Value Capture in South Africa—Conditionsfor their Successful Use in the Current Legal Context

Robert McGaffin & Mark Napier & Lucille Gavera

# Springer Science+Business Media Dordrecht 2013

Abstract This is the second paper in a two-part series on value capture South Africa.Value capture is a broad term used to describe the process of extracting the additional valuethat accrues to a property following specific public investment. As the increased valueresults from public action, the value capture is usually undertaken by a public agency tobring about or pay for a public purpose. The value capture process comprises four keyelements, namely, the creation of the value, the calculation of the additional value created,the capturing of this value and finally the use of the funds resulting from the capturedvalue. While the previous paper addressed the first two components, this paper focuses onthe last two, namely the capture and use of value in the current legal context. The paperconcludes that legally, value capture is possible in South Africa, but that the legislation isvague and inconsistent at times. Furthermore, the paper finds that value capture is mostsuccessful when the policy objectives are clear, the mechanisms are correctly defined,favourable market conditions prevail and solid administrative systems are in place.

Keywords Value capture mechanisms . Legislation . Policy . Inclusion

Introduction

The National Treasury allocated significant funds for transport-related infrastructuredevelopment between 2004 and 2012 and further allocations have been announcedfor 2013 and beyond (Brown-Luthango 2011; State of the Nation Address 2013). This

Urban ForumDOI 10.1007/s12132-013-9211-3

R. McGaffin (*)Department of Construction Economics and Management, University of Cape Town,Private Bag X3, Rondebosch, Cape Town 7701, South Africae-mail: Robert.mcgaffin@gmail.com

M. NapierCouncil for Scientific and Industrial Research, PO Box 395, Pretoria 0001, South Africae-mail: Mnapier@csir.co.za

L. GaveraPO Box 11450, Centurion 0046, South Africae-mail: lucillegavera@gmail.com

expenditure is increasingly viewed as leading to value creation and value capture oppor-tunities, which in turn can generate funding and open up new development possibilities.

The term “value” is used broadly to refer to both financial value and value relatingto the achievement of planning or developmental objectives, such as densification orinclusionary housing.

“Value capture” is a term used to describe the process of extracting (in differentways) the additional value that accrues to a property following some public invest-ment such as the provision of public transport or a school (Brown-Luthango 2011).The value extracted is therefore the value over and above the value the propertywould have had without the public investment. Since the additional value was createdbecause of the state's actions rather than the owner's, it is arguably justifiable for thestate to lay claim to this value through various mechanisms for some public purposesuch as paying for public transport (Rodriguez and Mojica 2008).

The paper begins by assessing the advantages and disadvantages of value capturebefore identifying the main mechanisms used internationally to capture value. It thendiscusses the use of value capture mechanisms in South Africa by giving an overviewof firstly, the legal context in which their use occurs, secondly, the mechanisms usedlocally, thirdly, the key issues associated with their use, and lastly, the conditions fortheir successful use.

The Arguments for and Against the use of Value Capture Mechanisms

International and local evidence shows that value capture instruments can beused to benefit the state, developers, investors, and households in a number ofways (Brown-Luthango 2011; Hendricks and Tonkin 2010; Huxley 2012).

Revenue generated through value capture mechanisms can be used to provideinfrastructure in underserved areas of the city and to make it more viable to extendexisting infrastructure to some areas that might otherwise be passed over. This canhave two positive impacts: it can improve the access of poorer people to jobs, servicesand amenities situated elsewhere in the city and it sets up a location for investment inthese poorer and underserved areas (McGaffin and Gavera 2010).

Furthermore, due to urban infrastructure's ability to attract people and theirexpenditure, it becomes an obvious focal point for investment. The creation of sucha focal point is important considering that many historical township areas wereoriginally developed as dormitory towns and often lacked an intrinsic economic logicwhich would have attracted viable investment (McGaffin and Gavera 2010).

In addition, as value capture is a potential local revenue source for munici-palities, it allows for more flexible, discretionary spending to address local issues(Hickey-Tshangana 2011). This is particularly important considering the follow-ing concerns raised by the South African National Treasury:

“…municipalities are becoming increasingly dependent on national infrastruc-ture grants to fund their capital budgets. This is not a sustainable trend, becauseit means the tariffs for the main municipal services are not covering theinfrastructure costs of providing those services. There is also a concern thatthe use of conditional grants by national government reduces municipalities'

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scope to set their own expenditure priorities, and thus weakens their accountabilityto local communities” (National Treasury Republic of South African 2011:56).

However, value capture is likely to generate the maximum revenue in locationswhere the market conditions are the most developed to take advantage of opportuni-ties created by the infrastructure provision. This creates potential opportunities forlocal authorities, but also some difficulties. By providing infrastructure in established,“wealthy” nodes, revenue generation to the local authority can be maximised, whichif used correctly, can cross-subsidise pro-poor developments such as inclusionaryhousing in the area or elsewhere. However, if the infrastructure provision occurs inestablished nodes in the absence of a pro-poor policy or clear decisions on how theadditional funds are to be used, there is a danger that the value capture exercise willmerely perpetuate the existing inequalities and skewed investment patterns in the city.

At a conceptual level, value capture also raises a number of issues and debates.Firstly, it is difficult to determine what percentage of any value increase is solely dueto the infrastructure implemented by the state, rather than to other extraneous factorssuch as the state of the market or other non-related developments (RICS 2002;Debrezion et al. 2007). Secondly, even if the development opportunities created canbe attributed solely to the state's infrastructure investment, the value created usuallycannot, because to exploit these opportunities, business and development risk-taking,capital, expertise and experience are required to ensure that such opportunities aremaximised. For example, a poorly designed and managed retail centre near a trans-port interchange will not generate the same value add as one that is similarly locatedbut well run and conceptualised. Which of the two outcomes emerges dependspredominantly on the skill and experience of the developers and operators of thecentre, and may have little to do with the actions of the state.

A further point of debate is what level of public investment is regarded as “thenorm” and thus can be reasonably expected in return for standard taxes paid and whatlevel of public investment should be regarded as over and above the norm because itcreates an “above average” investment climate for the private sector to respond to.Therefore, it can be seen that value capture is not a panacea for all poverty issues or asolution to make poor city structure problems disappear. In certain circumstances,some value capture mechanisms have the potential to be a strong developmental toolbut in other circumstances, their impact would be limited.

It is therefore important to understand firstly, the context and nature of the problem tobe addressed through the use of value capture [e.g., revenue generation or socialinclusion]; secondly, the institutional and legal conditions for their success; and thirdly,how they can be used to overcome the identified problem. This paper will focuspredominantly on the second of these. However, in order to assess how the institutionaland legal context impacts on the appropriateness and efficacy of the mechanisms, oneneeds to first understand the defining features of the different types of mechanisms.

An Overview of International Value Capture Mechanisms

Value capture mechanisms can be difficult to understand. In the first place, differentnames or labels are given to mechanisms with similar characteristics. Secondly,

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different permutations of the same mechanism can occur when they are implementedin different economic, institutional and legal contexts. It is therefore more useful torecognise the characteristics of a mechanism rather than to be concerned with thelabel attached to it.

With respect to these characteristics, there are two broad categories of valuecapture mechanisms, although the distinguishing line can be blurred from time totime and some mechanisms can exhibit qualities from both categories. The firstcategory includes mechanisms that try to use the increased value to bring about orfacilitate a broader planning outcome (“social/land use related outcome”) such asdensification or inclusionary housing. The second category includes mechanisms thatextract income in the form of a tax or user charge from the increment value to financethe infrastructure or some other development (“income generation outcome”).

For the sake of analysis, the different mechanisms are discussed below under thesetwo broad categories, but it is important to recognise that in many cases, a mechanismmay be used to achieve both a “use” and an “income generation” objective. Forexample, the issuing of air rights over a train station could result in more intense anddenser land use as well as the generation of an income stream to the landowner.

Social/Use-Related Mechanisms

The main social and use-related value capture mechanisms include transit-orientateddevelopment (TOD), varies zoning tools such as inclusionary zoning and densitybonuses, air rights, land banking and joint development agreements.

Transit-oriented development is not a value capture mechanism per se but it is acontext or form of development that lends itself to the use of value capture mecha-nisms. TOD policies typically make use of public, mass transit to leverage mixed-useprivate and institutional development. TOD places more housing and jobs, and thusmore potential commuters, within walking distance of a transport interchange and indoing so, can help to establish a captive “market” for public transport and increaserevenue streams accordingly (ADEC 2010).

Zoning can be used to direct the location, type and scale of a development wherethere is sufficient market demand to support the envisioned type and scale of uses.Incentive zoning rewards developers for providing certain public amenities or meet-ing public objectives. These bonuses make the provision of public goods by thedeveloper viable because the higher densities generate a higher return by reducing themarginal cost of development (ADEC 2010).

“Inclusionary zoning” is a variation that is becoming increasingly popular in theUS and in the UK, where local authorities require developers to include a certainpercentage of affordable units in their projects to create mixed-income communities.This zoning is however usually only successful where sufficient market appeal anddensities exist to allow for cross-subsidisation to occur (ADEC 2010).

Air rights facilitate development above public infrastructure such as railwaystations and highways. Public authorities often grant air rights in return for theprovision of public amenities, infrastructure and affordable housing (ADEC 2010;Cervero and Murakami 2009).

Land banking usually involves local governments acquiring land near transportinterchanges and holding it until some future date when it is developed, sold or leased.

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Value may accrue to the local authority through income generated, through leasing orsale of the property, or through the attainment of some developmental objective such asthe provision of social housing (ADEC 2010; Hendricks and Tonkin 2010).

Joint development agreements are public–private partnerships where both partiescontribute to the cost of a transport facility and share in the income generated fromthe associated development (ADEC 2010).

Income-Generating Mechanisms

Income-generating mechanisms include betterment taxes, business improvementdistricts, development charges and land value increment taxes.

The use of the term “betterment tax” is often confusing, because in some cases itis used to describe a specific value capture tax while in other cases it is used todefine a category of value capture taxes. In this paper, betterment taxes are definedas the latter; any tax or charge on an increase in value resulting from some publicaction such as the issuing of development rights or the provision of infrastructure(Hickey-Tshangana 2011).

Business improvement districts or central improvement districts (BIDs or CIDs)are usually defined as “special zones” where an additional charge is levied onproperty owners to finance additional services such as security, cleaning and market-ing for that specific district. The main differences among BIDs relate to the purposefor which the funds are used (i.e., the type of special benefits provided in the area)and the vehicle for generating the revenue (ADEC 2010; Hickey-Tshangana 2011).

Development Charges are levies imposed on developers of new or existingproperties, usually at the point that a property is subdivided or when a developmentor building permit is issued; in other words, in the course of an effective change inland use rights. The primary purpose of a development charge is to contribute to thecost of additional municipal infrastructure arising from the more intensive develop-ment associated with these land use rights (ADEC 2010).

The principle underlying land value increment taxes (LVITs) and tax incrementfinancing (TIFs) is that public infrastructure investment will increase the propertyvalues in an area, which in turn increases the property rates collected from that area.The municipality can therefore ring-fence that additional revenue to pay for theinfrastructure in question and in some cases other public goods.

In short, a municipality can establish a special taxing district by law and then valuethe properties within this district both without the infrastructure (the “before scenario”or “base value”) and with the infrastructure (“after scenario”). The difference betweenthe two is understood to be the “increment value” created by the infrastructure. Theproperty is taxed as per the “after scenario” and the income received is then dividedbetween the income earned on the “base value” and the income earned on the“increment value”. The income earned on the “base value” continues to be used tofund the general municipal expenses as before and the income earned on the“increment value” is ring-fenced to fund the infrastructure in question (ADEC 2010).

However, a problem arises in that there is usually a time lag between the con-struction of (and payment for) the infrastructure and the resultant rise in propertyvalues. To overcome this, many municipalities raise a public bond on the back of theexpected “increment” income that will accrue as a result of the infrastructure

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expenditure. In this case, the “increment” income earned is ring-fenced to repay thebond and this is known as Tax Increment Financing (ADEC 2010).

Application of Value Capture Mechanisms in South Africa

Many of the abovementioned value capture mechanisms have been successfully usedinternationally to raise funds for public goods and to generate more sustainable andequitable urban forms (Brown-Luthango 2011). Considering the current backlogs,budgetary constraints and opportunities offered by the infrastructure roll-out pro-gramme in South Africa, it is logical to ask if and how such mechanisms are usedlocally. To do this, the following sections will review the legal framework in whichthe use of these mechanisms must operate, then identify which mechanisms are beingused, before discussing the issues associated with their use. This will be done in orderto identify the key conditions needed for their expanded and more successful use.

Overview of the Legal Context Governing Revenue Generating Value CaptureMechanisms in South Africa

Section 229 (1)b of the Constitution of the Republic of South Africa (1996) onmunicipal fiscal powers and functions states that municipalities may impose taxes,levies and duties appropriate to local government if authorised by national legislation.However, these powers may be regulated by national legislation, and subsequentsections state that such taxes, duties and levies may not be exercised in a way thatprejudices national economic policies, economic activities across municipal boundariesor the national mobility of goods, services, capital or labour. Based on section 229 of theConstitution, a suite of legislation has been, or is in the process of being, developed toprovide a comprehensive framework to regulate municipal revenue collection instru-ments (Hickey-Tshangana 2011).

The Public Finance Management Act 1 of 1999 (PFMA) covers financial man-agement in the national and provincial spheres but does not cover local governmentwhich is governed by the Municipal Finance Management Act 56 of 2003 (MFMA).Importantly, the MFMA gives the Minister of Finance, together with the Minister ofLocal Government, the authority to prescribe uniform norms and standards regardingmunicipal tariffs. In doing so, it is linked to the Municipal Systems Act 32 of 2000(MSA), which preceded it.

The MSA sets out basic parameters, policies and principles for the application ofmunicipal tariffs. Importantly, this Act permits tariff policies to differentiate betweendifferent categories of users, debtors, service providers, services, service standards,geographical areas and other matters, as long as the differentiation does not amount tounfair discrimination. Furthermore, the MSA provides for the establishment ofinternal municipal service districts to facilitate the provision of municipal servicesin that part of the municipality.

The Municipal Fiscal Powers and Functions Act 12 of 2007 (MFPFA) sets out theprocesses and procedures necessary for the authorisation of new taxes and the verificationand approval of existing taxes. In addition, it empowers the Minister of Finance toprescribe norms and standards to regulate the imposition of surcharges by municipalities.

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The authority to levy property rates is governed by the Municipal Property RatesAct 2004 (MPRA) and it is explicit on how and in what cases municipalities may setdifferent rates for different categories of properties and ratepayers. The Act permitsmunicipalities to levy different rates for different categories of rateable propertyaccording to the geographical area in which the property is situated. Furthermore,and importantly for the implementation of value capture mechanisms, the Act allowsmunicipalities to set up special rating areas (SRAs) whereby groups of residents in aparticular geographic area voluntarily come together to increase their levies in orderto have additional services or infrastructure.

An Overview of the Value Capture Mechanisms Used in South Africa

The key mechanisms currently used in South Africa are development charges andbusiness improvement districts, but there is also an increasing desire to use taxincrement financing to fund some infrastructure projects in the future.

Development charges are the main income-generating value capture instrument usedin South Africa today, although in many cases this instrument is greatly underutilised(Savage 2009).

Constitutionally, municipalities have the right to impose development charges inthe form of a tariff or user charge, subject to national regulation. Currently, develop-ment charges are authorised in terms of provincial land use management ordinancesand national legislation in the form of the National Land Transport Act 5 of 2009(NLTA). The new Spatial Planning and Land Use Management Bill also states howdevelopment charges should be applied at a municipal level.

The NLTA requires that every municipality establishing an integrated public transportnetwork must also establish a Municipal Land Transport Fund to hold money collectedfrom national and provincial sources, user charges collected by the municipality, interestearned from the Fund, and donations and contributions from any other source. The Fundis to be used for the transport function in terms of the NLTA or the municipality'sintegrated transport plan. The provisions of the MFMA apply to the Fund.

The NLTA authorises a municipality that has established a Municipal LandTransport Fund to impose user charges that then accrue to the Fund, subject to theMFPFA. This is a little confusing because the MFPFA does not apply to user charges;the MFMA, the MSA and sector legislation govern user charges. However, becausesection 28 of the NLTA stipulates that the imposition of such user charges is subjectto the MFPFA, presumably National Treasury approval would be required as per theprocesses for new municipal taxes set out in the MFPFA (Hickey-Tshangana 2011).

The current regulatory framework is however seen as insufficient and consequent-ly a draft Policy Framework for Municipal Development Charges has been drafted(National Treasury Republic of South Africa 2010).

The Framework defines development charges as “once-off infrastructure chargesimposed by municipalities on landowners as a condition of approval of a landdevelopment that will result in an intensification of land use and an increase in theuse of or need for municipal engineering services infrastructure” (2010:1). NationalTreasury has therefore proposed that the MFPFA be amended to explicitly authorisemunicipalities to levy development charges as defined by the Framework and interms of the principles laid out in the Framework.

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These principles state that firstly, the charges must be equitable and fair and mustrecover the full and actual costs of infrastructure that result from new urban devel-opment. Notably, the Framework specifies that the charges are not an additionalrevenue source that local government can use to rectify historical backlogs in accessto services.

Secondly, the development charges must be predictable and treated as a formalcommitment by the municipality to provide the infrastructure required to supplyservices to the new development.

Thirdly, the charges must be spatially and economically neutral. The Frameworkexplicitly states that the primary purpose of the charge is to ensure the timely andsustainable financing of required urban infrastructure. The charge is not to be usedas a spatial planning policy instrument to rectify previous apartheid planningpolicies, nor is it to be used to raise funds that are then used to cross-subsidise servicesfor the poor.

Fourthly, the determination, calculation and operation of the development chargesshould be administratively simple and transparent.

The net effect of these principles is to exclude the possibility of the municipalityusing the funds raised through development charges for purposes that do not directlybenefit the new development. In addition to these specific exclusions, the Frameworkalso sets limitations on the exemptions and subsidies that municipalities can grant as ameans to attract investment by particular landowners, for particular areas or forparticular types of land use.

The Spatial Planning and Land Use Management Bill, appears to align with theDraft Framework but the potential for legislative overlap and/or confusion lies in theauthority the Bill gives to the Minister of Rural Development and Land Reform toissue further guidelines on development charges. Given that the Framework sets outto define development charges as a new municipal tax falling under the authority ofthe MFPFA, there is a possible conflict with the draft Act (Hickey-Tshangana 2011).

In short therefore, notwithstanding the National Treasury's efforts, the currentlegislative framework with respect to development charges is relatively confusingand therefore provides opportunity for developers to contest the levying of develop-ment charges by municipalities and to tie up the process in lengthy and expensivelegal processes. This vulnerability is likely to dissuade municipalities from levyingthe development charges and to inhibit municipalities from raising required revenues(Hickey-Tshangana 2011).

In South Africa, the concept of special zones appears in multiple pieces oflegislation relating to local authorities, including special rating districts in theMPRA, internal service districts in the MSA, BIDs in municipal zoning laws andthe urban development zones tax incentive in the Income Tax Act of 1962 and itssubsequent amendments. All these mechanisms include the labelling of a specificgeographic area for special tax treatment (Hickey-Tshangana 2011).

If BIDs or CIDs use property rates to generate the additional revenue, then they areessentially SRAs as defined in the MPRA (Hickey-Tshangana 2011). The MSA alsoprovides for internal service districts. Provided there is consent from the majority ofmembers in the area, the municipality can finance the additional service in that districtby setting a new tariff, setting a surcharge on an existing tariff, or increasing anexisting tariff (Hickey-Tshangana 2011).

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LVITs and TIFs are currently not used in South Africa but there is a growinginterest in their implementation in the future. In doing so, it is important to considerfirst, how the special taxation district would be defined and secondly, how the landvalue appreciation would be quantified (Hickey-Tshangana 2011).

With respect to the former, if the special rating area mechanism under the MunicipalProperty Rates Act is to be used to define the LVIT or TIF area, then it is important tonote that the legislation requires the consent of the majority of landowners.

With respect to the latter, quantifying the “increment”, or the difference betweenthe market value of the property both before and after the public infrastructureinvestment, may be problematic. The MPRA requires municipalities to undertake anew municipal valuation role every five years. However, it also allows for a supple-mentary valuation to be done on a rateable property when “the market value hassubstantially increased or decreased for any reason after the last general valuation”(Section 78(1)(d)).

In reality, it appears as if supplementary valuations are only undertaken when thereare changes to the property itself (direct impact) rather than changes to the property'svalue that occur as a result of an external influence (indirect impact). The implemen-tation of public transport infrastructure may change the market conditions (rentallevels, etc.) in an area, which in turn may have an impact on property values, and thuswould be regarded as an “indirect impact”. It is therefore unclear whether thedevelopment of such infrastructure could trigger a supplementary valuation neededto calculate any incremental value created. If not, the incremental value generated bythe infrastructure development can only be taken into account at the next generalvaluation, thereby reducing the ability of a municipality to collect income from theincreased value (Khodabacus et al. 2011).

Clause 78 (4)(d) of the MPRA creates further confusion by stating that rates basedon supplementary valuations become payable on the date on which the event oc-curred that substantially increased or decreased the market value of properties in thearea, as per section 78(1)(d). In the case of public infrastructure investment, whichboosts property values in an area, section 78(4) (d), would thus mean that the newrates based on the supplementary valuation would be effective from the date on whichthe public infrastructure was installed (Hickey-Tshangana 2011).

However, section 78(3)(a) states that the supplementary valuation “must reflect themarket value of properties determined in accordance with market conditions thatapplied as at the date of valuation determined for purposes of the municipality's lastgeneral valuation”. Section 78(3)(a) therefore implies that the supplementary valua-tion should attempt to resurrect or model the value that the property would have hadat the date of the last general valuation. In this case, the supplementary valuationcannot be used to reflect changes in market value due to public infrastructuredevelopment, as suggested in section 78(4)(d) (Hickey-Tshangana 2011). This con-fusion between these sections in the Act needs to be resolved for the Act to betterfacilitate the use of TIFs in South Africa.

Key Issues Relating to the use of Value Capture Mechanisms in South Africa

From the discussion, it is clear that while some value capture mechanisms can and arebeing used in South Africa, the legal framework is at times unclear and inconsistent.

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This limits the current and future use value capture in the country. In addition, thediscussion has highlighted that the issues of ring-fencing the revenue generated andhow the mechanisms are defined are critical to their use. These will be discussed inturn below.

International practice has shown that capturing the value created from publicinfrastructure investment is best achieved by ring-fencing the revenue collectedwithin the particular district or area where the infrastructure is located. The viabilityand success of value capture mechanisms therefore often depends on the ability todirectly link the development charge or tax payment to the benefit received (infra-structure or service provided) (Hickey-Tshangana 2011). For this reason, ring-fencedrevenue is a critical element of many value capture mechanisms but it can also beproblematic.

First, ring-fencing can undermine democratic principles in that it detracts from thelegislature's or the council's authority and ability to set budget policy and priorities; asthe body of elected citizen representatives, parliament is meant to have the final say inhow taxpayers' funds are spent. Secondly, earmarked funds are exempt from thescrutiny and requirements for justification that form part of the annual budget processand therefore lose the transparency, accountability and efficiency gains createdthrough the budget process. Thirdly, extra-budgetary funding (as per value capturemechanisms) can set up alternate structures and funds that may not be subject to thesame accountability and reporting requirements as regular revenue. Lastly, whenfunds are earmarked for a specific purpose, over time a sense of entitlement maydevelop whereby the strength of the claim on the funds deepens, even if the originalpurpose for the revenue collection has expired (Hickey-Tshangana 2011).

For these reasons, National Treasury's general position is to avoid ring-fencingbudget allocations or tax revenue, except in cases where there is sufficient transpar-ency and accountability to make the practice effective and equitable. Because of thestrong direct link between payment and benefit, user charges meet these criteria andnaturally lend themselves to ring-fenced expenditure (Hickey-Tshangana 2011).

The other key issue pertaining to the use of value capture in South Africa is howthe mechanisms are defined. Different pieces of legislation govern what incomegeneration instruments can be established and how they can be used. Which pieceof legislation is applicable will depend on whether the instrument is defined as a tax(or duty or levy) or a user charge (or tariff or administrative fee).

According to public finance theory, revenue instruments should be designed toadhere to the “benefit principle”, which states that the benefit of the service financedthrough fees or taxes should go directly to the taxpayer. Ideally, payment should belevied in exact proportion to usage or benefit. In the case of the individual benefitprinciple, the paying individual benefits directly. With the general benefit principle, alink still exists between the payer and the benefit, but the link is indirect and the benefit isnot necessarily in direct proportion to the payment (Hickey-Tshangana 2011).

The key distinction between taxes and user charges is that user charges adheremore closely to the individual benefit principle, whereas taxes are typically used togenerate general revenue for programmes or projects that benefit a group of benefi-ciaries and/ or the whole city, town or municipality. In the case of user charges, tariffsare levied in proportion to usage or benefit received by the individual payer, and theamount charged should not exceed average cost of the good service provided.

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However, in the case of taxes, the amount may exceed the cost of providing theservice or good (Hickey-Tshangana 2011).

A municipal base tariff is usually defined as a fee necessary to cover the actual costassociated with rendering a municipal service, while a municipal surcharge refers to acharge in excess of the municipal base tariff (Hickey-Tshangana 2011).

However, it is important to recognise that income-generating instruments often donot fall clearly into the category of a tax or a user charge but instead have elements orcharacteristics of both. For example, development charges are usually levied against alandowner for a particular development and are used to finance infrastructure toprovide services for that development. In this sense, they have user charge charac-teristics. However, the infrastructure may also benefit other areas and landowners andtherefore the charges exhibit the characteristics of a tax (Hickey-Tshangana 2011).

Due to the confusion that exists around the definition of terms such as taxes, levies,user charges and fees, tariffs, and surcharges, and the degree of overlap between thesecategories, it is usually useful to avoid the labels and instead look at the character-istics and purposes of the various revenue collection instruments (Obermeyer 2011).

Pre-conditions for the Successful use of Value Capture Mechanisms

The discussion above of the different value capture mechanisms and the legal contextin which they occur suggests that there are a number of important pre-conditions fortheir successful use.

The first is that policy objectives must be clear and non-contradictory. As such, alocal authority should not attempt to satisfy too many policy objectives in onedevelopment. For example, if the objective is to generate the maximum level ofincome to finance the provision of the transport infrastructure, the project should notbe hamstrung by too many socially orientated conditions such as the provision ofhigh levels of social housing.

Secondly, the introduction of value capture mechanisms can further complicateand strain the administration of a municipal funding system. It is therefore imperativethat the purpose of the additional mechanism is clear and essential, and that animprovement of existing funding instruments could not achieve a similar outcome.

The third condition is that value capture mechanisms are only likely to be successfulif the market conditions are conducive to the creation of surplus value over and abovethat needed to make the development viable. As a result, all parties involved require adegree of flexibility and a sound understanding of market forces, cycles and conditions.

Fourthly, the successful use of value capture mechanisms requires that strong legaland administrative systems are in place, such as revenue collection, valuation rolls,credit rating systems and sound fiscal management.

Fifthly, where income-related mechanisms are used, it is important to clarifywhether they are taxes or user charges, and the principles of sound public financetheory need to be applied. It is important to note that the imposition of additionaltaxes can have unintended consequences, and the tax incidence, or who ultimatelybears the additional costs of the tax, must be ascertained

If the additional charges or taxes are passed directly on to tenants and the users ofthe space, the value capture mechanism may actually inhibit or discourage economic

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development in the area. Expected taxes are usually capitalised into property values.Therefore, any significant change in taxation needs to be done in a gradual andtransparent manner so that property values are not unnecessarily undermined.

Lastly, while intervention by the state to maximise the potential benefit of infra-structure on value creation is important, it must also be recognised that such potentialcan only be maximised when it is acted upon by the private sector. This requires time,expertise, capital and a degree of risk-taking that needs to be compensated. Therefore,any value capture mechanism should be limited to the extent that it still allowssufficient incentive and return for the developer to partake in the development.

Conclusion

Although the use of value capture can entrench existing spatial inequalities, its use canalso result in increased infrastructure provision and the creation of investment focalpoints in under-serviced areas in a city. While certain gaps and ambiguities exist in theSouth African legal framework and certain improvements can be made to facilitate thegreater use of value capture in the country, the framework does permit the local use of anumber of internationally recognised mechanisms. However, their success will dependon whether they are recognised as localised, multi-party, negotiated mechanisms thathave a clearly defined purpose, defined time horizons, and good legal and institutionalfoundations. They rarely work when imposed one-sidedly, but when used correctly, theyallow positive partnerships among the state, private sector and local communities, whichcan result in wider socio-economic benefits to society.

Acknowledgments This paper is based on research commissioned by the Urban Land Markets ProgrammeSouthern Africa, which was supported by UKaid.

This work is supported by Mistra Urban Futures, a global research and knowledge center in sustainableurban development, funded by the Swedish International Development Agenday (SIDA) and the MistraFoundation for Strategic Development.

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Value Capture in South Africa