An investigation into the use of land-based financing to fund infrastructure in South Africa
| DOI | https://doi.org/10.1108/JPIF-02-2019-0016 |
| Published date | 21 October 2019 |
| Date | 21 October 2019 |
| Pages | 183-198 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Robert McGaffin,Francois Viruly,Luke Boyle |
An investigation into the use of
land-based financing to fund
infrastructure in South Africa
Robert McGaffin, Francois Viruly and Luke Boyle
Urban Real Estate Research Unit,
University of Cape Town, Cape Town, South Africa
Abstract
Purpose –The purpose of this paper is to understand how the nature of infrastructure as a public good has
traditionally lent itself to state provision and to review how land-based financing (LBF) can be used to
overcome the public infrastructure funding constraints in South Africa.
Design/methodology/approach –The paper is largely based on a review and analysis of the academic
literature, government reports and reports from research institutions such as the World Bank, Department for
International Development, Urban Land Institute and the Lincoln Institute.
Findings –The paper finds that although a number of LBF instruments are being used in South Africa, the
majority of them are not suited to addressing the current infrastructure funding constraint.However, the paper
finds that some LBF mechanisms, such as tax-increment financing (TIF), that are currently not used could play
a role provided that certain preconditions are met.
Research limitations/implications –LBF has only partially been implemented in South Africa, thus the
paper is limited to exploring the issues, challenges and necessary policy and regulatory changes needed to
support LBF.
Practical implications –The review of LBF mechanisms currently being used in South Africa highlights
many of their practical limitations. Furthermore, concrete proposals and legislative amendments are proposed
in the paper regarding the implementation of additional funding instruments such as TIF.
Social implications –Infrastructure is regarded as a key precondition for socio-economic development. LBF
offers a viable and important alternative for fiscally constraint governments in emerging economies to fund
infrastructure provision.
Originality/value –The main contribution of the paper is its focus on the use of LBF in the under-researched
Sub-Saharan African context.
Keywords South Africa, Infrastructure investment, Land-based financing, Tax-increment financing, Urban
infrastructure, Value capture
Paper type Conceptual paper
1. Introduction
Infrastructure is seen globally as a key factor in driving economic growth and reducing
poverty and inequality (Fedderke and Garlick, 2008;Brown-Luthango, 2011;Chitiga et al.,
2016;The African Development Bank Group, 2018;Foster, 2008;International Monetary
Fund, 2017;World Bank, 2017). In South Africa, research has similarly shown that there is a
strong correlation between infrastructure investment and economic growth (Coetzee and
Kleynhans, 2017) and that infrastructure investment is needed to restructure its inequitable,
inefficient, unsustainable and fiscally unviable cities (Fedderke et al., 2006;The African
Development Bank Group, 2018).
Infrastructure is generally seen as a capital good or service that supports the production of
private and public goods (Frischmann, 2004). It is often termed social overhead capital
because it provides services for society (Hirschman, 1958;Buhr, 2003;Frischmann, 2004;
Fourie, 2006;Fedderke and Garlick, 2008). There are two main categories of infrastructure:
economic and social. Economic infrastructure refers to resources such as roads, railways,
The use of LBF
to fund
infrastructure
183
This paper forms part of a special section “Industrial Infrastructure and Real Estate”, guest edited by
Professor Seow Eng Ong, Associate Professor Chyi Lin Lee.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 6 February 2019
Revised 28 June 2019
12 August 2019
Accepted 13 September 2019
Journal of Property Investment &
Finance
Vol. 39 No. 3, 2021
pp. 183-198
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2019-0016
telecommunications and electricity grids that promote economic activity (Fourie, 2006). Social
infrastructure refers to resources that promote health, education and cultural development
(Development Bank of Southern Africa, 1998). For the purpose of this paper, infrastructure
refers to the basic physical goods, services and facilities needed for the operation of social and
economic activity.
Fedderke and Garlick (2008),Ag
enor (2010) and The African Development Bank Group
(2018) argue that there has been insufficient infrastructure investment in South Africa.
Although the 2012 National Development Plan of South Africa identifies that annual public
infrastructure investment equivalent to 10 per cent of its Gross Domestic Product is required
to address the developmental challenges of the country, the South African National Treasury
2019 Budget Review showed that such investment has averaged around 5 per cent per annum
between 1994 and 2018 (Republic of South Africa, 2012 and 2019).
One of the main reasons for this is the fiscal constraints to fund such infrastructure (South
African Cities Network, 2016;International Monetary Fund, 2017;Republic of South Africa,
2019). As a result, there has been an increasing interest in identifying alternative ways, in
particular land-based financing (LBF), to fund infrastructure development in the country
(Brown-Luthango, 2011).
The use of LBF to finance infrastructure and urban development has been widely
researched (Cervero and Susantono, 1999;Cervero and Murakami, 2009;Debrezion et al.,
2007;Du and Mulley, 2007;Hui et al., 2004;Huxley, 2009;Ingram and Hong, 2011;Medda,
2012;Peterson, 2008;RICS, 2002;Rodriguez and Mojica, 2008;Smolka and Amborski, 2000;
Suzuki et al., 2015). However, this research has tended to focus on Europe, the USA, South
America and Asia, with little attention paid to its use in a Sub-Saharan African context.
Furthermore, the literature has tended to focus on the need for, and justification of, the use of
LBF to finance infrastructure and has paid limited attention as to why the state has
traditionally funded and supplied infrastructure as a public good.
The purpose of this paperis, therefore, to address these shortcomings by first, explaining
that the characteristics of infrastructure as a public good has traditionally lent itself to state
provision and second, to review the potential and challenges of using LBF to fund
infrastructure in a specific Sub-Saharan African context. However, as LBF has onlypartially
been implementedin South Africa, the paper is limitedto exploring the issues, challengesand
necessarypolicy and regulatorychanges needed to make LBF a reality.The paper does this by:
explaining why governments traditionally fund infrastructure development;
outlining why this model of infrastructure provision is increasingly under threat in
South Africa;
Illustrating the theoretical justification for LBF mechanisms; and
identifying which LBF mechanisms are currently in use and which additional LBF
mechanisms, such as tax-increment financing, could be used in South Africa.
2. Why the state has traditionally been the main provider of infrastructure
Although an increase in public private partnerships and the inclusion of infrastructure as an
investment asset class (Finkenzeller et al., 2010) has seen a growth in the role of the private
sector in the delivery of infrastructure, the state has conventionally been the main supplier of
infrastructure to date. This is largely due to the defining characteristics of infrastructure and
the consequent failure of the market to supply it adequately (Black et al., 2008).
The market, through the price mechanism, is relatively successful at bringing about a
Pareto optimal state –where there is an allocative and productive efficient outcome. This is
particularly the case in the long run and is dependent on producers and consumers being able,
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