Property developer Ed Peen expresses his views on the proposed development charges in an open letter to eThekwini Municipality Mayor James Nxumalo.
ATT: His Worship the Mayor of eThekwini Municipality, Cllr James Nxumalo
ETHEKWINI MUNICIPALITY DEVELOPMENT CHARGES
I would like to open my comments by making it clear that the aim of my submission is to endeavour to find a resolution to the problems that Ethekweni Municipality face regarding funding and future income; as well as the critical situation that we – property developers, associated professionals and especially the community at large – face as a result of both past actions of the Ethekweni Municipality and the current proposal for future development charges to be levied against us. I hope you take this submission in the spirit with which it is intended together with the offer that I am prepared to discuss any and all points raised herein with you or any of your senior executives to help find a resolution to this very serious situation. I might just mention that I have been endeavouring, without success, to arrange a meeting with you for the past four months to put my case to you.
The EThekwini Municipality Development Charges Presentation, the proposed legislation that justifies the charging of infrastructure costs to property developers, is the most ill-informed piece of proposed legislation I have ever seen. What it essentially states, is that property developers will now be responsible for infrastructure costs while still continuing to pay extremely high rates and taxes and the myriad of other charges that are currently levied by EThekweni Municipality. It would appear that someone is trying to figure out a way of increasing Ethekweni Municipality’s income. However, the serious negative effects that this action would cause have not been taken into account. If the proposed legislation goes through, it will be detrimental to EThekweni Municipality itself, to the Property Development Industry and especially have long-term negative effects on the economic growth of our local community.
Over the years, commercial development has already been hit hard by high rates, levies and red tape. In 1993, 1300 plans were processed in a month by EThekweni Municipality. Now, in Oct 2011 this has been reduced to only 205 plans per month, of which less than 10 were NOT residential. This means that one could say only 9 commercial developments are expected to fund the new development charges. I predict that should you pass this legislation, 90% of developers in Durban will either be out of business or will relocate to friendlier Municipalities. Meaning that, if there were only a few commercial developments in the pipeline before the proposed legislation, this number will dwindle to almost nothing in the aftermath.
The basic building block of any Nation/Local Authority to successfully grow its economy, is to ensure that development is encouraged. To do this, starting a business or developing property should be made a simple process, with a minimum of red tape and costs. By implementing your proposal, you will make EThekweni Municipality the most expensive and difficult place in the country to start a new business.
When I studied Economics, it was the accepted principle (and I am sure this has not changed) that Government/Local Authority borrows long-term money at low interest rates in order to provide infrastructure to enable private enterprise to develop. Government/Local Authority then builds up a residual income from rates and the taxes they levy to repay these loans. Expecting private enterprise to pay for infrastructure, plus rates and taxes is not sound economics – it’s misguided and short sighted, and I predict that it will backfire severely by destroying many private companies.
Imagine if no one was building houses for the community to live in. Imagine if no one was building factories where new businesses could open and provide jobs to the local community. Imagine if no one was building shopping centres where we could buy our daily bread (and other luxuries!). In one of the areas we are investigating, when the community wishes to spend R100 on groceries, they currently have to spend R60 on taxi fare to travel to the nearest shopping centre, i.e. they only have R40 left over to spend on groceries. Is this not disgraceful?
In addition, if no one is building any property, where on earth is the Municipality going to generate additional revenue to pay for ever-increasing expenses? We, the ratepayers, will be paying ever-increasing rates and municipal charges until one day we cannot afford to pay them anymore. And we won’t be able to sell our properties, because no one will be able to afford to buy them!
I can hear you saying that I’m being over the top here. But just have a look at what is currently happening in the USA: rioting in the towns, brutal police action against peacefully demonstrating citizens. Maybe I’m not being so far-fetched.
I have been in the property business since 1979. In those days a property investor worked on expenses of 18% of rental income when purchasing a property. On one of my EThekweni Municipality properties, I am now paying 24% in rates alone and my total expenses are 34% of rental income. It’s no wonder there are no properties being developed, except of course by one very big developer who has a cosy partnership with EThekweni Municipality and enjoys preferential discounts. And you wonder why the rest of the community is fuming!
Here is an actual example of a development my company has recently investigated and the ensuing result for EThekweni Municipality’s bottom line and the loss to the community.
Current rates earned by the Municipality on the vacant land: R12,000 per annum or R184,000 over the next ten years. Proposed rates on a new R80 million shopping centre: R1,3 million per annum or R18,8 million over ten years. The result is that the return to the developer will be too low to proceed with development. The town will stagnate with no further development, no increase in rateable income and continued high unemployment. And the only rates the Municipality will receive are those imposed on the vacant land – R184,000 over the next 10 years.
As a result of the proposed development charges, many promising developments are going to be killed before they’re even off the ground… and consequently all high hopes of improving local economies and engaging in relationship building projects with local businessmen are squashed.
A phased rates rebate over the same period sufficient to increase the return on investment to a market related return: Rates Income to Municipality R5,5 million. New permanent jobs created: 120. New houses required to be built: 40 with attendant jobs and additional rates to the Municipality. Surely a R5,5 million rates income to EThekweni Municipality is preferable to a R184,000 income?
The development charge should be scrapped and substantial rates rebates over a period should be implemented to encourage developers to build. If Government is not prepared to fund infrastructure costs (one of their obligations to the nation) then why don’t the Municipality issue tax-free Muni bonds to fund their infrastructure costs?
Should this proposal be adopted, I am sure there would be at least 50 major new projects proposed for EThekweni Municipality within the next 12 months. Imagine what that would do to your rates income base over the next ten years.
I feel that I have a huge positive contribution to make, and I am sure that if all the stakeholders could sit together, we could thrash out an acceptable solution for all. For the future of our country, we have got to get away from the “you guys, us guys” mentality and work together as a united team to resolve our problems.
When I first read EThekwini’s report, I was beyond anger, because so many exciting plans that I have for property development, and my high hopes for the future of this country, evaporated in the face of legislature that simply makes no economic sense. I’ve spoken to mayors, councillors, municipal officials, and have even tried to arrange to meet with the Premier’s Office, the Mayor of EThekwini and the ANC and local Trade Unions to get the message across that this policy is going to hurt our country. Obtaining an appointment to speak with a senior official at EThekwini Municipality is impossible.
South Africa is already one of the three highest taxed countries in the world, up there with Norway and Sweden; but conversely has one of the worst productivity, unemployment and growth rates. Strikes are costing us a fortune and the politicians play their internal power games instead of concentrating on the many problems we face. These problems can be simply resolved if someone has the commitment to sensibly address them. And the first thing that needs to be done, is to address the needs of the small businessman – he’s the one who actually creates a successful economy.
We urgently need a rates rebate policy, the scrapping of the proposed Infrastructure Charge and review of the many other charges levied for new developments that will encourage developers to proceed with new projects. This would be in the interests of not only our industry, but also will increase the income tax base for the municipalities and SARS and create jobs and infrastructure.
This will encourage development in EThekweni Municipality which will eventuate in a sustainable rates income base for you. I am very aware that implementing this will cause even more problems to EThekweni Municipality short-term financing, but there are solutions to this and we the community must actively work with you to help find a resolution that will solve this problem.
I still believe that our country has a great future – and if we work together, we can overcome difficulties, create awareness of our frustrations and put South Africa on the fast track to economic success.
Yours sincerely,
Ed Peen
Chairman
Amber Dawn Development (Pty) Ltd
edpeen@amberdawn.co.za