The road ahead for engineering service contributions - The Property Developer , March 2010
The topic of engineering service contributions is one with which most developers are already familiar. The legal and regulatory frameworks surrounding the amount of the contribution for a development, and the means of making it, are still very much in the developmental stages. Dr John Sampson, a civil engineer specialising in transport engineering, addressed a seminar held by the South African Institute of Valuers late last year, in order to try to shed some light on the process.
Dr Sampson’s address focused on the road financing portion of engineering service contributions, and how they are now seen by many municipalities around the country, including local and provincial authorities, as a major source of income, particularly because of a lack of funding in other quarters. He gave a brief explanation of the concept, and went on to discuss where South Africa’s system is going, why developers are expected to pay engineering service contributions, how much they should be, what the legal framework is for charging them, how they have been implemented in the past, and what some of the problems within the system are. He also pointed out that a new framework is currently being developed, and explained the principles on which this is based and how the future implementation of engineering service contributions is likely to work. The following is a summary of his address.
What are engineering service contributions?
For the uninitiated, engineering service contributions are financial or equivalent contributions made to a municipality by an applicant, usually a property developer, who has been granted enhanced land use rights in order to develop a piece of land. The change in the land use rights triggers the requirement for the contribution to be paid – if the land use rights are not changed, then no engineering service contribution is necessary. When an applicant makes an application for a change in the land use rights, its approval by the municipality is usually subject to this contribution.
Essentially, an engineering service contribution is a contribution towards the capital cost which the municipality will incur in providing additional engineering services to the development in question. In the various acts and ordinances which deal with them, the engineering services which are usually contributed to are roads, storm water, water services, sewage services and electricity services. While the focus in Dr Sampson’s address was on roads, many of the principles and the calculation of the amounts payable are common to all these services.
Why should an applicant pay an engineering service contribution?
All townships need services, and additional developments which have required a change in the land use rights will result in the need for additional services to those developments. These services have traditionally been provided by the municipality. Developers who apply to change the land use rights on their properties will incur the responsibility to pay an engineering service contribution as a result. Partly because of the need to allocate costs to the various parties involved, the relevant services to the property are divided into internal services (those inside the new development) and external, or bulk, services (those outside the development). The applicant is responsible for providing all the internal services such as roads, sewage, water, pipes, drainage, etc. It is once the internal services join the external services or municipal infrastructure (such as an arterial road), the engineering service contribution becomes payable. The reason for this is that while the applicant is responsible for the internal services, it is up to the municipality to provide all the external services – but the applicant’s new development is going to have an impact on those external services, so the principle behind the contribution is that the developer should compensate the municipality for the cost of those external services to the extent that his development is going to make additional use of them.
How much should the engineering service contribution be?
The amount paid should be in accordance with the additional impact that a development makes on the external service, but it should also be such that the inhabitants of any existing township should not have to subsidise the new township. Equally, the existing township should not derive benefit from the new township – ie, the developer should not be paying to upgrade or subsidise the existing services of others.
At present, there is a lack of clarity on exactly which legal framework should be used for engineering service contributions, which is cause for some confusion. In the past, the Town Planning and Townships Ordinance of 1986 was used, but to a large extent this has been overtaken by other legislation and it is supposedly no longer applicable. However, there are certain clauses and conditions in that ordinance which are still being applied by some local authorities, which developers should be aware of. In terms of that ordinance, applicants “may” be required to pay a contribution. This, of course, presents an immediate problem in that it is then up to the municipality to decide who pays and who doesn’t, which leads to unequal treatment when some developers have to pay, and others don’t.
In order to try to set out the requirements more clearly, the Venter Commission of 1984 set guidelines for the implementation of engineering service contributions. These guidelines were put into effect as what have been termed the administrator guidelines in all provinces.
The Venter Commission determined that the cost of the engineering service contribution should be negotiated between the applicant and the local authority, although this gives rise to its own complications, and again, can lead to unequal treatment. The commission also derived what is called a TMA (Transvaal Municipal Association) formula, which calculates the cost of the contribution based on capital costs, consumer units and outstanding loan debts. This formula is supposed to be used in cases where negotiations are not working. The formula states that the municipality should take the total cost of its road network, for example, divide that by the total number of people using the roads (consumer units) and then subtract the municipality’s outstanding loan debt for the provision of those roads (which they will recover over time as developments take place and occupants of properties start paying rates and taxes). The formula itself, however, is also problematic because it is extremely difficult, if not impossible, to calculate accurately the extent of the road network and the total number of users. As a result, many municipalities have simply made estimates on the engineering service contribution amounts.
When the Development Facilitation Act (DFA) was passed in 1995, it did not affect the ordinance obligations in any material, but with the passing of the Gauteng Planning and Development Act (GPDA) in 2003, the way in which engineering service contributions should be determined was redefined. It is unfortunate that, while the GPDA was approved by the Gauteng cabinet, the regulations were never approved, making the act effectively toothless.
The GPDA introduced the concept of link services between internal and external engineering services, and the way of paying for these has its own definitions and associated complications. One thing this act did do was to dispense with the TMA formula, although it still required a contribution, the amount of which was to be stated the Gauteng planning Tribunal. This, again, is not a set amount and is difficult to calculate without leading to disputes. Unfortunately, with the regulations not having come into effect, there is nothing else on which the contribution amount can be calculated other than the arguments of the planning tribunal.
There are also a number of other legal frameworks (including the Constitution, the Municipal Systems Act of 2000, the Municipal Finance Act of 2003 and the Municipal Property Rates Act of 2004) which determine what the municipal, provincial and national governments’ responsibilities are. All of these deal, to varying degrees, with the ability of municipalities to recover the costs of service provision, and how they should be accounted for and spent.
Complications and confusion
There are a large number of town planning schemes in operation around Gauteng alone, and some of these require no engineering service contribution at all. This is especially applicable in area where the municipality is trying to promote and foster development. Others charge varying amounts, and until now, many of these (and the methods of determining them) have been ad hoc, inconsistent and confusing.
To make matters worse, often the amounts collected in the way of engineering service contributions were very small. For example, it costs approximately R1 million to construct one kilometre of single lane road today. A four-lane road would cost R4 million per kilometre to build. If a development is going to generate 100 cars, and the developer is charged R1000 per vehicle (charges have varied between R200 and R2000 in the past), the contributions for the road is R100 000, which doesn’t go very far. So, unable to do anything immediately with such a contribution, the municipality concerned would put these funds into the council coffers, and perhaps after several years, it would be allocated elsewhere and not used to upgrade the intended roads.
The result of this is that even though contributions were made and the roads were theoretically paid for, in many cases the infrastructure simply wasn’t built, and we are now living with the consequences of that in just about every major city in the country.
Because of the lack of consistency and predictability, some developers in the past have been coerced into implementing massive upgrades to the infrastructure surrounding their developments. Once again, this opened up the potential for unfairness and great dissatisfaction. Many developers found themselves at a disadvantage purely because of the fact that their development was right next to a provincial road. Now, while municipalities are entitled by law to charge an engineering service contribution, the provinces are technically not entitled to do so. However, some developers found their applications would be refused unless they were prepared to contribute large sums of money to upgrading the provincial road, regardless.
Exploring solutions
Clearly, the situations above have not resulted in a workable or predictable system, and there are plans in place to try to rectify this. At present, a new set of National Guidelines for Engineering Service Contributions in South Africa is being developed. These guidelines are based on earlier work which was carried out for Gauteng and some of the metros, many of which recognised the need to streamline the system. The National Department of Transport and the South African National Roads Agency Limited have appointed a group of consultants who will be developing these guidelines.
These new guidelines will be based on a number of principles which are set down here briefly:
- The engineering service contribution must be justified. That is, the beneficiary of enhanced land use rights must contribute towards the cost of service provision.
- The contribution must be limited to the actual impact of the new development and is not required to remedy any backlog (a problem many developers have been facing).
- The principle of full cost recovery will be applied – that is, the additional demand will be calculated and the full cost of the service to meet that demand must be paid.
- There must be equal treatment of every applicant regardless of location or situation. Every town planning scheme will have to make provision for this. In cases where a municipality does not want to charge the engineering service contribution because it is trying to promote development in an area, they will be entitled to reduce the amount payable by the developer, but the municipality will have to pay the balance to make up the full amount.
- The developer must have certainty about the amount of the contribution before he submits his application. This is important because developers will now be able to calculate upfront what the engineering service contribution will be, and build into their costs.
- The amount of the engineering service contribution required must be defendable – that is, it must be able to withstand legal challenges.
- Efficiency: the policy is intended to be uniform, standard and easily implemented with minimal cost. This should eliminate difficult and costly calculations and negotiations.
- The amounts will be current, as they will be reviewed annually or as required.
- Discretion is another important principle. Applicants will be able to elect to build the infrastructure themselves in lieu of paying a contribution. This has already taken place in some cases. This gives the developer control over which infrastructure gets upgraded and how, and as long as the appropriate amount is being spent, the municipality will not ask for the money.
Future implementation
The implementation in future is intended to be fairly simple. In phase one of the process, the applicant will be given a master plan by the municipality which will indicate the approved land uses for the relevant integrated development plan (IDP), and the class one, two and three road network. In the absence of such a plan, the developer can submit his own plan showing the intended development and the roads that he would like to allow for, and can make the upgrades and recover the costs from the engineering service contribution amount. The municipality will have to provide a spreadsheet on which the applicant can calculate his contribution, according to the uniform implementation requirements.
In phase two, the applicant submits his land use proposal with the accompanying traffic impact assessment (TIA). The TIA will indicate the amount of the engineering service contribution and the applicant’s offer, if any, to design and construct external roads. The municipality will have to consult with any other affected authorities and can accept or reject the offer, but it is must furnish reasons if they reject it. Neither the fact that the applicant is not prepared to build infrastructure, nor the fact that there is a backlog and congestion, is a ground for a municipality to refuse an application.
In phase three, the applicant provides the actual infrastructure either by paying the engineering service contribution or by building it himself. After the normal defects period of one year has expired, the municipality takes over the road's.
It is important to note that the amount of the contribution under this new system will be five to ten times more than the current engineering service contribution amounts, and the reason for this is the ‘full cost recovery’ principle. Some developers consulted by Dr Sampson in his investigations have indicated that they are not necessarily unhappy with this because it will enable them actually to build the infrastructure (as opposed to watching their money disappearing into council coffers) which they require in order to support their development and make it more attractive. There will also be no further requirement for upgrading – the council will not be able to require that the developer does anything further once the required infrastructure has been built. The certainty that this offers – the improved levels of infrastructure and service – is likely to increase property values.
The road ahead
The national guidelines are expected to take some 18 months to complete (the process started in about September 2009). There will be extensive consultations and workshops in major centres around the country. Once the guidelines have been developed to the extent that they can be published, there will be workshops with the local and provincial authorities, but developers, land use consultants, valuers and other interested parties will be welcome to attend and give their input.
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