Objection laid with the Public Protector regarding Cape Town’s alleged failure to fulfil its rates and taxes obligations as sec229 of the Constitution.

Thursday 18 December 2014 

Gideon Landman
Senior Investigator: Service Delivery Unit
Office of the Public Protector
Western Cape Provincial Office

Your ref: 7/2-48724/11WC

Dear Mr Landman,

I am sorry it has taken so long to reply to your e-mail of 18 August 2014, in which you advised me of the City of Cape Town’s replies to the queries you put to them on my behalf concerning their rates policies.

You will recall that the gist of my queries was that, in my view, the way the City applies the property rating provisions of the Local Government: Municipal Rates Act 6 of 2004, contravenes section 16(1) of the same Act and, consequently, it also contravenes section 229(2)(a) of the Constitution.

I am most grateful to you for pursuing this matter. However, I would like to clarify my purpose in asking for your office’s intervention. You state in your e-mail that “the only available remedy for any aggrieved party, specifically residential property owners, is to challenge the methods used by the City in a court of law, after the remedies, as provided for in terms of the said Act, has been exhausted.” My grievance, or objection to the City’s rates policy, has nothing to do with the fact that I am a residential property owner; indeed, my problems with the policy would be exactly the same even if I were not a ratepayer at all.   

Nothing in the City’s replies, as you have conveyed them, alters the fact that the current rates policy unreasonably prejudices the key national economic policy of job creation. The policy also undermines that constitutional imperatives of accessibility of land and adequate housing (Constitution sections 25(5) and 26(2)). This brings the question squarely under the purview of your office, and specifically the function set out in section 182(1)(a) of the Constitution: to investigate any conduct of state affairs or public administration that results in prejudice.

As for the contention that a dispute of fact exists between me and the City on this issue, I am afraid that their replies reveal very little in the way of facts at all. At best they simply offer bare denials or plead ignorance, as I shall indicate below, where I deal with each of the four questions in turn. (The City’s replies are in blue and my refutations thereof are in green.) 

I am very much aware that your office deals with numerous complaints from members of the public, and I have no intention of adding unnecessarily to your workload. However, the Public Protector has proved itself in recent years to be the most effective institution we have for the protection of people’s rights in the face of state power. Current rates policy effectively violates people’s rights to employment, and of access to land and adequate housing. Accordingly, I would request that you pursue the investigation and that you reject the inadequate responses offered by the City.

If, having considered my refutations as set out below, you are still not persuaded that this is a matter for the Public Protector, then I would respectfully ask that you give my legal advisor and me the opportunity of a meeting in order to discuss a way forward.

With my thanks once again for your kind attentions so far,

Yours etc,

 Peter Meakin


Meakin Question 1:  

If people are penalised for building by having to pay rates and taxes on bricks and mortar as well as the land, then less building will occur than otherwise? True/False.

City’s Answer: (1) People are not penalised for building but instead are rated on the basis of the market value of property in terms of the Act.

Meakin Refutation: If someone owns vacant land worth R1m he will pay X in rates. If he then erects a building on the land valued at R500 000, he will be liable for 1.5 times X in rates. Clearly, his expenditure of R500 000 attracts a penalty in the form of increased rates; and this penalty acts as a disincentive to such expenditure.

The situation is made worse by the fact that land values escalate faster than improved property values. The following example shows this. Suppose Mr A buys two empty plots of land in an average South African suburb like Southfield for R550 000 each (the current ABSA estimate), while Ms B buys a house in the same suburb for the same total amount (R1 100 000). We must assume that the value of residential land will escalate in value by fourteen times in the next 20 years (as it has in the past 20, as confirmed by ABSA). Then, in 2034, A’s properties will be worth R15.4m while B’s will be worth R7.8m.  This is because, although B’s land will also have risen 14 times in value, her house will not have done so – over time buildings depreciate in value and are costly to maintain.

This shows clearly why the current rates policy encourages people not to build (and thereby negatively affects employment) and also encourages people to speculate by keeping land off the market while it grows in value, thus reducing the amount of land available for landless and homeless people.

A rates policy that sets a much higher rate in the Rand on unimproved (vacant) land would significantly increase the cost of speculating in land, and thus make it, firstly, less attractive to keep it off the market and, secondly, more attractive to build on it. The former would free up land for much-needed housing; the latter would create jobs.   

City’s Answer: (2) The City indicated that it cannot postulate on the allegation that people are building less…

Meakin Refutation: The following ABSA figures show that the City can certainly postulate that people are building less, because the cost of the land portion of an average property has risen by a third – from 37% in March 2004 to 49% in March 2012:

If people were building as much as ever, one would not expect such a marked increase in the land portion of the total value of properties.

City’s Answer: (3) Nor has the City come across any scientific study to support the allegation.

Meakin Refutation: Many studies, reports and commissions have been undertaken, for example, the following:

[if !supportLists]·       [endif]The City commissioned Judge Steyn in the 1980s to review the Cape Town rating system.  His report concluded unequivocally that development slowed when land prices were not curbed by taxes. The City’s response was to institute Land Value Taxation (LVT) in its rates policies, but this was stopped by a High Court ruling against procedural shortcomings.

[if !supportLists]·       [endif]A recent report by the city of Brisbane, Australia; the Mirrlees Tax Review in the United Kingdom; and a seminal paper by Prof Joseph Stiglitz, all acknowledge that imposing rates on buildings (also referred to as ‘rating improvements’) slows development and is bad for job-creation. (Sir James Mirrlees and Prof Stiglitz are both winners of the Nobel Prize for Economics.)  

[if !supportLists]·       [endif]On page 124 of his book That All May Live (1990, A Whyte publishers) Godfrey Dunkley calculated from countrywide South African municipal valuation rolls that, between 1974 and 1984, the growth in value of improvements in those towns which had more than R200m of land and improvements, and which rated land only, was 345% (see table below). This was nearly twice as much as the 189% growth in towns where land and buildings were both rated. This constitutes clear scientific evidence that land value rating leads to far greater investment in buildings (improvements). By definition, such investment creates jobs and promotes economic growth. 

Many other scientific studies and pieces of academic research are readily available from both local and international sources. I would suggest that the fact that the City, in its reply to this question, has admitted that it is ignorant of such studies is an indication that it does not take seriously the duty expressed in section 16(1)(a) of the Act. And, further, that the City is not serious about using its rates policy to promote job creation.


Meakin Question 2: 

To the extent that the City relies on building (improved) values, and not land values, for its rates and revenue, the price of land will rise and this will further impede development, with a further loss of jobs. True/False?

City’s Answer: (1) The City does not rely on the building values for its revenue, but on the market value of property.

Meakin Refutation: I did not suggest that the City relies only on building values. The market value of a property comprises the land value plus the value of the buildings – see section 46 of the Act. In the case of residential properties, the average land value is approximately half of the market value (according to ABSA); therefore, the buildings must account for half the rates and land the other half.

Any asset becomes more desirable to own to the extent that it costs little or nothing to own it; as a result, its price will rise. If land is only lightly rated (because the buildings on it carry half the rates) it is cheaper to own than it would be if it carried the full rates burden. Clearly, the more that land is made to carry the full rates burden, the more expensive it becomes to own, the less desirable it becomes as an asset, and the more its price will fall. 

In the present situation, since land carries only half the rates burden it is relatively attractive to hold as an asset. Therefore, its price tends to rise steadily (as shown by the ABSA figures for Southfield referred to earlier) and this makes it more and more difficult for landless/homeless people to gain access to land.

Conversely, if the City were to increase the rates on vacant land, thus bringing down its price (since it would become more expensive simply to hang on to vacant land for speculative reasons), more and more landless/homeless people would gain access to it. 

Indeed, the City is already rating vacant land at double the rate of improved land. However, this is not sufficient to drive down the price of land to levels where it is affordable for ‘ordinary’ people. Johannesburg and Durban appear to take their responsibilities in this regard more seriously: their rates on vacant land are twice as much as those of Cape Town.   

City’s Answer: (2) The City does not agree with the contention that the rating of property results in the loss of jobs.

Meakin Refutation: In this question reference to ‘property’ means improved property – land plus buildings. The City cannot deny what is self-evident and obvious. Erecting buildings, houses, extensions, swimming-pools, etc, involves the creation of jobs in the construction sector and all manner of supporting and supplying industries. But all of these improvements increase the value of the property and therefore the rates payable. In other words, there is an ongoing cost attached to such improvements (i.e. an increased rates bill every month) and, as with any other investment, if it comes with a cost attached, people will be less inclined to undertake it. Therefore, people will be less likely to spend money on extensions, swimming-pools, renovations, etc. This can only result in a loss of potential jobs in the construction and associated sectors.

This shows again that the current rating policy offends the key national economic policy of job creation; and thus that the policy violates section 16(1)(a) of the Act.


Meakin Question 3: 

Apart from interest rates, land values rely entirely on the location, infrastructure, and services which the City and the Province and Government themselves provide. So if the standard of these drivers of value rises, then land becomes less affordable and fewer job opportunities will result. True/False?

City’s Answer:  In respect of 3 above the City indicated that it does not have any empirical evidence to support or disagree with the allegation that the higher land values results in fewer job opportunities.

Meakin Refutation: I have already shown how higher land prices (resulting from low rates on vacant land) mean that people will tend to hold on to vacant land for speculative reasons; they simply do nothing and wait for the value of the land to go up. Part of the ‘nothing’ that they do is to not build on the land, thus avoiding the increased rates that the City imposes on land that has buildings on it. By not building, such speculators rob the economy of potential jobs.

However, high land values deprive people of jobs in another way as well. There are numerous people who could earn a living from land if only they were able to afford to buy it or rent it. Consider the following actual example. Mr Mosima Pale runs a small business growing organic spinach on 500m² of once degraded land in Wynberg. He pays R700/month in rent and has a house and car. He is a successful entrepreneur, and he has a business plan, prepared by the Western Cape Provincial Government, to expand the business to one hectare. This will enable him to employ 40 more people. I searched the internet for him and found only one agricultural hectare for sale in the City (Atlantis), for R1.8m. This is completely out of his reach, either to buy or to rent.

Why is a single hectare in Atlantis worth R1.8m? To a large extent it is because, as vacant land, it has a relatively low rates burden. If it were rated at three or four times the current rate, it would not be so attractive for its current owner to keep it off the market; it would be worth less, and would increase in value more slowly – if at all. Therefore, the owner would be more likely to sell and it would fetch a lower price. Perhaps it would fetch a price that Mr Pale could afford, and he could then expand his business and create his 40 new jobs.

One has only to extrapolate from this one example, taking into account the huge number of potentially viable businesses which are kept from expanding by the unaffordability of land, to realise the vacuity of the City’s answer. It would be a simple exercise for the City to gather the empirical evidence that they apparently lack, and thereafter to adjust their rates policy to favour access to land and the consequent creation of jobs.


Meakin Question 4: The City is bound to make land as affordable to all citizens as it possibly can in terms of section 25 of the Constitution. True/False?

City’s Answer: The last allegation is disputed by the City indicating that it is continuously making efforts to provide affordable land for housing as part of its mandate.

Meakin Refutation: Certainly, the city makes an effort to provide some access to affordable land and subsidised housing. However, the City also acknowledges that the housing waiting list has now reached such proportions that it will take generations, rather than years or even decades, before it is cleared. In reality, under the present system – in which the price of land rises inexorably – there will never be sufficient affordable land to satisfy the legitimate needs of poor people, or even people with a modest income.

To make matters worse, it is the City itself that is perpetuating this situation. How? By causing land values to rise due to the provision of infrastructure, services and good governance. A well-run city, with good roads, water supply, refuse collection, and so on, becomes a desirable place to live. Consequently, land prices rise in such a city. Who has created such enhanced land values? Not the owners and speculators (they do not put in the roads and collect the refuse) but the city itself. Who benefits? The lucky few who own the land. Who loses out? The many for whom land becomes progressively less affordable and accessible.

I suggest that the City’s answer to this question falls far short of what the Constitution demands in section 25(5): “the state must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis”.

It is entirely within the capacity of the City to construct a rates policy that (1) will penalise the holding of, or speculation in, vacant land and, in doing so, (2) will start to bring down the cost of land, thus ‘fostering conditions which enable citizens to gain access to land on an equitable basis’ as the Constitution requires.

To put this another way, it is unreasonable for the City to continue with a rates policy that effectively encourages people to hold land off the market (while they wait for it to gain value), to speculate in it, and to decline to develop it (thus depriving people of housing and potential jobs). It takes no great leap of constitutional insight to see that this goes entirely against the intention of section 25(5) of the Constitution and, for that matter, against section 26(2) as well. It is simply not sufficient for the City to claim that it is “making efforts” – a purposive interpretation of the Constitution demands more than merely “making an effort”.  

thuli

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