Property Rates Bill: municipal submissions

Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
13 August 2003
PROPERTY RATES BILL DELIBERATIONS: MUNICIPAL SUBMISSIONS

Chairperson: Mr. Y I Carrim

Relevant Documents:
Local Government Property Rates Bill (B19-2003)
Ethekwini Municipality Submission
Ekurhuleni Municipality Presentation
Ehlanzeni District Submission
Klerksdorp Municipality Presentation
Johannesburg Municipality Submission
Johannesburg Municipality Presentation
Letter to Municipalities requesting input

SUMMARY
The aim of the meeting was to engage with the practical implications of implementation through the use of submissions from the municipalities. A letter had been sent out framing the questions that the Committee needed answers to before any decisions were taken. The municipalities of Ethekwini, Ekurhuleni, Ehlanzeni District, Klerksdorp and Johannesburg presented their practices and experiences with regard to property rates.

Tentative decisions were taken based on discussions and submissions between the Committee and the municipalities. It was decided that a subcommittee would be formed to engage with the details of particular issues and SALGA was given till 26 August to submit their position on the rating method.

MINUTES
The municipalities of Ethekwini, Ekurhuleni, Ehlanzeni District, Klerksdorp and Johannesburg presented their practices and experiences with regard to property rates.

Ethekwini Municipality Submission
Mr. Louis Kruger presented that the basis of valuation in the Ethekwini municipality was for land market value and for improvements, replacement cost less physical depreciation. The rating system for residential properties was a composite rate applied to the combined value of land and improvements and for commercial, vacant land, agricultural property separate rate randages for land and for improvements. Agricultural land was currently rated as "other" property with a special rebate being applied to all agricultural properties. The rebate was currently under review.

Under the broader impact on the citizenry point 3.1 stated that the current ratio of rates income was +/- 35:65 with values of property in residential areas at R54,6 billion and industrial / commercial at R39,7 billion. The current property boom in residential properties could materially impact on this ratio.

Mr Kruger pointed out that the broader impact between affluent and poor areas would see significant rates increases in affluent residential areas and a reduction in rates in poor or less affluent areas. He pointed out that the majority of rural properties would probably fall within the lifeline policy and would pay no rates or a low flat rate only.

The presenter said that the impact on the commercial sector/CBD would see considerably greater rates increases for new commercial developments. The CBD values were expected to drop, thus rates would drop largely as a result of the degeneration of the inner city core.

Mr Kruger said that the administrative feasibility of the Bill would see the initial challenge being the determining of a market value for each of the approximately 450 000 properties in the Metropolitan area excluding sectional title units. The inclusion of sectional title units would increase total number of properties. The shifts in the incidence of rates would be better managed if the property values were reviewed more regularly. The take-on of the outstanding debts within each body corporate would have a considerable impact on administration.

On the theme of exemptions and exclusions, he said that the lifeline policy in respect of residential properties was in terms of a council resolution. Exemptions in respect of churches, welfare organizations etc were currently prescribed in terms of the Local Authorities Ordinance. Exclusions, such as amateur sporting bodies, were in terms of council policy. Applicants were required to complete a questionnaire and a detailed analysis was conducted on each applicant before an exemption was approved. Welfare organizations and churches, including the manse, currently paid no rates. Where part of the premises was hired out for monetary return this portion was rated. The Council would need to determine the future rating policy.

All public service infrastructure (PSI) was rated other than pipes, cables, roads and railway lines.

On the exemption of R15 000, if the figures applied the general rate would see a 5% rate. Property less than R30 000 would have no rate but that people between R15 000 and R30 000 would end up paying. People with properties beyond R30 000 would also pay. The higher up the line there would be a 1% reduction and an additional 5%. There would be a shift from poorer bands to higher affluent bands. He said that he was not against the rate but stated that there would be an impact.

On the provision of phasing-in of rates, the Bill was fine for new ratepayers but that there was no provision for existing ratepayers to be phased in. He argued that the impact motivates for the phasing in of the new rate system.

He suggested the option of the banding of property values. This system would ensure that the band would pay whatever rate applies to it. He motivated that this approach would cut down on administration and valuation issues.

Discussion
Mr P Smith (IFP) said that his understanding of the R15 000 was as a minimum so it would not change in Durban. He wondered in the context of Durban if there was a flat rate or a variable rate on land improvements, which direction the municipality would take. He asked about the property boom and what one does in that situation.

Mr Kruger explained that across the board R8 million was exempted from rates. Having a much broader base to calculate was a reason for concern. The municipality did not apply a flat rate to lifeline properties. He did not favour a flat rate. His reasoning for a variable rate was that he believed there would be a higher value, which would mean more contribution. If there was not a variable rate, the poor would be subsidising the poor if there were a cap on the flat rate. Each value carried a proper rate.

Mr Kruger explained that there was a property boom because of the foreign money that was coming in and pushing up the prices. With the rates that the municipality would attract, people would no longer be able to afford it. He explained that it forces people to move but he admitted that this was not related to the Bill.

Mr Carrim asked about the question of deferred rates.

Mr Kruger explained that there was defers for pensioners. The municipalities looked at properties less than R60 000 until the property changed hands. Rates did not exceed 30% of the rate value.

Mr J Durand (NNP) brought up the issue of 4-roomed stock houses. The houses could be valued over R100 000 under the land & improvements value although the house had no ceiling etc. He asked what the municipality's experience was with this. What about the impact of the market value when it came to the townships? How were values determined?

Mr Kruger said that the national rate value was R30 000 which fell into the flat rate. There was not much of a market and that the municipality would try and look at other homogenous areas and try to submit a rate. He explained that it was hard to determine a market. The Department of Provincial and Local Government's study showed that rates would drop if the market was introduced. If they fell into the lower band they would get more benefits.

Rev A D Goosen (ANC) asked how the municipality rated agricultural land and if they rated land with crops etc.

Mr Kruger explained that the municipality rated agricultural land as all other properties. They rated land separate from improvements. Agriculture received an 85% rebate, which brought the rate down substantially. They did not value crops, just the land.

Mr S Mshudulu (ANC) asked for information on how the municipality defined PSI.

Mr Kruger explained that airports were rated fully together with the runway. The shopping area in airports were commercial enterprises.

Mr Carrim asked about sectional titles and individual titles. This was a strain on municipalities therefore why did the presenter motivate that. He asked for an explanation on the subsidisation in residential suburbs and the commercial area.

On sectional titles, Mr Kruger explained that municipalities were taking 209 body corporates to court, which was a lengthy Supreme Court route. In order to treat everyone equally, individual units would be rated personally. He admitted that it was more work but pointed out that it was fairer. On the issue of subsidisation he said that cross subsidisation of residential and commercial properties sees residential properties rated at R54, 6 billion with an individual R39 billion rebate system which was a 71% rebate to the residential sector. The municipality was aware that the commercial sector could pass on the cost to consumers but the residential sector could not do that. There was a 35% rebate for residences and 65% for the commercial sector.

Mr Carrim gave clarity on what the Committee was expecting which was the experiences the municipality was having based on their reflection on the current clauses in the Bill. He wanted a clear outline of what was beneficial and what was not. He explained that he was puzzled by what was being said. He said to municipalities that they must be clear because the Committee needed information. The department must also explain how they got to their conclusions and how the general answers were arrived at - based on the experiences of municipalities.

Mr Smith brought up the issue of affordability. He felt the situation had been under-represented and that the property boom was an issue of affordability. The current system was variable rating but which system gave more discretion to municipalities to make adjustments: variable rating or fixed rating? He asked why a fixed rate would add to the problem. He commented that market value would result in an increase and not the valuation method.

Mr Kruger replied that the municipality was still using 1998 values, which meant that properties were in sync. Once you introduce market values, different areas increase and they move up in sync. The property market could push up the value. Therefore the new value to determine the rate should consider the increase. It was not the Bill that was having an impact but other factors that were causing the impact. They had applied system and the suggestion was that maybe it should not be fully market value.

He continued that current practice allows for discretion and that the ordinance allows for differentiation between sectors. The municipality had the discretion to pay special attention to the poor.

Mr Durand asked what exemptions the Bill should have. On the issue of commercial values where market value and improvement is replacement minus depreciation, he asked if replacement was the same for commercial as for the township. He also asked about the impact.

Mr Kruger agreed that replacement value would have an impact. He explained this by saying that because of the limited market in the township the values would drop. The anomaly rate freed the first R30 000 but the Bill now proposed R15 000. He proposed that there should be a limit across the board of R50 000 because lifeline values are below R30 000. Exemptions did not have much impact because the municipality was doing so already. He explained that for improvements there would be a relatively small increase for power stations and substations. Most of them belonged to the council so basically the municipality would be rating themselves.

Ms Jackie Manche (DPLG) commented on the movement of the Department towards market value. She pointed out that it was not the Bill that would cause an increase but that the increase was caused by a number of factors. The market value showed the real value of property and this approach was treating citizens more equitably. The values of the properties in townships may be higher than the department thought and thus the poor were subsidising the rich. For the municipal situation, certain property values would go up through the market value or through the revaluing after 5 years. It did not necessarily translate into a higher rate. Municipalities had to decide the rate based on their expanded tax base.

Mr Smith pointed out that Mr Kruger had said the opposite to Ms Manche and asked for clarity.

Mr Kruger explained that municipalities had to look closely at the relationship between residential properties and commercial properties. This relationship had to be looked at more often than 5 years. The administration burden could be managed. Municipalities were collecting the same pot of money and the issue was how municipalities would spread that out from the base.

Mr Durand said that the municipality could not discriminate against the industrial sector and agriculture based on the provisions in the Bill.

Mr Carrim said that you could discriminate.

Mr Durand asked what the boundaries were for return investment. On the basis of agricultural land and improvement land what did the municipality understand to be discrimination, knowing the limited return investment.

Mr Kruger explained that you could identify certain sectors and apply certain rules to them. The overall system had identified residential properties and agricultural land as valid areas to get rebates in order to treat them fairly. It was difficult to go to specific areas and he would see that as unfair.

Mr Carrim said that the Committee could not pursue issues that had already been debated extensively. He ruled that the question had been dealt with. Mr Carrim introduced the notion that you could have variable valuation in the Bill with the two options: land or improvements. He repeated that it was possible to do this in the Bill.

Ms Manche explained that improved value had to be a composite rate.

Mr Carrim asked Mr Kruger if he was aware of this.

Mr Kruger admitted that he was not.

In reply to Mr Carrim asking why body corporates were not paying, Mr Kruger explained that in this area you would find gross mismanagement. In poorer areas they try to do it themselves instead of the managers. He admitted that they were not collecting from unit holders.

Mr Carrim pointed out that the Bill advanced the case of the unit holder and the body corporate. The Bill mandates that the rate should be taken from the individual. He asked if municipalities agreed with that and he asked the department if outstanding arrears would be a problem down the road.

Ms Manche admitted that the department had not thought about the matter very carefully. She said that they would look at it.

Mr Johan Boshoff (Ekurhuleni Municipality) said that according to section 1.1.8, you could demand rates for 2 years but that thereafter you could not keep it back anymore.

Ms Manche admitted that she had not worked with sectional title and she was reluctant to say it had been worked with if that was not the case.

Mr Kruger explained that their municipality's legal team lifted their department from body corporates so that they could collect old rates. He suggested that the Bill look at this.

Mr Carrim commented on the exemption of churches, that is, places of worship. The Committee was not sure about the commercial aspect of this. He asked the municipality what they exempted.

Mr Kruger explained that where there was a religious activity taking place they were automatically exempted. Where there was a commercial activity they isolated it from the rest of the property and that entity was rated.

Mr Goosen asked for clarity on whether the church would be rated.

Mr Kruger said that it would be if the municipality could prove that there was a commercial interest.

Mr Carrim asked Mr Kruger that based on his experience what would he go for: site value or land and improvements with a fixed rate or land and improvements with a variable rate?

Mr Kruger said that the municipal view on values was a preference for the clearest method therefore he would choose a fixed or variable rate being applied to a variable rate system.

Mr Carrim asked if he wanted to have a uniform system with a variable rate.

Mr Kruger agreed.

Ms Manche asked how that would happen.

Mr Kruger said that a land rate of 0.19 cents of the rand the ratio of land & improvements is 12:1 therefore the rate of improvements is 1,7 cents. He explained that through a formula some sectors received a 50% rebate, the government 60% and agriculture 85%. Whether it was a percentage rebate or a calculated rate it would say the same thing. The uniform rate is 19% for land and the variable is the application of the rebate.

Mr Carrim commented that a variable rebate and a variable rate is a highly political decision. A variable rate across the board is objective and less political.

Mr Kruger repeated that there was no difference and that they were saying the same thing.

Mr Kevin Meyer (Ethekwini Municipality) explained that in the existing system the poor were paying more. With a move to market value there would be a turnaround with the poor paying less and affluent areas paying more. He submitted that banding was a way to address where property rates had hit the roof. He repeated that the Committee should look more in depth at banding.

Mr Carrim asked Mr Meyer if he supported the phasing in of a new rates system.

Mr Meyer explained that he agreed with phasing in, in the short term, but that the situation needed to be managed because the property market would take off.

Mr M Manyike (DPLG) asked for clarity on the issue of valuing. If you had a system where land was valued and improvements were valued, would you be able to use a composite rate based on variable rates? He also asked if the concept in the Bill was proposing land and improvements with one value. There was a variable rate across the residential sector and he asked that within property would it be per range when talking about variable rating or would it still have land and improvements, and is that variable?

Mr Kruger explained that once the Bill became law it came in composite land and improvement rates. He further explained that variable rates came in residential and industrial sectors with a 30% rebate on residential and 60% on industrial. You could work out a different rate that was variable to property rates as a whole.

Mr Smith pointed out that it was in the Bill. He asked from a strategic point of view what the presenter would prefer.

Mr Kruger said he preferred one property rate for the sector.

Ms Manche asked municipalities why when they had market value, would they then decide on different categories with different 1 rate in the rand. Why after taking decisions, would they add rebates - because you would not be able to tell the residence sector the price that they have to pay. She asked municipalities why they did not just rate and what was the purpose of a rebate?

Mr Carrim agreed with Ms Manche and asked municipalities why they did not lower the rate in the rand. A rebate now made no sense.

Mr Ben Dorfling (SALGA) explained that most ordinances spelt out the 1 rate in the rand, which allowed for rebates such as for the residential sector with a maximum rate in the ordinance. There was not rebate systems with categories but rather it was a political system. He asked why there was a rebate on a figure when you could just give the rate in the rand that was more transparent for the categories?

Mr Musa Soni (SALGA) explained that it was an artificial political decision to give the impression that municipalities were giving something back.

Mr Kruger agreed that Mr Dorfling was right because it was something else to rate properties as opposed to giving rebates. He brought up the Income Tax levy where the lowest stratum was rated the same. For properties to be put into intervals it would depend on the categories. He explained that not having rebates applied is an option but that it left no room for the poorer classes and that it did assist with integration.

Mr Carrim noted the ideological predisposition not to unduly penalise the rich and then
told the department that banding seemed like a good idea. It was evident that the notion of fixed rates did not cater for situations like Durban. He asked the Committee to think about how to cater for situations like that.

Mr Smith asked if it would be a higher marginal or lower rate on the band as there were different approaches. He was not against the principles but was concerned about the citizens who fell into the margins.

Mr Carrim wondered what other options there were besides banding.

Ms Manche stated that the department had a position that was opposed to banding.

Mr Carrim reminded them that the principle of the Act was not to unduly penalise the rich hence as a Committee they had to explore mechanisms to deal with the provision of banding.

Ms Manche pointed out that municipalities had moved on from this issue. She argued that the shocks would not be hectic and that they were providing for the impact. She pointed out that municipalities had already undertaken revaluation therefore shocks were not relevant.

Mr Smith questioned whether the issue was shocks or the magnitude of the shocks. The submission had demonstrated the figures and the spread.

Mr Carrim ruled that it was the view of the Committee and the issue needed to be addressed.

Ekurhuleni Municipality Submission
Mr Daniel Lieberberg presented that the basis of valuation was market related and the rating was based on site value only with the rate being 10,36c/R on site value. Value of improvements was also recorded on the valuation role but that rating was based on site value only.

Mr Lieberberg said that a uniform rating was used. There would be a discernible impact for both residential and business and commercial entities. The Bill would probably be more fair and just but the impact to implement the Bill would be severe.

On the effect on the poor and lower middle class, the effect would be severe but this would depend on the rate in the rand charged in terms of the Bill. On the question of the effect on social mobility of people, he argued that it was quite possible that rates could remain relatively the same for all residential sectors ranging from the very poor, to the super rich therefore the effect of social mobility would not be severe.

The desegregation of living areas would probably still continue from the poor to the middle class areas as before with a decline towards the more affluent areas. Mr Lieberberg said that it was much easier to substantiate and to do the correct market valuation on residential sites other than on the improved (total) values thereof. This could lead to feelings of unfairness and competition between neighbours. For valuers, it would be difficult to keep track of the change of improvements on residential properties and lack of accessibility to these properties and the mass valuation approach would contribute to possible inconsistency on relative values.

Mr Lieberberg pointed out that there was an increased probability of mass objections and there was a possibility that it could cause distrust within the Local Authority. Pressure would be placed on local authorities to substantiate their values, to do valuations correctly and to give the impression of efficiency.

The market values at the low end of the property market, especially in former black areas did not show any significant improvement in values since amalgamation. This was contrary to the values at the higher end of the market especially security estates where they showed unbelievable hikes in market values since amalgamation. He was unable to comment on rural areas because the municipality did not have any rural areas.

Mr Lieberberg explained that churches and private schools were currently exempted from the payment of rates, as prescribed in the ordinance. The railway lines between stations were non-rateable. On the issue of PSI, the value of improvements was usually replacement value less depreciation. Most PSI infrastructure was rated including airports, that is, the landing strips, farmland around the airport and the terminals because they were commercial enterprises.

Charitable organisations and welfare organisations received "grant-in-aids" as prescribed by the ordinance and, depending on merit, up to 100% discount was given in some instances. In the case of agricultural land it was rated according to a sliding scale as prescribed by the ordinance.

Discussion
Mr Carrim said that airports would be dealt with now.

Mr G Grobler (DA) reminded the council that smaller councils had airports too.

Mr Lieberberg pointed out that Johannesburg International paid more than the Rand airport.

Mr S Mshudulu (ANC) asked what the definition of 'merit' was under question ll.

Mr Carrim asked what the difference was between 'grant-in-aids' and rebates.

Mr Lieberberg explained that it basically meant which ones got a rebate. He admitted that there needed to be national clarity on this. A rebate was fixed and that the difference was more in the notion of being.

Mr Carrim clarified that rebates were political and 'grant-in-aids' were emotional.

Mr Dorfling argued that taking out rebates removed flexibility and it would mean that councils could only have 1 rate in the rand. The issue was question of what rate would be given to certain categories. The Bill by allowing for many categories and many rates was keeping flexibility. He motivated that the reduction portion of the Bill should remain. In the residential sector there are pensioners and the poor who could either get a reduction or grant-in-aid or profit forgone. He repeated that the system must be kept flexible with no prescription.

Mr B Solo (ANC) took over as Chairperson because Mr Carrim had to leave.

Mr Smith said that he was struck by this issue of affordability because of its inconsistency within the presentation (see 5.2 & 10.7). He found the statements to be contradictory.

Mr Lieberberg explained this by saying that if the same rate was paid then it would be fine but if the same rate were not paid, the rich would pay more.

Mr Smith asked about the 1:12 ratio.

Mr Lieberberg explained that it was 12:1 to rate values. It was the ratio of land value and average to the building value.

Mr Smith said that it seemed that Mr Lieberberg's was arguing for site value. He asked Mr Lieberberg if he preferred to stay with site value and whether his response was a personal or council view.

Mr Lieberberg replied that it was his personal view that the Bill taxes the rich, which meant that the person who improved his property would be taxed and the poorer person would benefit from it. Site value helped to address such problems. It had a base and everyone would pay the same. He asked from a valuation point of view if it was worth it to establish the market on little houses because it helped in the residential sector but not in the commercial sector. It would help if housing was site value and commerce and business was land and improvements.

Ms Zora Ebrahim (ODA) pointed out that the valuers' profession supported market value. The aim to even out the basis of valuation was to address the issue of the poor unduly carrying the burden on residential property in the past. Land and improvements had been suggested and largely supported. Issues could be sorted out via categories or rand rateage. The Bill was dealing with the market value of land instead of the municipal value of land.

Mr Solo commented that there should be a comparison on social mobility. The Committee did not want black areas to remain the same. He said that the reality was that it was an issue of public goods when people move to better areas. The market gives relevant information and added value and dignity to citizens basically improving the quality of life.

Mr Grobler asked if the super rich should get a banding from councils. Had there been a significant improvement of values?

Mr Lieberberg replied that he thought it was a good thing because banding would help a lot.

Adv M Nonkonyana (ANC) argued that the social mobility was not to rich areas. For the middle class it was a market escalation for the rich. Did it not affect non-racialism and entrench the inequalities of the past? He asked for a comment based on the experiences of the council.

Mr Lieberberg agreed that one could not influence market forces. However he said that rich areas could not afford rates over the long term therefore the prices would come down because they could not afford the higher rates. Rates on properties discouraged people from buying thus they move to middle class areas.

Ms Ebrahim spoke on the social mobility/equality issue. She said that new entrants are paying market rates. She explained that buyers would look at the market for the rate. If the current owners have a high value, new entrants would pay for that level. She explained that the issue was skewed for the people who lived in rich areas. The Bill needed to take cognisance of the property market across the country. She pointed out that the Bill could possibly set up a system where you would need a property market in poorer areas.

Mr Manyike asked Mr Lieberberg for clarity about his comment on site value. He also asked about the prices of property at the higher end and if that was not good for emerging property markets. In the long run many more people would be able to afford properties and it would no longer be exclusive.

Mr Lieberberg said that at the end of the day the same rate may affect the market in such a way that it would go down and it would be beneficial to integration. For the super rich the reality is that buying a plot for R500 000 meant buying into a share of the tax on services and buying of the land. He later admitted that it actually made it unaffordable to the lower classes.

Mr Solo said that the market value in certain areas would bring the prices down but that the lack of services made people move around. The market brought in responsibility with a changed mindset about one's property and the community.

Mr Smith proposed that a way to deal with affordability was to ask for figures from this municipality. He wanted to know if banding was a solution and the extent of the problem.

Mr Lieberberg said that banding would help.

Mr Smith asked Mr Lieberberg what would be the effect on the rates burden.

Mr Lieberberg said that by looking at high properties the rating would be increased 500 times.

Mr Smith said that Mr Lieberberg's response was not the answer he was looking for because it did not answer his question.

Mr Solo said that the Committee was not getting anywhere but he pointed out that there were many ways to deal with these issues.

Ehlanzeni District Municipality Submission
Mr Johan Boshoff (Director Auxiliary Services) submitted that the basis for evaluation and rating was land and improvements. The information recorded in the valuation roll was the extent of the land concerned, the improved value, the site value, the value of improvements and the name of the owner.

They used both a flat rate or composite rate. They did give exemptions and exclusions but it depended on the municipality in the district. He gave examples of levying of property rates by Mbombela and Thaba Chweu.

There would be a discernible impact of moving to a flat rate based on land and improvement resulting in investment in improvements being less attractive. In order to save on rates, cheaper improvements would be done

He broke down the broader impact on the citizenry into categories. The effect on the poor and the lower middle classes if property rates were fixed would be that expenditure in this regard could be controlled by the individual . If a poor person received a more expensive property as a grant in aid or inherited such property, the property rates on the improved value may be too expensive and the person would have to sell the property. Mr Boshoff said that it could also be an obstacle for emerging entrepreneurs.

The effect on social mobility of people would see a trend of cheaper improvements to avoid high property rates. More economic structures would be constructed which would result in less attractive areas. The effect on desegregation of living areas may discourage integration into the present living areas. Normally the land value increased in areas where expensive and luxury houses were built because there was normally a relation between the value of the land and the value of the improvements.

In answer to administrative feasibility, it could be done effectively. He mentioned that there would be a shift in both the high and the low end of the property market therefore property rates normally would not affect the value of property.

They did exempt rateable property such as places of public worship and the residence of a minister of religion in full time service. On the issue of PSI value Ordinance 11 of 1977 prescribed the evaluation of railway property, power undertaking property and that they were rated without rebate or discount.

Only agricultural land (agriculture holdings) within proclaimed townships (excluding R293 towns) was rated.

Discussion
Mr Solo pointed out that the agricultural submissions had shown a willingness to compromise when it came to rates. He pointed out that there were poor municipalities due to their rural nature He brought up the case of tribal land rates were being paid to chiefs in the form of a tax. He reminded the Committee about the issue of Kruger National Park and the difficulties of rating.

Mr Durand said that for the tax payer there was no choice because they had an account with the city councils and it sometimes amounts to 50% of their monthly salary. He was concerned about how the decisions are made on how the poor are taxed out of their home. He asked what experiences the municipalities had when the fixed cost was high and about the citizen's ability to pay or not.

Mr Solo interrupted and said that he failed to understand the difficulty the opposition had putting in an extra burden to increase the tax base in order to provide and maintain services. Citizens must contribute to that and it was a means of making people take responsibility for their services.

Mr Durand commented that the Committee should not be idealistic because at the end of the day it was money out of people's pockets.

Mr Solo argued that everyone had to be responsible and that this reality should not have a negative spin on the Bill.

In reply to Mr Durand, Mr Kruger agreed that there was definitely an impact that was affecting the ability of people to pay. The income per household was very low and he brought in the issue of pensioners. He argued that rebates reverse the fixed cost of rates.

Mr Mshudulu commented that the objective of the engagement with municipalities was to gain more information about what was happening on the ground. What knowledge was needed was ways in which the Bill could be positive and assist municipalities to be more effective. He suggested that that the presentations should be in a format that would enable the Committee to consolidate a report about the issues. He submitted that all the sectors should come up with a summary to map the way forward from here. Please summarise the point he is trying to make?

Mr Solo agreed that Mr Mshudulu's points were valid for direction. He asked municipalities to give a sense of to what extent the Bill would be effective when it became law and give assistance.

Mr Kruger responded that generally the Bill contributed to everyone in the country. He agreed that farmers used facilities but were paying nothing. With wall to wall local government the Bill was part of a good initiative. Everyone should contribute in proportion and affirmative action should be included in this, particularly in the rural areas.

Mr Solo asked on the issue of contribution what of churches because farmers were not paying. He stated that the policy framework should enable people to contribute. When municipalities could not pay corrupt methods had been used.

Mr Dorfling said that Bill was going to be in practice in local government for many years to come. Currently the rate system was not based on the same norms and standards because of all the different ordinances. The attempt to standardise the system was not a new monster. Wall to wall local government could provide for everyone. The poor would benefit from land and improvements and the rich would pay more, which would bring more equality to the system. Basically he said that the Bill would bring in a better system.

Mr Solo agreed with Mr Dorfling but cautioned that the issue of affordability should not be forgotten.

Ms Ebrahim asked what exactly was the rate in the rand rating. She also brought up sectional titles and pointed out that there was a benefit in rating properties individually. She reminded the Committee that some issues had been left hanging.

Mr Carrim asked about current practices and how they would effect the provisions in the bill.

Mr Dorfling said that the actual effect of the Bill was on the improvement level value. In the past local government had charged rates based on site value. He charged that improvement value was not as 100% as it should be because in some areas valuations had never been done which meant that there was quite a distorted or skewed picture of improvement value. Until you valued each house based on potential and got improvement value of properties, it was impossible to say that no municipality could argue their point. With improvement value no one could say that it was 100% and that the reality was that they only had a 60% view of what was up. Current improvement value was not fixed. What the Committee needed to see was the high level affluent areas and the lower levels and do a comparison to see the rate in the rand change. There was no rate in the rand measurement at this stage but municipalities could do these exercises.

Mr Carrim asked SALGA to do a comparison because the evidence was not available to conclude on site value rating or land and improvements rating. He noted that this was not a reasonable request because municipalities could not be sure about the impact. Therefore the question was how to allow municipalities to decide for themselves or make a decision without empirical data.

Mr Dorfling said that the impact would be the changing from site value to land and improvements. Improvements would have an impact and that it was a reality.

Mr Carrim agreed with Mr Dorfling and said that his assessment was fair. There was an increasing argument for land and improvements either at a variable or uniform rate. The department would argue that variable rating allowed for site value. He asked what the Committee was expected to do until there was evidence. The Committee should set up the criteria to decide on variable or uniform rating because the presentations could not give empirical data. SALGA and the department were in support of land and improvements at a uniform rate He asked for a comment from the members of parliament.

Adv M Nonkonyana (ANC) he said that the debate about site value and land and improvements was exhausted. The decision should be land and improvements and then the question of rating should be dealt with. The Committee should not forget the question of imbalances.

Mr Mshudulu said that the Committee should endorse the process of getting evidence. The route that had been proposed was necessary because the department had had the challenge of drafting the Bill with no evidence. This route had positive implications for municipalities to add value to the process

Rev Goosen said that and and improvements had been decided on therefore people should have until Monday to respond on whether it should be a fixed or variable rate and then a ruling would be made.

Mr Carrim noted that because of deliberations on the Municipal Systems Amendment Act, the earliest date for conferring with SALGA and the department on all the research that was done would be 26 August. Motivations could be submitted until that day. Failing that, the decision would be to let municipalities decide.

Mr Dorfling said that the better option would be a variable rate for land and improvements because it is easier to phase in. This would be a gradualist approach moving to a uniform system.

Mr Carrim said that SALGA would have to come and outline their position and guide the discussion.

Klerksdorp Municipality Submission
Mr I J Haarhoff (Manager of Financial Services) presented (see document for their comments).

Discussion
Mr Mshudulu asked whether it was deliberate that mention of ordinances was omitted. He asked what policies were linked to dealing with issues of the ability to pay. The current situation looked like a vacuum because it seemed like municipalities were waiting for the Bill which brought in the question of what they were doing now.

Mr Haarhoff said that not mentioning the ordinances did not mean that there was no legislation. He had wanted to put the point across about the impact of the Billl by talking about the background in that manner. On the issue of the ability to pay the municipality had an indigent subsidy scheme to deal with this. Rates should match services and direct services and public good services should not be confused.

Mr Goosen asked if rural municipalities had a decent revenue base. He asked how the rating system would contribute to the increase of revenue in the future.

Mr Haarhoff explained that the inclusion of agricultural land would increase the base. He challenged would it not debilitate agriculture in the future?

Mr Grobler asked what percentage of the properties in mining were houses.

Mr Haarhoff said that in regards to mining 80% were residential properties.

Mr Carrim asked what valuation method was used for agricultural land. He also asked if the application of property rates to agricultural land was tenable. He questioned why the municipality would value improvements if it was not subject to rates, what was the policy of rates on PSI and what percentage was exempted and finally how did the municipality treat welfare organisations.

Mr Haarhoff explained that his understanding of a variable rate was a difference between land and improvements and not categories. He added that property rates were also a culture change with a direct change of mindset. For agriculture they did value the land and the buildings and outer buildings but excluded the crops.

Mr Carrim asked why the municipality valued both.

Mr Haarhoff said that his personal opinion was that everyone wanted development in the rural towns and they had to encourage people to improve their houses.

Mr Carrim pointed out that he was arguing the site value case.

Mr Haarhoff stated that PSI was not valued. Religious organisations, places of worship and the homes of religious ministers that were on the premises were exempt. He explained they charged for picnic areas, parking areas, halls, shops etc.

Mr Carrim asked why they were rated that is picnic areas etc if they were making a profit to plough back into socially useful activities.

Mr Haarhoff said that there was a blanket approach to churches.

In answer to Ms Manche asking if they were using all three ordinances and how this was explained to the community, Mr Haarhoff explained that they only used the one.

Ms Ebrahim asked how using the market value was more work.

Mr Haarhoff replied that the value of improvements would cause a drastic change because for academic purposes there would have to be an urgency to the matter and they would have to notify and explain to the ratepayer. He stated that it was a huge change.

Mr Goosen asked how the exclusion of agriculture, religious organisations and churches worked.

Mr Haarhoff said that within his municipality it was in the form of a rebate.

Mr Carrim charged that the department's evidence was not enough. Site value only was not on or open for municipalities at a variable or fixed rate. He asked if it was possible to preclude a variable rate minus 0 cents of the rand.

Mr Dorfling said that if you use a variable rate you could decrease the rate of improvements and improve the site. There was much more flexibility on land and improvements.

Mr Carrim again asked what the official position of SALGA was - land and improvements at a uniform rate? He asked SALGA if they would allow for variable rating. He reminded SALGA that they must submit their official position by 26 August.

Johannesburg Municipality Submission
Mr Bethwell Jwili (Internal Financial Consultant) submitted that the basis for valuation at this stage was site rating only. The value of improvements was also recorded on the valuation roll. There would be a minimum impact in moving to a flat rate based on land and improvements as the rate in rand would be adjusted to obtain the same amount of revenue needed by the council.

The impact on the poor and the lower middle classes would be minimal with there being an effect on social mobility because of the value of improvements. He suggested that the Bill encouraged people to move where they could afford assisting with the one of the aims of the bill which was desegregation.

Mr Jwili said either method had the same impact on administrative capacity. Tall government buildings were rated. A rebate was granted on a differential basis. Charitable and welfare organisations were given grant-in-aid and places of worship were exempt.

Discussion
Mr Durand asked about the R15 000 exemption in relation to RDP houses and questioned whether it was a meaningful amount.

Mr Carrim ruled that the debate had been exhausted.

Mr Mshudulu asked how Johannesburg had dealt with the issue of mobility in the inner city. The statistics did not reflect this.

Ms Manche asked what the approach was to the inner city downtown area of Johannesburg.

Mr Jwili explained that they had adopted a uniform indigent policy at a particular level. There was a blanket uniform unified system. In regards to the inner city the regional manager was responsible for that. They were trying to revitalise the inner city in terms of a substantial rebate over the long term.

Ms Manche asked if the inner city abused the special rating district.

Mr Jwili said that the municipality was using special rates to attract development to the area for a 5-year period.

Pietermarizburg Municipality Submission
Mr Adrian Ogilvie said that many policies were overlapping in their use. The impact of the Bill would be minimal because they were already using improvements on replacement depreciation cost basis. He did not foresee a problem with the super rich although he suggested a phase-in period to combat the fears of cross subsidisation.