Municipal property
 
MAGIC WAND SNAPPED

By Ian Fife
 
New laws will hamper profitable business between municipalities and developers
  
Small municipalities are successfully using private developers to turn their property holdings into millions of rand, which they can then use to improve their services and infrastructure.
For instance, Overstrand Municipality, which includes Hermanus, Gansbaai, Betty's Bay and Rooi Els, will be able to add R53m to its annual R10m capital budget when profits are paid out from one development.

But recent legislation is making it difficult to repeat these opportunities, says Overstrand municipal manager Jan Koekemoer. Until now, municipalities have used a controversial development facilitation agreement. This handed their properties over to private developers, who had to pay all development costs, including those for installing services such as water, sewerage, roads and electricity.

The Cape Town municipality entered into an agreement with Rabcav, a consortium formed by Rabie and Cavcor, for its Big Bay coastal development north of Blaauwbergstrand. It created a furore for appearing to favour people connected to the ANC-led council, who would have made large profits on the resale of their properties.

There was a public outcry, too, over the Hermanus development facilitation agreement, also by an ANC-led council which signed with Cavcor in 1999. The residents' main objections were that the council had no development experience and did not know what it was getting itself into, and that the structuring of Rabcav's facilitation fee would give Rabcav almost all the development profit.
The agreement gave Rabcav 25% of the difference between the raw land value of a property and the selling price - a share of gross profit that excludes the cost of developing the land. At 25% of gross profit, Rabcav could have got around R75m of the R80m net profit from its development of the Hermanus municipal golf course into a golf estate.

"But the agreement with Rabcav was renegotiated after the public outcry," says Koekemoer. "We reduced its fee to 15%, tidied up some vague clauses and removed the confidentiality clause."
Rabcav's fee will now be between R40m and R50m, and the council will get a profit share of about R35m on top of the R18m it receives for the raw land value of the golf development.

Some residents object that Rabcav is still getting excessive profits. But new Overstrand mayor Theo Beyleveld thinks the Rabcav agreement is a great boon to the area and he's delighted with it.

"They are professional developers and can create profits over 10 years the municipality can never hope to achieve," says Beyleveld. "Rabcav designed 350 houses around the golf course and sold them in eight hours last year. They are paying R200m in development costs out of their own pockets without being able to use our land as security.

"Why should I begrudge them their profit when they have realised capital for the municipality we could not have otherwise made?"

The important gains for municipalities are the development skills they lack. Just as important is the off-balance sheet financing of projects by the developer, bypassing the usual bureaucratic morass. This bureaucracy aims to limit corruption, rumours of which have surrounded some facilitation agreements. (No hard evidence has been seen.)

But the agreements are being improved with each new contract. This can be seen in the development facilitation agreement between the Mossel Bay municipality and Attpower, a consortium of Atterbury Cape and Power Developments. The facilitation fee is now a share of the net profit on a sliding scale between the raw land value and the finished development.
The Attpower agreement gives the Mossel Bay council clear majority control of a joint development planning committee. The Rabcav agreement is vague on that. The Attpower agreement also sets out where the profits to the council will be spent on improvements.
Atterbury Cape CEO Gerhardt Jooste says his consortium is playing a broader role in Mossel Bay than Rabcav in Hermanus. "For instance, we have been doing research into Mossel Bay's history," he says. "There are 42 shipwrecks and other artefacts from a nearly 500-year history. We will turn Mossel Bay into an international resort.

"But we'll do it in a sustainable way with local communities sharing in the developments and their proceeds."

But Koekemoer says the Municipal Systems Act will make it almost impossible for future development facilitation agreements to work. "Section 78 requires us to form any development agency into a municipal entity. This then falls under the Municipal Finance Management Act and eliminates the flexibility the developer has by paying the development costs himself."
This also affects the relative independence of municipal development agencies that are being financed by the Industrial Development Corp.

Jooste is not so gloomy: "Section 120 of the Municipal Finance Management Act supports private public partnerships and government policy favours it. We can still make it work."
The benefits for municipalities of good, clean facilitation agreements are enormous. Yet corruption remains a threat. Transparency and more appropriate bureaucratic rules should, however, deal with that threat.