must levy development charges. The legislation was crafted to say that development charges may be levied. It was fully in line with how the Constitution was crafted. It respected the constitutional provisions. She responded to the question about the SPLUMA provisions. She noted that refinements were being made to the definitions. Those definitions were critical. It needed to be clear when development charges were applicable and when they were not applicable. Treasury worked very closely with the National Department concerned on the definitions, and they were fully behind it. The Department had indicated its support for these refinements to the definitions.

The Chairperson said he understood the response that there needed to be a bigger debate about getting off the grid. However, when the Minister presented his speech in Parliament, he had already spoken about this issue of getting off the grid. It was like Treasury had already taken a view in this regard. He asked that Treasury prepare a presentation explaining what the Minister was talking about and the implications on municipalities. It was in the Budget Speech. It was not something that was going to come. It was a policy matter of this Government. What would be the implications if every company and household just went off the grid? What would the financial implications be on the municipalities? It was a serious matter. When Parliament passed legislation it needed to make sure that the legislation was not going to prejudice future generations. Many municipalities relied on water, electricity, and property rates to raise their own revenue. From there, they received an equitable share from Government. If big companies begin to get off the grid, what was the implication going to be for municipalities in terms of raising revenue? It was not just a debate. It was an issue Treasury had taken a view on through the speech of the Minister in Parliament. The Committee wanted to receive a clear briefing and detail. SALGA also needed to appear before the Committee as it was representing municipalities. The Committee needed to be fully aware of the consequences of any Bill that it passed. The Chairperson asked the Committee Secretary if the Committee was going to take the Bill for public hearings.

Mr Alan Wicomb, The Committee Secretary, said that the Committee would be having public hearings on the Bill. The closing date for submissions was next week Monday. The public hearings would be next week Wednesday.

The Chairperson said that during the public hearings, SALGA needed to appear before the Committee. It represented municipalities. The Committee would engage with SALGA on this matter.

The meeting was adjourned.