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Although there was market demand for a range of commercial and residential uses in the Diepsloot Node, the lack of bulk infrastructure constrained developers from building projects that could meet this demand. Furthermore, attainment of required land use and development approvals from local government authorities was preconditioned upon these infrastructure constraints being addressed. This problem was exacerbated  by the fact that the various local government authorities had insufficient capital budgets to build the necessary infrastructure upfront, even if the costs could be recouped through payment by developers of DCs over time.

Specifically, several types of bulk infrastructure needed to be installed to make the developments possible. Firstly, the R511 provincial road had to be expanded. This was funded through a partnership arrangement involving the provincial road authority and two of the developments in a two thirds/ one third ratio. However, as DCs do not apply to provincial infrastructure, the two developments could not off-set their contribution towards this infrastructure against any DCs that they were required to pay the local authority to get the necessary rights to develop the sites.

Similarly, each of the three developments had to fund and build electrical sub-stations on their respective sites. As the electrical supply authority was a national state-owned enterprise – Eskom, they similarly could not offset these costs against any DCs demanded by the local authorities.

Other key pieces of urban infrastructure necessary to unlock the developments included a water reservoir, a sewer pump station and the upgrade of several municipal roads.

The water reservoir was funded by a combination of two of the developments, but both developments were able to off- set these costs against the DCs required by the municipality for this bulk infrastructure type. The sewer pump station was funded by a different combination of two of the

developments and similarly were able to off-set these costs against the required municipal DCs. It appears that all three developments recognised the need to share the burden of collectively providing this key infrastructure upfront.

In addition, the different developments had to build and upgrade several municipal roads. Although they were able to off-set these against the DCs owed to the municipality, they could not off-set the total cost incurred. One of the developers argued that this was because the capital unit cost (as discussed in 5.1 above) was incorrectly calculated by the municipality such that the actual cost was 2 – 3 times higher than what was charged in terms of the DCs. Hence, by building the infrastructure upfront in lieu of DCs, the developers incurred higher costs that had to be borne by the development.

The calculation of the capital unit cost raises some debate. In the City of Johannesburg, the actual cost of the infrastructure provided by the developer is used in determining the amount that can be off set against the DCs (as per option 1 in Table 1) . Whilst this can be more accurate, it can be administratively cumbersome and can result in protracted negotiations, the outcomes of which can be difficult to predict and hence to factor into the viability study of the development.

Other municipalities, such as the Municipality of Tshwane, apply a standard unit cost rate (as per option 4 in Table 1) regardless of the actual costs, which may differ substantially depending on the local conditions. For example, the costs to develop a road may be lower if the required material is nearby, but equally may be higher if a bridge needs to be constructed due to the topography. However, it was felt that over time it balances out – “you win on one project and lose on another” as one developer said. Furthermore, this approach was seen by the developers to be simpler, quicker and more predictable.

In addition, the upfront development of the bulk infrastructure by the developers raised the issue discussed in 6.7 above. In some instances, the bulk infrastructure had to be delivered at a scale that was greater than what was needed by the developments (for example, an electrical sub-station comes in standard sizes and hence additional capacity beyond the requirements of the developments was provided). This raised two problems:

Firstly, the cost of this additional capacity was high, putting pressure on the developments to bear these costs upfront. Secondly, a mechanism needed to be put in place for the developers to recoup the cost of the excess capacity over time. In this case the City of Johannesburg did not have a mechanism in place for this to happen and therefore an additional burden was placed on the developments.

A possible solution may have been to apply the City of Tshwane policy, which allows the cost of any excess

capacity provided by the developer to be recouped through the future DCs paid by subsequent developments that utilise this capacity. In this case, the developer providing the excess capacity would enter into a service level agreement, whereby the municipality would pay the developer the DCs paid to it by the subsequent developers.

This agreement would usually be limited to a time period of 5 – 10 years and therefore the initial developers would run the risk that no subsequent development takes place. Notwithstanding this, this approach was seen by the developers to be more equitable and viable.

Though complicated to execute, the funding of key bulk water, sewer and road infrastructure using DCs enabled commercial centres and over 30 000 houses, of which 4500 were affordable, to be developed in the area.