Chapter 3  THE CAPACITY OF RURAL MUNICIPALITIES IN SOUTH AFRICA ⁽¹⁾

3.1 Introduction

The transformation of local government in South Africa is taking place in terms of the Local Government Transition Act, Act 209 of 1993. The interim (1993) Constitution as well as the Constitution of the Republic of South Africa, Act 108 of 1996 confirms this. Section 152 of the Constitution charges municipalities to strive, within their financial and administrative capacities, to:

• Provide democratic and accountable government;
• Ensure the provision of services to their communities in a sustainable manner; and
• Promote social and economic development within a safe and healthy environment.

According to the Constitution, rates on property are a constitutionally guaranteed source of revenue for local governments, while Sections 228 and 229 explicitly prohibit provinces from introducing such a tax. Despite the fact that it is a revenue source for local government, national and provincial legislation will most probably continue to regulate how it is charged, assessed and collected. In this regard, the White Paper on Local Government ⁽²⁾ spells out the basic design of a new local government system, addressing the following important aspects:

• The specific powers and functions of the different categories and types of municipalities;
• Demarcation of their areas of jurisdiction;
• Reducing the number of municipalities from the existing 843;
• The link between small towns and their surrounding rural areas;
• The current two-tier structure; and
• Fiscal relations between municipalities.

From a constitutional point of view any new system of local government must take cognisance of the primary role of municipalities, namely the provision of essential municipal services (such as water, sanitation, electricity, etc.) to all local communities. A new system of local government must, however, also consider an important secondary role of local government, namely the promotion of economic and social development, which includes participation in national and provincial development programmes. The White Paper stresses the need to build the capacity of municipalities, especially in rural areas, as a matter of extreme urgency.

However, to achieve these constitutional goals, any future system of local government will have to come to terms with the following realities:

• Managing major processes of transition in an orderly and equitable fashion requires an appropriate Constitutional and legislative framework and realistic time frames. Municipalities must be perceived to be legitimate, based on adequate representation, accountability, viability and sustainability. Municipalities must have adequate sources of revenue to exercise their powers and perform their functions. If not, their legitimacy may become questionable. To be sustainable, local government must be affordable.

• The creation of municipalities throughout the country has necessitated the establishment of rural local government structures in many areas where it was ineffective or non-existent in the past. Before there can be any clarity on a viable system of local government finance, there must be clarity on the future local government structures, its powers and its functions. Generally, finance should follow function - although this does not always happen. An important area of concern in this regard is the division of functions and powers (especially fiscal powers) in a two-tier rural local government model. Ideally the devolution of functions and powers should go hand-in-hand with the fiscal means to perform those functions and exercise those powers. The Financial and Fiscal Commission will have to play a pivotal role as regards the proper funding of the local government sphere.

• There is still a proliferation of complex and ‘overlapping’ legislative provisions, inherited from the apartheid era, that undermines legitimate local government and invites constitutional attacks of rating ordinances. Furthermore, there are various inhibiting data limitations. The following examples should suffice:

1. The 1996 population census was conducted on the basis of magisterial districts which makes it difficult - if not impossible - to relay much of the information to local government jurisdictions;
2. Not all land has as yet been surveyed by the office of the Surveyor General. The problem is especially acute in the former homeland areas; and
3. Insecurity of tenure rights pertaining to urban and rural land exists in many areas. This is especially relevant in the context of tribal land.

Data limitations and a lack of uniformity of available data (e.g. pertaining to property tax), amongst other issues, prevent the full implementation of a tax/fiscal capacity component into the formula for intergovernmental fiscal transfers to local government.

• According to the White paper, Metropolitan Councils (MCs) and District Councils (DCs) must act as regional mechanisms for redistributing wealth from affluent areas to disadvantaged areas under their jurisdiction by providing financial support to primary councils. It states that richer consumers could be required to pay more than the cost of a particular service to subsidise the poor. The expenditure side of the budgets of many Metropolitan (MCs) and District Councils (DCs) bear testimony that redistribution is, at least to some extent, already occurring at the secondary tier of local government; and

• An important principle expounded upon in the White Paper is the need for realistic and affordable budgeting. On the expenditure side municipalities must ensure that the services they provide are at a level that is affordable to themselves and to households which pay for these services. Municipalities must ensure that they recover the cost of providing services.

Local government must overcome the legacies of apartheid, such as the difficulties of amalgamating racially segregated urban municipalities on the basis of economic and historical realities rather than race and the absence of effective municipal government in many jurisdictions, particularly in rural areas. Overcoming these obstacles has serious financial and fiscal implications for local government. In June 1997 Project Viability⁽³⁾, for example, found that an alarming number of municipalities were in dire financial straits.

The purpose in this Chapter is to survey the current status of local government in South Africa, with a focus on non-metropolitan areas. The evolving new local government structures are explained, as are their main sources of revenue. This is followed by an assessment of their existing capacity to raise taxes, with the emphasis on a land tax. This latter assessment is based on field research that was conducted with the majority of the 42 DCs in South Africa. A summary of the results is presented here: the detailed assessment on a provincial basis is reported in the original research report.

3.2 Local government structures (municipalities)

Metropolitan and non-metropolitan municipalities

In terms of the Local Government Transition Act 209 of 1993 clear distinctions can be drawn between municipalities in metropolitan areas and those in non-metropolitan areas.

Section 155 of the 1996 Constitution envisages three different categories of municipality:

• Category A: A municipality with exclusive municipal executive and legislative authority in its area of jurisdiction;

• Category B: A municipality that shares municipal executive and legislative authority with a Category C municipality within whose area of jurisdiction it falls; and

• Category C: A municipality that has municipal executive and legislative authority in an area that includes more than one municipality.

The different transitional structures provided for in that Local Government Transition Act, read with the above-mentioned categories of municipality in the 1996 Constitution, are listed in the following figure:

Transitional local government structures

Note: In terms of the Local Government: Municipal Structures Bill Metropolitan Councils may in future become Category A councils.

Non-metropolitan municipalities

It is important to note that there is no clarity on the meaning of ‘rural’ in the context of non-metropolitan local government. The White Paper⁽⁴⁾ states that ‘rural’ is variously used to include a wide range of settlement types, such as:

• The urban fringe outside the boundaries of metropolitan councils or TLCs;

• Small, fledgling urban municipalities (e.g. Vischkuil and Magaliesburg in Gauteng and Oyster Bay TRC in the Eastern Cape);

• Dense rural settlements (e.g. planned betterment settlements in former homeland areas and informal settlements, which are generally unplanned and largely unserviced);

• Small rural settlements (e.g. unplanned traditional settlements or resettlement areas);

• Agri-villages;

• Dispersed or scattered settlements (e.g. homestead settlements on tribal land, commercial farm land or other privately-owned or public land); and

• Extensive farming areas with only a few homesteads.

The present transitional system of non-metropolitan local government

The Local Government Transition Act provides for different types of rural municipalities in non-metropolitan areas, and provinces have some freedom to choose suitable structures.

District Councils (DCs)

Currently there are 42 DCs throughout South Africa. Together with the 6 MCs, they cover the total surface area of South Africa - i.e. they provide wall-to-wall local government.

Primary municipalities in rural areas

Within the area of jurisdiction of a district council, primary local government structures exist in the form of transitional local councils (TLCs) in urban areas, and transitional representative councils (TRepCs) or transitional rural councils (TRCs) in rural areas.

TLCs vary from secondary cities (e.g. Germiston, Kimberley, Port Elizabeth and Witbank) to small towns and villages. They have executive powers and service delivery functions and (at least in theory) act as autonomous municipalities. TLCs are represented on the district council within whose area of jurisdiction they are located.

Generally TRepCs and/or TRCs have neither executive powers nor any service delivery functions. Presently they function as consultative and/or advisory structures to district councils. The responsibility to provide infrastructure and to deliver services in the rural areas falls largely on the shoulders of DCs and the relevant line departments (e.g. Health, Water Affairs, and Public Works) at the national and provincial spheres of government.

In the provinces of North West and KwaZulu-Natal there are still so-called ‘remaining areas’ for which no primary rural municipalities exist at present. Within these areas the DCs hold interim responsibility for the provision of services and infrastructure. In some of the former homeland areas DCs and primary urban and rural municipalities are only now being established, and revenue sources for the new municipalities are still extremely limited.

It is important to note that there are large differences between the fiscal capacities of metropolitan and non-metropolitan municipalities. Secondly, within non-metropolitan areas there are differences between the fiscal capacity of secondary-tier municipalities and primary-tier municipalities (TRepCs and TRCs), as well as amongst the stand-alone urban municipalities (TLCs). When the viability and affordability of especially municipalities in rural areas are considered, it is important to keep the geographic sizes and population densities of various jurisdictions in mind. To establish the cost of a minimum standard of basic services in rural areas, population density is an important factor.

Table 3.1 gives an indication of size, population and the population density for each of the 9 provinces. The table also lists the number of DCs, the various TLCs and TRepCs and TRCs, as well as the number of magisterial districts in all 9 provinces. It does not show the 6 MCs (4 in Gauteng, 1 in KwaZulu-Natal and 1 in the Western Cape) and 24 metropolitan local councils (12 in Gauteng, and 6 each in KwaZulu-Natal and the Western Cape).

Table 3.1: Summary data on the 9 Provinces

Sources: Department of Provincial Affairs and Constitutional Development and the Department of Justice

Non-metropolitan local government as envisaged in the White Paper

In the light of the challenges faced in the non-metropolitan areas, the White Paper makes the case for strong district government. Although some of the challenges will have to be addressed at the primary tier, some demand regional attention. A system of district government, that will build on the capacity of the present system of DCs, but that will also assume new roles and responsibilities, is envisaged.

District governments

The White Paper correctly points out that District Councils are very different entities in various parts of the country. In the light of the various rural settlement types and other peculiar local circumstances, a measure of flexibility must be retained in a future district government system. The White Paper envisages that local government will fulfil the following key roles:

• District governments must be given key responsibilities for district-wide integrated development planning (including land-use planning, economic planning and development and transport planning);

• District governments must act as infrastructural development agents and providers of bulk services (where required) - through the retention of RSC levies;

• District governments must be able to provide on-demand assistance to primary municipalities and should also assume a capacity-building role to enable primary municipalities to assume municipal functions; and

• District governments must provide and maintain appropriate levels of municipal services in areas where (primary) municipalities have inadequate administrative capacity.

Category B municipalities

The White Paper envisages alternative types of primary municipalities (Category B) in areas which fall within the areas of jurisdiction of DCs (Category C). These include urban municipalities, amalgamated urban-rural municipalities and rural municipalities.

Urban municipalities will be best suited to secondary cities and larger towns (presently TLCs). They will have a full range of municipal powers and functions (excluding the power to raise and collect RSC levies). The municipal boundaries of these municipalities must enclose the urban fringe.

Amalgamated urban-rural municipalities can be established through the amalgamation of existing rural (TRepC/TRC) and urban (TLC) municipalities, or the extension of urban municipal boundaries to include a town’s rural hinterland. According to the White Paper this model is appropriate for small and medium-sized towns where there are clear economic and social linkages between the urban and rural settlements. Much of the evidence suggests that although the costs incurred by the town will naturally increase, there are significant delivery gains in the rural areas with positive economic spin-offs for the area as a whole. Amalgamation could, amongst others, have the following results:

• reduction of costs of government (e.g. overcoming duplication of structures and increasing efficiency of resource allocation);

• broadening the tax base and ensuring that all residents - urban and rural - share in the benefits derived therefrom;

• facilitation of access to public services by rural communities; and

• promotion of the integration of urban and rural development.

Rural municipalities (present TRepCs and TRCs?) could be retained in some areas, as long as they are allocated a minimum of executive and legislative powers, and are empowered to ‘draw down’ powers from the district government as they demonstrate sufficient administrative and financial capacity to administer those powers. The varied allocation of powers between the district governments and their constituent category B municipalities will provide flexibility to cater for the diversity of needs and contexts in rural areas, but the division of powers and functions will have to be facilitated by criteria set in national legislation.

The White Paper envisages that a system of district governments (category C) and category B (urban, amalgamated urban-rural and/or rural) municipalities will operate in all non-metropolitan areas. It does, however, mention the possibility that there may be areas where no sustainable category B municipality is possible (e.g. expansive sparsely populated areas) and where a district government would have to assume responsibility for all municipal functions.

In summary, non-metropolitan government must be flexible enough to accommodate the diversity of settlement types, administrative capacities and unique circumstances prevailing in rural areas. It is foreseen that although primary municipalities may differ substantially between and even within district governments, some consistency and uniformity should exist at the district government tier. The development and utilisation of local tax bases (e.g. a rural land tax) will have to be considered with the diversity, but also the need for some uniformity, in mind.

For purposes of the present inquiry into the ability of present and/or future non-metropolitan municipalities to introduce and collect a land tax, the focus in the rest of this chapter is on the present system of district councils, for the following reasons:

1. DCs (together with MCs) cover the total surface area of South Africa, but primary councils do not. In areas where primary rural municipalities do not exist (e.g. in KwaZulu-Natal and parts of the North West), a land tax – if introduced – would have to be levied by the DCs;
2. Primary rural councils presently have no (or very little) executive powers or functions in terms of the Local Government Transition Act. They were hastily established when the first democratic local government elections were held in 1995 and 1996, and their future is still uncertain. In contrast, DCs have taken over the powers and functions of the former Regional Services Councils (RSCs) and Joint Services Boards (JSBs). RSCs and JSBs had been in operation in most parts of the country (although not in the former homelands);
3. DCs already have experience with the administration of RSC levies and, in a few instances, rates on property, which they administer on behalf of TLCs and/or TRCs within their jurisdictions);
4. The administrative capacity to introduce a rural land tax at DC level presumably exists or could be developed in the short term. Generally primary rural municipalities (TRepCs and TRCs) do not have any capacity to introduce and collect such a tax. The development of administrative capacity in the primary sphere of government will probably take considerably longer;
5. In terms of section 10G(6) of the Local Government Transition Act, a DC is responsible for the valuation or measurement of all properties within so-called remaining areas (in North West and KwaZulu-Natal) or within the jurisdiction of representative councils; and
6. Even if a rural land tax is introduced at DC level, the revenue can be allocated to the primary rural municipalities. Should the latter be retained under a future local government dispensation, and should their administrative capacities be developed, the full administrative burden of charging, assessing and/or collection could be devolved to these municipalities.

In the provinces where primary municipalities have been established for rural areas, these generally function merely as advisory bodies to the relevant DC. They have no executive powers or functions. This implies that, at present, DCs are the only structures that may be in a position to introduce a land tax in the local sphere of government.

3.3 Intergovernmental revenue sources available to local government

Section 214(1) of the Constitution states that an Act of Parliament must provide for the equitable division of revenue raised nationally among the three spheres of government. Section 227(1)(a) states that local government is entitled to an equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it.

In July 1997 the Financial and Fiscal Commission published a discussion document ⁽⁵⁾   setting out its initial thinking on a financing regime for local government. The document addresses the FFC’s proposed formula for the division among MCs and DCs of the share of nationally collected revenue accruing to local governments. The aim of the formula is to ensure horizontal equity among municipalities in the various provinces and possibly within each MCs and DCs.

The FFC suggests that these transfers should be directed to the MCs and DCs, rather than via the provinces or to primary municipalities directly.

National legislation must provide for any other allocations to provinces, local government or municipalities from the national governments’ share of nationally collected revenue, and any conditions on which these allocations may be made. Such legislation must, inter alia, take into consideration the need to ensure that municipalities are able to provide basic services and perform the functions allocated to them, the fiscal capacity and efficiency of municipalities, as well as their development needs. Section 227(2) of the Constitution makes it clear that the additional revenue raised by a municipality may not be deducted from its share of revenue raised nationally, or from other allocations made to it by the national government. However, there is no obligation on the national government to compensate municipalities that do not raise revenue commensurate with their fiscal capacity and tax base - i.e. a high premium is placed on municipalities' tax effort.

The White Paper argues that the maximum degree of fiscal independence is in the best interest of both the local and national spheres of government, and that intergovernmental transfers must be rational, predictable and accountable. Municipalities should know well in advance what amount of money they will receive, when they will receive it and for what purpose (if conditional). This will ensure that grants and the local revenue bases operate in support of each other. Predictability of fiscal transfers is also emphasised by the FFC. Fiscal independence of municipalities should, at least in theory, result in increased financial discipline and local accountability.

In various cases DCs have received provincial grants to help establish primary rural municipalities. Most noticeable in this regard are the grants administered by the Bosveld District Council and Northern District Council in the Northern Province.

3.4 Own sources of revenue for local government

As the introduction of new taxes must be considered in the light of the overall tax regime at all spheres of government, but especially at the local sphere, a brief overview of the revenue sources currently exploited by local government is necessary.

Section 229 of the Constitution states that a municipality has the power to impose:

• Rates on property;
• Surcharges on fees for services provided by or on behalf of the municipality; and
• Other taxes, levies and duties appropriate to local government or to the category of local government into which that municipality falls if authorised by national legislation.

A municipality’s power to raise revenue in this manner may be regulated by national legislation and may not be exercised in a way that materially and unreasonably prejudices national economic policies, economic activities across municipal boundaries, or the national mobility of goods, services, capital or labour. Furthermore, a municipality may not impose income tax, value-added tax, general sales tax or customs duties.

Below, the current sources of own revenue used by municipalities are presented.

Current revenue sources for municipalities

Table 3.2 shows the contribution of each of these own sources of revenue to the income generated by primary urban municipalities. The table gives no indication of the financial viability of individual municipalities and also does not reflect the income from the turnover and payroll taxes (amounting to more than R2,1 billion) collected by MCs and DCs. Therefore, it does not give a clear picture of the current total revenue for all municipalities. The data clearly show that the bulk of own revenue generated by metropolitan and urban municipalities consists of income from trading services and ‘rates on property’.

Table 3.2: Local government revenue sources in the 1996/97 financial year

Source: Kapp, C (1998). Property tax workshop for the Department of Provincial Affairs and Constitutional Development, April.

Income from trading services (surcharges on fees for services)

Income from trading services is an important source of revenue for local government. The four most important trading services are:

• The provision of water;
• The provision of electricity;
• Sewage disposal; and
• Refuse removal.

Although the Constitution sanctions surcharges on fees for services provided by or on behalf of the municipality (s 229(1)(a)), it is uncertain to what extent municipalities will be able to continue to raise a major portion of own revenue through profits on trading services. Issues such as the possible future provision of electricity by regional distributors, the role of the National Electricity Regulator, and compensation to municipalities for losses in revenue from this source all remain to be clarified. An equitable and transparent tariff structure (at least recovering the cost of providing basic services) must be introduced. Furthermore, in terms of the Water Services Act 108 of 1997 water tariff regulations may be promulgated. This may also impact on municipalities’ ability to raise revenue from the provision of water.

It is clear that any material reduction in a municipality’s revenue from these sources will impact significantly on its other sources of revenue, especially the property tax base. Traditionally the property tax base has been subsidised by the substantial income from trading services.

Property tax (‘rates on property’)

Although property taxes conventionally include taxes on movable property and property transfer taxes, in the South African context ‘property tax’ refers to a tax variously called a ‘general rate’ or ‘assessment rate’ (or more generally ‘rates on property’). It is an important own source of revenue for metropolitan local councils (MLCs) and local councils (TLCs), in other words for urban primary municipalities. It is an annual tax on owners of land and presently charged, assessed and collected in terms of provincial legislation in all 9 provinces. Municipalities generally have a choice between at least 2 of the following tax bases:

• Site rating (i.e. unimproved value);
• Flat rating (i.e. improved value); or
• Composite rating (i.e. land and improvements - but at different tax rates).

A property tax or land tax is not currently levied on rural land. All colonial land taxes (on primarily rural land) in the various provinces were abolished by national legislation by 1936. The only recent form of property tax on land outside urban municipal boundaries was the tax levied by Divisional Councils in the former Cape of Good Hope. This was phased out by 1989 in terms of the Abolition of Development Bodies Act, Act 75 of 1986.

Property tax was an important and widely accepted source of revenue for municipalities under apartheid, but only for White municipalities and in some cases Coloured and Indian municipalities. In most cases generous rebates were granted to residential ratepayers, shifting much of the tax burden to commercial and industrial properties. Many local government councils could also afford to set low property tax rates as a result of the profits (an implicit excise tax) made on the sale of certain trading services. Tax rates were normally set annually after the revenue from all other sources had been considered - in essence making up the shortfall. A brief outline of the characteristics of the property tax is given below.

Synopsis of rates on property (property tax)

The White Paper identifies a number of issues to be addressed in regard to property taxation, including:

• The extension of the tax base in urban municipalities;
• Reassessment periods; and
• The variety of rating systems presently used.

Regional Services Council levies

The regional services levy (a payroll tax) and the regional establishment levy (a turnover tax) are presently the most important sources of revenue for metropolitan and district councils. These levies are levied in terms of the Regional Services Councils Act 109 of 1985 and the KwaZulu and Natal Joint Services Act 84 of 1990 read with section 10(3) of the Local Government Transition Act. The total revenue from these levies amounted to more than R2,1 billion in 1996//97 ⁽⁶⁾ and the amount budgeted for 1997/98 is R2,9 billion ⁽⁷⁾.

The future of these levies is uncertain. Firstly, turnover and payroll levies are generally considered to be economically inefficient. Secondly, according to the Third Interim Report of the Katz Commission, there may be problems with the constitutionality of both these levies. However, little if any substantive research on these levies has been done since the Commissions’ Third Interim Report was tabled in November 1995.

Despite the Katz Commission’s doubts, the White Paper argues that these levies will remain an important source of revenue for MCs and DCs, at least in the short term. As DCs are generally dependent on these levies for their entire income, administrative problems need to be addressed to ensure that all potential levy payers are registered and revenue is collected. Information gathered from 28 of the 42 DCs indicates that only a few (particularly in the Eastern Cape) experience serious problems with the registration of new levy payers and/or the collection of levies from currently registered levy payers. Collection rates generally tend to exceed 90 per cent, and some DCs have successfully outsourced the collection of levies. The research also suggests that in the case of many DCs, levy income is currently sufficient to balance their books. However, in the Eastern Cape (e.g. Kei DC and Wild Coast DC) and KwaZulu-Natal (e.g. Ilembe RC), where new councils were established in 1996 and 1997 respectively, levy income will probably continue to be supplemented by intergovernmental transfers in the short term.

The fuel levy

The fuel levy is levied and collected in the national sphere of government. However, until 30 June 1997, 1 cent per litre of the fuel levy was allocated to DCs and MCs on the basis of origin (i.e. an amount was paid over to each council in relation to the fuel sold within its boundaries). These amounts so allocated had to be used by these councils for public transport-related expenditures. In most cases it was used to subsidise commuter bus services, with the result that the amounts received were paid over to the Department of Transport. Some DCs, however, had surplus funds available to spend on transport-related infrastructure such as roads and taxi ranks.

A rural land tax

Primary rural municipalities generally have no tax base at all and currently rely almost exclusively on ad hoc intergovernmental grants (via DCs) to cover their administrative costs. To promote fiscal autonomy and accountability, the problem of inadequate revenue sources - especially acute in rural areas - must be addressed as a matter of urgency. It is in this context that a rural land tax must be considered.

3.5 The capacity of District Councils (DCs) to introduce a land tax

Below, the main issues and problems regarding the capacity of rural local government structures to levy a rural land tax are analysed according to the respective provinces. Because local government structures, climatic conditions, physical features and demographic factors may differ substantially between (and even within) provinces, this research focused on an analysis of the information supplied by DCs on a provincial basis. The research report contains data pertaining to the numbers of rural local councils in each district; its surface area, population and population density; the number of councillors and taxpayers; revenue sources and amounts collected; and land use. Here, a summary is given of the problems encountered in each province according to officials in each of the DCs visited, as well as an assessment regarding whether it was possible to introduce a rural land tax and, if so, when this would become feasible.

The Eastern Cape Province

The Eastern Cape is the second largest province (170 000km²) and has a population of 5 865 000 and a population density of 35 persons per km². Both local governments and the provincial government are struggling to come to grips with the plethora of old RSA, Transkei and Ciskei laws that regulated local government.

There are 6 DCs in the Eastern Cape. The Port Elizabeth-Uitenhage-Despatch area is situated within the Western DC. The rural component is almost exclusively commercial farmland. It is the only district council in the province that does not include any tribal land within its boundaries. Three of the other 5 DCs include both commercial farmland and tribal land, whilst the Kei and Wild Coast DCs consist almost exclusively of tribal land. Both the latter councils were only established in 1996. TRepCs have been established for each magisterial district. Land in the former Transkei and Ciskei has not yet been properly surveyed.

Establishing ownership with reference to tribal land can be onerous. For example, land may be registered in the name of:

• The state (national government);
• The state president (as trustee);
• The tribal authority;
• The tribe (collectively); and
• An individual member of the tribe (i.e. private ownership).

Table 3.3 provides an assessment by the relevant DCs of when, in practice, they expect to be able to introduce a rural land tax if the decision were taken to introduce it.

Table 3.3: The feasibility of introducing a rural land tax in the Eastern Cape

Note: 1As not all land within this DC has been surveyed, the feasibility of this assessment is doubtful.

There is little possibility that a land tax could be introduced successfully in the areas of jurisdiction of any of the DCs within the next four years, while most of the DCs expect to be able to introduce such a tax within the next five years. This assessment seems to be realistic, especially if the national and provincial spheres of government provide support to DCs in surveying tribal land.

Specific problems identified in this Province include:

• The diversity of legislation, brought about by the ‘amalgamation’ of the former Transkei and Ciskei administrations with a part of the former Cape provincial administration, is an inhibiting and complicating factor in the areas of local government and finance;
• A large proportion of land in the Eastern Cape has not been surveyed;
• There was strong resistance from the commercial farming community against the RSC levies as well as the concept of a land tax;
• There is also resistance against RSC levies in the former Ciskei and Transkei where business licences were collected until recently. It is imperative that the introduction of any new tax must be accompanied by the elimination of double taxation (e.g. licence fees as well as RSC levies on the owners of businesses) and a well-structured education programme;
• The cost of assessment of all land in this large and highly rural province will be high;
• There is generally a lack of security of title (uncertainty about land rights) in the former homeland areas;
• The future role (and fiscal powers) of tribal authorities must be clarified;
• Should Port Elizabeth become a MC, it may seriously affect the Western DC. The major portion of the Western DC income is generated in the PE-Uitenhage-Despatch area. It is interesting to note that total budgeted RSC levies for 1997/98 amount to R117 747 000 - which is higher than the totals for 2 of the existing 6 MCs (the Lekoa-Vaal MC (R55 647 500) and Khayalami MC (R105 000 000));
• There is a general lack of administrative capacity in the recently established Kei and Wild Coast DCs in the former Transkei. These councils are struggling to introduce RSC levies (i.e. to register new levy payers and to collect the revenue), suggesting that the introduction of a land tax will be impossible within the next few years.

Free State

The Free State covers 130 000km² and its population 2 470 000. The population density is low – at only 19 persons per km².

The rural areas of the Free State are made up primarily of commercial farmland. Only 2 of the 4 DCs contain tribal land (Thaba Nchu and the former Qwa-Qwa homeland). The Free State primary rural local government model is relatively well developed in comparison to most of the other provinces. The TRCs generally have good working relations with the relevant DCs and the process of endowing TRCs with executive powers and functions is apparently well under way. Table 3.4 shows that officials at all of the DCs thought a rural land tax could be introduced within the next 2-4 years, which seems to be a realistic assessment.

Table 3.4: The feasibility of introducing a rural land tax in the Free State

The main problem areas encountered were:

• Representatives of the DCs estimated that the cost of assessment of all rural properties will be substantial; and
• It may be difficult to introduce any new tax in a situation where current revenue sources seem to be adequate to fulfil the constitutional obligations of local government, as is the case, for example, with the Goldfields DC.

Gauteng

Gauteng is the smallest province measured by physical size (17 030km²). It has a population (1996 census estimate) of 7 171 000 and by far the highest population density in the country (421 persons per km²).

Gauteng boasts 4 MCs and 2 DCs (called services councils). Because it is so highly urbanised and geographically relatively small, Gauteng is in many respects unique. There is very little tribal land in Gauteng. The Eastern Gauteng DC will be implementing a rating system (property tax) throughout their respective areas of jurisdiction as from 1 July 1999 (the 1999/2000 financial year). Within its jurisdiction all land is being assessed at present and a valuation roll is in preparation. In principle all landowners will therefore be rateable as from 1 July 1999 in terms of the Local Authorities Rating Ordinance 11 of 1977 – that is, on the same basis as urban property owners. Table 3.5 reflects this justifiable optimism regarding their potential to introduce a rural land tax.

Table 3.5: The feasibility of introducing a rural land tax in Gauteng

Problem areas:

• There is fierce resistance against the present assessment of rural properties by the Eastern Gauteng Services Council. The lack of cooperation by property owners has already set back the process several months, and has resulted in the postponement of the introduction of the property rating in TRepCs by at least one year;
• Once a valuation roll is published, many objections and appeals are expected; and
• Gauteng’s experience in attempting to broaden its urban property tax to include rural properties should at least serve as a valuable learning experience for the other provinces.

KwaZulu-Natal

KwaZulu-Natal has the highest population (7 670 000) of all 9 provinces, and the population density of 81 persons per km2 ranks second after Gauteng. Rural areas consist largely of tribal land, although there are sizeable commercial farmland and conservation areas.

KwaZulu-Natal has 1 MC and 7 Regional Councils (RCs). Presently it has no primary local government structures in rural areas, although such structures seem to be evolving in the form of sub-regions within each of the seven RCs. All 7 RCs consist, to a greater or lesser extent, of unsurveyed tribal land that makes it difficult to establish a fiscal cadastre. Traditional leaders are ex officio members of the RCs, resulting in very large councils (in excess of 250 members in some cases).

Table 3.6 shows that officials in these DCs are relatively pessimistic about the feasibility of introducing a rural land tax, at least in the near term, although some think it possible in about five years’ time. Again, this seems to be a realistic assessment based on the problems at hand.

Table 3.6: The feasibility of introducing a rural land tax in KwaZulu-Natal

Problem areas identified include:

• In probably all 7 (RCs) (but at least within the 4 RCs that supplied data) there are tracts of as yet unsurveyed land;

• In the case of tribal land the lack of security of title, i.e. the uncertainty about land tenure rights, will impact on the feasibility of the introduction of a rural land tax;

• Establishing a valuation roll, particularly in tribal areas, will be costly. Although densely populated, KwaZulu-Natal is still largely rural;

• The future role of the traditional leaders in the local sphere of government will have to be clarified. Without their cooperation the introduction of any tax is bound to be unsuccessful; and

• Should Pietermaritzburg become a MC, it will impact dramatically on the tax base of the Indlovu Regional Council.

Mpumalanga

Mpumalanga covers 79 530km² and, with a population of 2 646 000, has a population density of 33 persons per km². There are large tracts of tribal land in 2 of the 3 DCs. The Mpumalanga government opted to establish TLCs for rural areas in the former KwaNdebele, rather than TrepCs. Apparently this makes it easier to access development funding, although the reasoning is not clear.

Mpumalanga also has to cope with the intricacies of legislation from the three former homelands of Kangwane, Gazankulu and KwaNdebele, as well as the former Transvaal. Furthermore there are large unproclaimed settlements, even ‘cities’ (e.g. Nkomazi East and Nkomazi West to the east of Nelspruit) in some rural areas.

By their reckoning, all 3 the DCs will be able to introduce a rural land tax within the following 3-4 years. However, this may be optimistic given the scale of informal settlement and the high proportion of unsurveyed land in the former homeland areas.

Table 3.7: The feasibility of introducing a rural land tax in Mpumalanga

The main problem areas identified in the province are:

• The diversity of local government legislation from the former administrations, which will have to be addressed as soon as possible;
• Not all land has been properly surveyed;
• The lack of security of title (uncertainty about land tenure rights) in especially former homeland areas, which must be addressed;
• The future role (and fiscal powers) of tribal authorities must be clarified; and
• The cost of assessment, especially of tribal land, will be high.

Northern Cape

At 363 200 km², the Northern Cape is by far the largest province, more than double the size of the second largest, the Eastern Cape. However, with a population of only 746 000 the population density is a mere 2 persons km². If Kimberley (a secondary city) and the other urban municipalities are excluded, the population density would probably be closer to 1 person per km².

There are 6 DCs in the Northern Cape. The Hantam DC covers 80 000km² (roughly 4,5 times the size of Gauteng), but has a rural population of only 14 000 persons. Officials in these DCs estimate that they would be able to introduce a rural land tax within the next three years. However, the huge size and low population (landowner) density in the Northern Cape suggests that a rural land tax may be impractical. Even in the Diamantveld DC (of more than 30 000km²) a uniform land tax does not seem to be a viable option throughout the DC’s jurisdiction. This council has sparsely populated extensive commercial farming areas, but also boasts smallholder areas under irrigation.

Table 3.8: The feasibility of introducing a rural land tax in the Northern Cape

Problem areas identified include:

• The size of DCs will be a challenge to any land tax administration. Providing effective and affordable local government in the extremely sparsely populated rural areas of vast DCs is a daunting prospect;
• Soil quality and, hence, farming conditions differ appreciably within some of the DCs, where irrigation and extensive livestock farmers can co-exist (e.g. Benede Oranje DC and Diamantveld DC); and
• A cost-benefit analysis is imperative in order to establish whether the cost of assessing properties and collecting a land tax is justifiable in the light of the tax revenue that can be generated.

Northern Province

The Northern Province is 123 100km² in extent, and the population is 4 128 000, resulting in a population density of 34 persons per km².

This relatively large province has only 2 DCs. Within the geographic area of the Northern DC there are more than 1 200 rural villages (i.e. unproclaimed informal settlements). Furthermore, the province has to cope with the intricacies of legislation from three former homelands and from the former Transvaal province. Some areas in the former homelands are presently (still) administered by the province, which also collects property rates from these areas. This practice is probably unconstitutional, and has become a bone of contention. Officials in the two DCs believe that they would be able to introduce a rural land tax within the next five years. However, this assessment seems to be optimistic given the nature of the problems faced by the DCs.

Table 3.9: The feasibility of introducing a rural land tax in Northern Province

The major problem areas in the province seem to include:

• The Northern Province needs to unify and simplify the diversity of legislation pertaining to local government and local taxation;
• The huge size of the present 2 DCs (especially the Northern DC) seems to create logistical and administrative problems. Administering a rural land tax equitably and efficiently within such vast jurisdictions with limited resources seems impossible;
• The provincial government collects property rates in some former homeland settlements. Apart from probably being unconstitutional, this creates friction between the Northern DC and the provincial government;
• Not all land has been properly surveyed;
• Assessing land in 2 huge and highly rural DCs will be problematic and costly;
• The lack of security of title (uncertainty about land rights) in especially former bantustan areas will have to be addressed if a usable fiscal cadastre is to be established; and
• The future role (and fiscal powers) of tribal authorities will have to be clarified.

North West

The North West province covers 116 500km², has a population of 3 043 000 people and its population density is 26 persons per km². The province consists of portions of the former Transvaal, Cape Province and Bophuthatswana. Thus, the local government legal framework presently differs between and even within DCs. There are 5 DCs in the province, each with some tribal land.

There are only a few, relatively small TRepCs for some of the informal settlements in the province. There are large so-called remaining areas within the jurisdiction of the district councils. These DCs all argue that it will be possible to introduce a rural land tax within the next 2-4 years, as is shown in Table 3.10. This assessment may be optimistic, while it does seem possible for the tax to be introduced within 5 years.

Table 3.10: The feasibility of introducing a rural land tax in North West Province

Problem areas encountered by the DCs include:

• Diverse and ‘overlapping’ local government legislation. With respect to urban property rating the former Cape Province, Transvaal or Bophuthatswana legislation is applicable - depending on the location. If a local government model in terms of which urban municipalities amalgamate with their rural hinterland is followed this will impact on the tax base. Uniformity within the province is imperative;
• Ownership of tribal land is problematic. However, this is a short-term problem that could be addressed in terms of land reform programmes;
• Not all land in the province has been properly surveyed;
• Initial assessment of all rural land for purposes of a valuation roll will be costly;
• The lack of security of title (uncertainty about land tenure rights) in some areas will have to be addressed;
• The future role (and fiscal powers) of tribal authorities will have to be clarified; and
• There are a number of large settlements, often perceived as ‘rural’ settlements, that are in reality urban communities (e.g. the ‘city’ of Winterveld in the Eastern Region DC). If distinctions are to be drawn between urban property taxes and rural land taxes, these settlements need to be classified as urban.

Western Cape

The population of the Western Cape (129 600km²) is 4 118 000 and the density 32 persons per km². The province has 1 metropolitan council and 7 DCs. Rural areas consist primarily of commercial farmland, and all land has been surveyed. There is no tribal land. Generally the Western Cape (as well as the Northern Cape and to a limited extent the Eastern Cape) has a long history of regional local government, building on the former regional services councils and before them the divisional councils. Table 3.11 shows that two of these DCs are able to implement a land tax forthwith, while all will be able to do so within the next 2-4 years. This assessment seems to be realistic.

Table 3.11: The feasibility of introducing a rural land tax in the Western Cape

Generally the capacity exists to charge, assess and collect a rural land tax. It will, however, be a difficult task to ‘sell’ such a tax to the potential taxpayers if it is an additional tax. The divisional council levy was abolished a decade ago and replaced by the RSC levies currently levied by district councils.

Problem area:

• The initial cost of establishing a valuation roll will be high. The divisional council values (where records were retained) are totally out of date.

3.6    General summary

A number of general conclusions regarding the capacity of DCs to levy a rural land tax can be drawn from the analysis of these councils, based on the information supplied in the original research report and summarised above.

Key information on DCs

Population figures vary widely across districts, as does the size of their areas of jurisdiction. The districts in the Northern Cape and Northern Province are very large. Accurate population figures could not be supplied, as the Census 1996 data are not yet available, and population figures are disseminated according to magisterial districts, while quite a number of DC boundaries do not accord with magisterial districts.

While the large districts are in arid areas, and therefore have fewer farms to survey and there is less non-agricultural rural land, the long distances will increase the cost of such an exercise. Furthermore, these areas are sparsely populated, and may not be able to afford the administrative costs, especially as the net take from the tax is expected to be lower.

Number of councillors and employees

The number of councillors reflects, to some extent, the population density within DCs (i.e. the number of TLCs and TRepCs). Councillors were elected indirectly in all provinces except in KwaZulu-Natal and the North West, where they were directly elected. In KwaZulu-Natal councils are very large because all traditional leaders are ex officio councillors and because of the system of direct representation.

The number of employees in the DCs varies widely, although the majority of councils seem to average between 20 and 35 employees. DCs that were established to replace former Cape Province RSCs traditionally have more employees, as they perform various agency functions (e.g. roads, health and ambulance services) on behalf of the provincial government. Only 2 (newly established) DCs in the entire country complained that they were understaffed. As explained below, a number of councils were confident that a land tax could be introduced without an increase in personnel.

A number of DCs gave an estimate of how many additional staff members will have to be employed to administer (i.e. introduce, assess and collect) a land tax. The results are shown in Table 3.12 below.

Table 3.12: Estimated number of extra staff required to administer a rural land tax

Income from RSC levies

The total income from RSC levies varies considerably among DCs. There are 6 DCs whose income from RSC levies for 1997/98 is not expected to exceed R5 million. These are all in ‘deep’ rural, relatively large and sparsely populated areas that rely largely on stock farming. A further 9 councils expect their total RSC levy income to be less than R10 million.

The Eastern Gauteng Services Council (R262,1m) and Western District Council (R117,7m) have by far the largest income from RSC levies. The levy income of Eastern Gauteng Services Council even exceeds that of the Pretoria TMC. Only 8 councils’ total levy income is expected to exceed R50 million in 1997/98.

Councils determine their own rates in consultation with the Department of Finance. At least the following 7 DCs give farmers a rebate of 25 per cent on the standard rates of the levies:

• Gauteng: Eastern Gauteng SC and Western Gauteng SC;
• Mpumalanga: Eastvaal DC and Highveld DC;
• Northern Province: Bosveld DC;
• North West: Rustenburg DC; and
• Western Cape: Winelands DC.

RSC levies are paramount sources of revenue for the DCs. It is doubtful (see also the White Paper) that these levies will be abolished in the short or medium term. The introduction or not of a rural land tax will, therefore, have to be evaluated in the light of the probable retention of these levies.

The number of levy payers and the percentage of levies collected in TLCs and TrepCs jurisdictions

In most of the districts the number of levy payers outside TLCs are less than 40 per cent of the total number of levy payers. Only 3 of the surveyed DCs have more levy payers registered outside TLCs than within: Hantam DC (70 per cent), Bophirima District Council (65 per cent) and Central Karoo DC (52 per cent).

Only 1 council, the Kalahari DC, reported that more than 50 per cent of its levy income came from outside TLCs. However, in this case 5 of the TRepCs are mining towns, where mining is responsible for 80 per cent of levy income and agriculture only 2 per cent. Although 52 per cent of levy payers in the Central Karoo DC are located outside the TLCs, their contribution is only about 20 per cent of levy income. In the case of Hantam and Bophirima DCs, where 70 per cent and 65 per cent of the levy payers are located outside TLCs respectively, their contribution amounts to 36 per cent and 33 per cent of total levy income. In 3 councils in the Eastern Cape as well as the Goldfields DC in the Free State, the amount collected within TLCs exceeds 95 per cent, whilst the 2 councils in Gauteng and 4 of the KwaZulu-Natal councils indicate that less than 10 per cent of total levy income comes from outside the TLCs. The Diamantveld DC and Northern DC also collect less than 10 per cent from levy payers outside TLCs.

Generally, therefore, the contribution from rural areas tends to be small in comparison to even the smaller towns, especially in the more densely populated jurisdictions.

Collection of RSC levies

A number of DCs indicated that they are experiencing problems with the registration of new levy payers and/or the collection of levies from registered levy payers. Ugu Regional Council indicated problems only in respect of the registration of new levy payers, and Klein Karoo DC only in respect of collection, while a number of DCs admitted to problems in both respects (Bophirima and Eastern Region District Councils in North West; Amatola, Drakensberg, Kei and Stormberg DCs in the Eastern Cape and Ilembe and Uthungulu Regional Councils in KwaZulu-Natal).

However, the majority of DCs have no or few problems with the collection of RSC levies, and collection rates are generally high. Three councils reported collection rates of 98 per cent and above; 9 of between 90 and 97 per cent, 4 between 80 and 89 per cent and only 3 below 80 per cent.

The majority of the DCs spend far more in rural areas than in TLC areas, and thus more than is collected from rural levy payers. Northern Province DCs generally spend between 50 and 60 per cent of their levy income in rural areas, while in the North West and Mpumalanga more than 80 per cent is spent in these areas. In the rest of the country there is a less pronounced redistributive pattern.

Information on rural land

Very little land in the former homeland areas has been properly surveyed. This problem is especially acute in the Eastern Cape, KwaZulu-Natal, Mpumalanga and the Northern Province. It is not a problem in Gauteng, most of the Northern Cape and the Western Cape. Only a few councils are in the process of establishing a Geographic Information System (GIS) with substantial data on land use and management. This should be encouraged, as DCs seem to have little information on actual land use. This problem is also more acute in the former homeland rural areas, where a substantial proportion of the land is often used for residential purposes. Land that is officially classified as rural is, therefore, often indistinguishable from urban uses.

Only the Eastern Gauteng Services Council has thus far embarked on the creation of a valuation roll for the total surface area under its jurisdiction, although the Western Gauteng Services Council has recently completed a valuation roll of all business premises within its jurisdiction.

As land data is wanting in many jurisdictions and not all land yet properly surveyed, this aspect will have to be addressed urgently if a rural land tax is to be considered as a source of revenue by DCs.

The introduction of a rural land tax

No DC (or any primary rural municipality) is capable of introducing a land tax in the 1998/99 financial year. The Eastern Gauteng Services Council aimed to introduce property rates from 1 July 1998, but due to delays with the establishment of the valuation roll, the introduction has been postponed by at least a year. The majority of DCs will, however, be able, with logistical support (proper land surveys, assessment, etc), to introduce a land tax within 4 to 6 years.

It is clear that the introduction of a rural land tax will have cost implications for the implementing authorities, especially in the case where properties are valued according to their market value. Once in place, there will also be costs involved in maintaining a legitimate, accurate and equitable valuation roll.

Even if a proper market value-based roll is substituted for a so-called measured roll ⁽⁸⁾ or a use value-based roll, initial assessments and continuous reassessments will have to be made. The lack of data makes it impossible to estimate the total cost of preparing a valuation roll throughout the country. Only a few DCs have thus far embarked on the estimation of this cost in their area of jurisdiction and/or on an estimation of the cost of doing so.

Although it is evident that assessment will be a cost factor to be considered, it is also noteworthy that the information gathered pertaining to land use and land management could become a valuable resource in itself to be used for other purposes, or even to be sold for commercial use.

Capacity to administer a land tax

It is clear that primary rural municipalities (where they exist) have no capacity to administer a land tax. However, the capacity to administer such a tax generally exists at the district council tier. Although information was not received from all 42 DCs, and in most instances conclusions had to be drawn from the opinions of or estimates made by individual officials, it can be inferred that it is possible for the majority of DCs to introduce a rural land tax in the not too distant future. A lot will, however, depend on the logistical support provided by the national and provincial spheres of government.

In summary, while the DCs in the Northern Cape may have the capacity to introduce the tax within the next 2-4 years, the expected low revenue yield may preclude the possibility of doing so. The problem of a low expected revenue yield in the Eastern Cape is compounded by the lack of capacity amongst most of the DCs, especially as 5 of the 6 DCs have tribal land within their areas of jurisdiction. It is unlikely that they will be able to introduce the tax within 4 years without support from the provincial and national spheres. The same argument applies to the Northern Province, Mpumalanga, the North West and KwaZulu-Natal. The only provinces that are likely to be able to introduce the tax within this period are Gauteng, the Free State and the Western Cape. Nevertheless, it should be technically feasible for all DCs to introduce a rural land tax within 5 years, given the required support from the other spheres of government.

3.7 Conclusions

This analysis of rural municipalities shows that there are a number of factors that mitigate against the introduction of a rural land tax in the near term:

• Large areas of the country are so sparsely populated that it seems unlikely that a rural land tax will yield a positive net revenue there;

• From the information supplied by half of the DCs (see Table 3.12), it is clear that, by their own estimates, some of the DCs will have to employ additional staff in order to implement a rural land tax successfully;

• Some of the tribally owned land in South Africa (about 15 per cent of the agricultural land in the country) has not yet been surveyed. Experience elsewhere has shown that this is no easy task;

• There are virtually no primary local authorities with the capacity to deliver services of any kind. Therefore, it is evident that DCs will have to be charged with the responsibility to implement the tax, even though the Subcommittee has argued in favour of primary authorities; and

• Few DCs will be able to introduce a rural land tax within 4 years.

However, despite these caveats, the research has also shown that most DCs will be able to introduce a rural land tax within the next 4-6 years. Further, most DCs receive very little tax revenue from rural areas, while a large proportion of their spending is in rural areas.

Finally, this research has also shown that it is unlikely that RSC levies will be replaced with other revenue sources, if only because of their key importance as an existing source of revenue. Thus, if the principle of maintaining the total tax burden is to be adhered to, and a rural land tax is to be introduced, tax relief measures will have to be implemented or a rural land tax will have to be treated as a provisional tax payment for income tax purposes.

(1)    This Chapter is based on Franzsen, R. ‘The capacity of municipalities in rural areas to introduce, assess and
         collect a rural land tax.’ University of South Africa (UNISA). Unpublished report.

(2)    Ministry for Provincial Affairs and Constitutional Development, March 1998.

(3)    Set up by the national government in November 1996.

(4)    The Strauss Commission (Commission of Inquiry into the Provision of Rural Financial Services, 1996)
         also emphasised the weakness of existing official definitions of rural areas and rural dwellers in South Africa.

(5)    Titled, Local Government in a System of Intergovernmental Fiscal Relations in South Africa.

(6)    Budget Review, 1997

(7)    Budget Review, 1998

(8)    See section 10G(6) of the Local Government Transition Act.

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