Thabile Chonco | Jun 24, 2020

Development charges in South Africa – An introduction to the Municipal Fiscal Powers and Functions Amendment Bill (Part 1)

Picture this scenario: Trollkins Consortium (Pty) Ltd submits a land use application to Nkanyezi Local Municipality, with the proposal to undertake the construction of retail stores, restaurants, offices and a casino. This proposal sounds exciting - on one hand, it will offer employment opportunities, economic development and growth, and will result in the movement of goods and people in the municipality. On the other hand, Nkanyezi Local Municipality is concerned that by approving Trollkins’ application, more water, sewerage and electricity infrastructure will be needed. This means the proposed development could have negative financial impacts such as burdening the current municipal infrastructure without value for use. It could thus potentially burden the municipality as it will have to provide infrastructure to accommodate the additional load that the proposed development will place on municipal bulk infrastructure and unduly benefit the developer who might not pay the true cost of the extended infrastructure or not pay at all.

The Municipality does not have money to fund these costs and is also concerned that existing residents will end up being charged unfairly because they would bear the costs of increased use of the infrastructure. To avert these negative consequences, Nkanyezi Local Municipality wishes to levy a development charge but is unsure of the legal status of development charges and the levying thereof. Furthermore, the Municipality is unaware of the basis for calculating development charges and what it can use revenue(s) generated from these development charges for. Without clarity on these issues, the Municipality fears that it may suffer financially by agreeing to this proposed development.

On 8 January 2020, the National Treasury published, for comment, the Municipal Fiscal Powers and Functions Amendment Bill. The proposed law seeks to address the uncertainties concerning development charges highlighted in the scenario set out above. The Bill provides for the uniform regulation of development charges, thus catering for a transparent, consistent and equitable basis on which municipalities may calculate and levy development charges from landowners. Members of the public were invited to submit comments on the Bill on or before 30 April 2020. This article provides a summary of the Bill as well as an analysis of general provisions on development charges.

What is a development charge?

A development charge is a once-off charge that is levied to recover the actual cost of external infrastructure needed to accommodate the additional impact of new development on a municipality’s existing engineering services. It is meant to cover the costs incurred by a municipality when installing new infrastructure or upgrading existing infrastructure that is needed to service a proposed new development. This charge is levied against the developer as a condition for approving a land development application.

Development charges are not a new revenue source for municipalities. They are existing charges some municipalities have been levying to recover costs incurred when providing infrastructure services, albeit inconsistently, while some municipalities have avoided doing so because of uncertainties and risks. Development charges are also not a municipal tax, unlike property rates and taxes levied under section 229(1)(b) of the Constitution.

Purpose of the Amendment Bill

The Bill aims to regulate the power of municipalities to levy development charges on land development applications submitted to the municipality in terms of section 33(1) of the Spatial Planning and Land Use Management Act of 2013 (SPLUMA). The Bill seeks to insert a new Chapter 3A in the Municipal Fiscal Powers and Functions Act. This new chapter gives a municipality the power to levy development charges, the power to adopt a policy on levying of development charges and community participation in the adoption of a policy on development charges, in accordance with Chapter 4 of the Municipal Systems Act of 2000.

The levying of development charges is a power that is incidental to the municipal planning power already exercised by municipalities. The national government may, therefore, regulate minimum standards, norms and guidelines on the levying of development charges. This means the Bill cannot override any pre-existing policies or by-laws currently used by municipalities to levy development charges. Once the Bill becomes law, municipalities relying on pre-existing policies or by-laws will have to ensure that they comply with the Act by no later than 36 months.

Who is affected by the Amendment Bill?

The municipality

Municipalities are obliged to “ensure the provision of services to communities in a sustainable manner”, to “promote social and economic development” and to carry out developmental duties in terms of section 153 of the Constitution. There is a huge demand for municipalities to prioritise economic infrastructure so as to promote economic growth, create employment and possibly reduce poverty. Charging development charges, in a standardised, consistent and transparent manner, will enhance the revenue streams for financing strategic municipal infrastructure and give municipalities the opportunity to use development charges to guide municipal planning so as to support urban spatial transformation.

The developer/landowner

The developer will be liable to pay development charges as a condition of getting their land development application approved. A national, standardised legislation and policy framework on development charges will ensure that the variables used to calculate development charges are the same across all municipalities. The legislation and policy framework will also minimise the confusion experienced by landowners, as landowners will be able to estimate their liabilities and hold municipalities to account for the delivery of required infrastructure. The payment can be made in one of two ways:

  • as a monetary contribution that must be paid in full prior to the developer exercising the rights approved by the Municipal Planning Tribunal (Residential, commercial, industrial, agricultural and various other land-use rights exist for certain properties and areas. For example, if a developer is granted commercial land use rights, they may only use the land for commercial purposes by installing infrastructure and constructing commercial properties according to the land specifications given by the municipality), or
  • as a payment in-kind, where a developer installs the infrastructure needed.

The developer will not only pay for the infrastructure which they benefit from but will also be informed on how the costs are determined, as well as the quality and quantity of the infrastructure installed.

National and provincial departments, state agencies and state-owned enterprises

In 2007, Eskom began the construction of Medupi power station in Lephalala Local Municipality, Limpopo, in order to meet the growing demand for electricity in South Africa. In the following year, Eskom began the construction of Kusile power station in Witbank (eMalahleni Local Municipality), Mpumalanga, also intended to meet the growing demand for electricity in the country. In 2018, President Cyril Ramaphosa launched a multi-billion rand train manufacturing factory in the City of Ekurhuleni “as an essential part of government’s rolling stock fleet renewal programme” to transform passenger rail services and public transport.  These projects are tied to the national sphere of government, as well as a State Owned Entity and they require land – municipal land to be specific. These projects also require infrastructure – municipal infrastructure to be specific. The involvement of the national government does not excuse it from abiding by municipal planning laws when building the said infrastructure in the various municipalities mentioned. In light of the above examples, national and provincial departments, state agencies and state-owned enterprises that may not have paid any form of development charges previously will now have to do so. This is to ensure that municipalities are not left sitting with infrastructure costs stemming from projects such as those mentioned above. Also, the fact that the Bill has not provided for the subsidisation or exemption of land use applications for government purposes (land use by the national government, provincial government or a municipality to give effect to its governance role) [proposed section 9E read together with Schedule 2 of SPLUMA], supports the view that national and provincial departments instituting land use applications are not eligible for subsidisation and must cough up development charges.

It is, therefore, important for the spheres of government to integrate their budgeting and planning. Development charges have the potential to promote integration, as they ensure that each sphere of government bears the full cost of infrastructure provision. The national and provincial spheres of government must, therefore, align their development plans with those of a municipality. Where a development by either sphere does not align with the municipal prioritised plans or falls outside of the subsidised categories of land development, a development charge will be triggered. The levying of a development charge will ensure the timeous provision of bulk infrastructure to serve national and provincial projects, and help reduce delays in the provision of infrastructure to support these developments. The national and provincial spheres may avert paying this charge where a municipality directs available grants to cover the infrastructure costs.

What will be the implications for municipalities?

Power to levy development charges

Upon receipt of a land development application, a municipality has a choice of whether or not to levy a development charge against the proposed land development. Should a municipality decide to levy a development charge, its decision will now be followed by an adoption of a resolution, by its municipal council, to that effect. Once this resolution is adopted, the municipality will have to comply with the Municipal Fiscal Powers and Functions Act. It is unclear who or what constitutes “a municipality” in this provision – is it the municipal council, the municipal executive, the municipal administration or the Municipal Planning Tribunal (MPT)? In addition to this, there is very little mention of the MPT, which according to SPLUMA is responsible for land use and land development applications and incidentally should be responsible for development charges and the levying thereof. Although the Bill states that development charges must be imposed by the “competent authority” that approves land development applications, the MPT is brought back in explicitly after the council resolution [mentioned above] by the amendment to section 40(7)(b) of SPLUMA. This amendment empowers the MPT to endorse a municipality’s calculation of development charges and where applicable, the timing for payment. This means the decisions taken by local politicians on the determination and calculation of multi-billion rand developments will be “scrutinised” by the MPT and that the MPT’s endorsement must be sought for the development charges to be levied. Therefore, the municipal council must set the policy on development charges, not implement it.

Adopt a policy on levying development charges

A municipal council that supports the levying of development charges must adopt a policy that:

  • addresses the methodology for the calculation of various costs;
  • ensures the non-duplication of costs when development charges are calculated;
  • determines the criteria to be applied when development charges are based on municipal engineering service zones (these municipal engineering service zones must be specified in the policy as well); and
  • determines the criteria to be applied when a municipality grants a reduction or subsidy, to a specific category of landowners or category of land developments.

The policy must also provide for the methods of payment that may be employed, taking into account the principles of equity, transparency and fairness. Whatever shape or form the policy takes, it must be consistent with the Municipal Fiscal Powers and Functions Act on the levying of development charges.

Public participation in the adoption of the policy on development charges

A policy on development charges must be made available to the public and the local community must be invited to submit comments on the draft policy which must be taken into consideration when finalising the policy. The policy may only be adopted after this community participation process. Given the complex and technical nature of development charges, one would hope that municipalities will go a step further and educate their local communities on development charges so that they are in a position to make informed input. Failure to empower the communities to participate may result in one-sided engagements, dominated by big developers who play an influential role behind the scenes and obviously have the power of the purse. Municipalities must, therefore, re-think how they undertake public participation and consider partnerships with civil society in order to reach out to communities in an accessible manner.

Adopt and publish by-laws to give effect to the implementation of the policy on development charges

Once the policy on development charges is adopted, a municipality must adopt and publish by-laws for the implementation of this policy. A differentiated approach of the development charges payable may be used for categories of landowners, land developments and municipal engineering services.

When can a municipality charge a development charge?

A municipality may levy development charges on the engineering services covered in the definition of engineering services provided in SPLUMA, as well as bulk external engineering services, the provision and operation of which lies with the municipality. These are engineering services that provide water, sewerage, electricity, municipal roads, stormwater drainage, gas, and solid waste collection and removal, required for the purpose of land development. The Bill permits a municipality to apply to the Minister of Finance for an extension of engineering services to be included in the calculation of development charges. This provides some flexibility for municipalities to levy development charges on other engineering services not set out in SPLUMA.

The Bill is not too concerned with the type of applicant or the proposed land use, as the principle is that development charges should be calculated for all land use applications so that the infrastructure costs of the development are known irrespective of the municipality levying the development charges or not. Instead, the Bill focuses on the impact of the proposed development on infrastructure, and the cost incurred by the municipality in addressing that impact and not on whether the developer should pay for the particular type of land use. If the municipality opts not to levy a development charge, then an alternative source of funding should be identified.

Development charges and the levying thereof is a complex space to navigate. The introduction of a legal framework for the levying of development charges is thus a good starting point as it can be used widely across all municipalities. This first part of the series on the Municipal Fiscal Powers and Functions Amendment Bill looked at the introduction of development charges into a standardised legal framework – touching the tip of the iceberg on development charges. It will be interesting to see the shape the Bill takes as it goes through the revision process (if substantial changes need to be made after the public participation process), in preparation for its introduction in Parliament.

 

by Thabile Chonco

 

The publication of the Bulletin is made possible with the support provided by the Hanns Seidel Foundation and the Bavarian State Chancellery.

                                                                                 

                                                                                 

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