Press - Profit Centre Promotion

Posted On Saturday, 18 August 2001 02:00 Published by
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'Rich Man, then Poor Man'

Bold proposals for reconsidering the management and prioritisation of Johannesburg's' profit centres, must be allowed to flourish at a policy debate level. Middleton's conceptual model is certainly an interesting one, which only a couple of years ago would have been met with much skepticism in both right and left wing camps. The basic premise of the model - allow for commercially prosperous centres to generate wealth 'become all that they can be' and in so doing generate the necessary proceeds (property rates) for developmental re-investment in under privileged areas - is not necessarily a novel concept and partially already at practice in the city. The fact that the argument is raised as a means for promoting an awareness of 'rich man, poor man' interdependencies, is indeed praiseworthy. Time and debate may raise further interest regarding both detail and the underpinnings of the framework. As part of stimulating the policy debate environment, JHI Research raises some points for consideration.

· Understanding the nature of real estate market cycles is an important consideration. Essentially well performing centres have emerged out of a particular set of both structural and cyclical factors. Sandton for example, has proven itself to be fairly robust in that rental escalations have been met by continuous demand that speaks volumes about its role as the financial heartland of South Africa. This does not necessarily imply that the status quo will continue indefinitely; particularly whilst supply led growth provides for alternative choices of location and whilst other risks lurk. The fundamental principle of promoting such and other centres is however sound and necessary. That being said, in the process of seeking to create a more 'predictable' investment environment, structural city-wide policy intervention may be sought. The concept of 'market intervention' raises a myriad of contentious points that cannot be addressed here - but essentially one that is possibly at odds with principles of city dynamism, growth and competition.
· In predicting this investment and 'best spend' potential, the model would presumably somehow require a rating or benchmarking of profit centres; predominantly as these serve various niche roles and are often at different stages of evolution and performance, for reasons cited above, this may prove difficult. There is also no reason why industrial districts not be included in the picture.
· Clear and bold statements of intent regarding local government's support of the kinds of infrastructure and facilities required to add value to these centres, must be considered. If not, there remains the risk that such a model will be vague and ambiguities will abound.
· On the 'target support' side, careful consideration must be given to the danger of further skewing existing socio-economic disparities. There is little city-wide benefit to 'artificially' propping up marginal 'beneficiary' locations. Perhaps poorer non-performing or obsolete employment nodes adjacent to labour pools should in fact be the subject of investment targeting if such economic resuscitation can be clearly shown to have positive impacts - real job creation and sustainable real ratable properties! The risk exists for local government responding to their social welfare mandate in an ad hoc fashion. For example, housing policy shifts at national and provincial levels could focus spending in rural areas, leaving Council's in a vulnerable position and one which they may be tempted to fulfil using property rates generated by the profit centres. A clear 'partnering' type of approach may be required in order to 'match' growth and reinvestment. Geographical partnering may well be more sustainable and plausible.
· The effective 'gearing' of commercial centres' ratable values provides a strong argument for generating wealth; this needs to be considered in the light that rates were never intended to serve a redistributive role per se. In addition, proposed credit repayments by local government for private capital investment and improvements raises the notion of cash flow dilemmas regarding when such credits are effected and when benefiting localities receive this wealth fund.
· Conceivably, the CBD and other 'poor performing' centres could benefit in a new market-based valuation system - with the gap between them and the premier nodes furthered - this could drive the rental gap even wider thereby causing commercial location strategies to be reviewed. Everything has a threshold. Whilst gaps of a twofold rental differenetial have not been sufficiently enticing, perhaps three or four fold rental rate differences may well prove a veritable 'nectar' for companies seeking to rationalise their overall or partial operating strategies. So whilst the rates base of a CBD scenario painted above may not provide short term spin-off re-investment funds, it needs to be recognised that over time it may well be able to regain the lost ground and become a meaningful contributor to such model (as opposed to being viewed as a 'beneficiary'). Recognising the concept of a 'system' of centres of excellence is clearly necessary, once again pointing to the difficulty of 'targeting' one area above another and recognising the concept of real estate seasonality and timing.
· City Improvement Districts (CID's) are already operational in various areas - but have generally emerged as a 'precautionary' or 'investment-holding' strategy. The concept is premised on the fundamental principle of voluntary or legislated self-management, whereby additional levies raised by contributing businesses, are injected directly back into a CID geographical area for specific services and improvements. In turn, this frees local government to provide the balance of its predetermined 'basic services' in the centre, to other areas, thereby effecting a redistributive mechanism. Furthermore, international and local experience indicates that ratable values tend to increase in established CID's. The idea of a 'network' of CID's is already occurring; an inevitable result of projecting existing trends. Presumably nothing prevents the system of CID's from being the 'proactive' mechansim for a city-wide investment matching strategy - all the basic ingredients exist. Additionally, the Draft Property rates Bill makes provision for the establishment of special rating districts for the purpose of levying additional rates on property, and will further entrench the concept of business/municipal partnerships for focussed investment/development strategies.

South Africa cannot get away from the harsh reality that direct investment is lacking and economic growth staid. Cities and city centres need meaningful economic injection in the form of domestic and foreign investment and must certainly serve as platforms for maximising return on such investment and adding value. We need to grow our cities and facilitate viable and profitable commercial nodes; particularly in the era of fluid capital flows and human resource retention priorities. Examples abound about the kind of direct investments that can be made in the various profit centres and these need to be considered on merit and as serving the city in it's broadest context. Perhaps domestic or even international investors may not balk at the prospects of being party to a city redistibution system akin to that promoted by Middleton, but on the off-chance that this proves a risky proposition and that the nuance of the argument is missed, perhaps careful thought needs to be given to how this is developed and communicated.

Publisher: Financial Mail
Source: Financial Mail

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