Value Capture in South Africa: A way to overcome mounting infrastructure challenges?

21 Jul 2016 - 15:15

By: Robert McGaffin, Mida Kirova, Francois Viruly and Kathy Michell from the UCT-Nedbank Urban Real Estate Research Unit at UCT

The South African Government is in the midst of what can often appear to be an insurmountable infrastructure challenge. While our cities grow at a rapid rate, so does the need for infrastructure investment. This investment must address the service delivery backlogs, the legacy of apartheid’s spatial planning, the restructuring of our our inefficient and unviable cities and the need for economic infrastructure to drive the economy. However, these competing challenges must be met in the context of a stagnant economy and declining revenues at a national level.

This ‘perfect storm’ clearly indicates the need for investigating other options to solve South Africa’s infrastructure challenges, especially in terms of funding and responding to opportunities. One such possibility is Value Capture, which is already used in South Africa and which is used frequently in the USA, Hong Kong and a number of South American countries. Value Capture refers to the sharing of the increased property value that results from public infrastructure investment such as the Gautrain. This could be in the form of the private sector using the additional value to build affordable housing or higher densities (use gains) or it could be through higher taxes or levies (financial gains) that could be used to pay for the infrastructure.

Value Capture mechanisms, particularly those that are income generating, have a role to play in addressing the infrastructure challenges outlined above. To begin with, they can assist municipalities in raising local revenue.  In addition, they can enable municipalities and the private sector to respond to development opportunities that are dependent on non-budgeted infrastructure investment. Similarly, they reduce the need for municipalities to make trade-offs between infrastructure investment needed for economic development and the redressing of historical imbalances and spatial transformation. Furthermore, under certain circumstances, they can increase the borrowing capacity of municipalities without impacting on their gearing limits and credit rating. Lastly, the risk associated with raising funds off the property market can be shared with the private sector that is often better equipped to assess and mitigate such risk.

One of the key challenges that Value Capture seeks to solve in South Africa is that of risk and reward.

The current model of infrastructure financing often means that the State takes on the risk that sufficient additional property rates will be generated by the infrastructure investment, while private landowners are the ones that benefit the most from infrastructure development. In order for Value Capture to succeed, a culture of shared responsibilities between the public and private sector needs to be nurtured. Municipalities need to take responsibility for funding, planning and implementing infrastructure investment, the private sector should take the lead in providing investment in exchange for fair returns while national government needs to provide a stable and predictable fiscal and regulatory regime.

Research and evaluation will also play a key role in informing our approach to Value Capture, within the South African context. As a result, the Urban Real Estate Research Unit was formed as  a collaboration between the Department of Construction Economics and Management at the University of Cape Town and Nedbank Corporate and Investment Banking (NCIB). NCIB’s Property Finance Business has committed R1 million per year over the next four years to the Unit, which will develop an interdisciplinary research platform to identify issues within and solutions to urban real estate investment, finance, economics and management problems in Africa.

The motivation behind the research is the desire to find a different way of doing things. While we make no claim that Value Capture is a ‘silver bullet’ that will solve all of South Africa’s infrastructure challenges, we do believe it is one of the solutions. We understand that Value Capture can only function effectively under certain conditions; however, it should certainly be examined and discussed between both the public and private sectors especially given the current economic climate.