Using tax increment financing to spur business development on disused or degraded land could be a highly feasible method to repurpose otherwise unusable land, as well as create jobs and encourage entrepreneurs and business in general.
This is according to Government Technical Advisory Centre (GTAC) transaction advisory services senior adviser James Aiello, who spoke on the topic Crowding in Infrastructure Investment during a recent meeting of infrastructure-focused forum the Infrastructure Dialogues, held at the Development Bank of Southern Africa in May.
GTAC is a public–private partnership unit of the National Treasury.
Tax increment financing has been used in the US and Aiello said, in his experience, it was a “piece of cake” to implement on land that was difficult to develop, such as closed landfill sites that had been rehabilitated.
Aiello explained that his experience of implemented tax increment financing involved identifying undeveloped land – most of which would have a tax base of nil – and then marketing it among businesses that would invest in building “something really expensive on it”. He added that, because the initial tax base of the land was low, the first developers on the land would not incur reflective taxes, but, as the land became increasingly more attractive, other businesses would begin to develop on it too.
“[The initial developers] can use the money they save to develop their businesses,” he said.
Encouraging local authorities (mainly municipalities) to adopt the same operating model to encourage business development, Aeillo says the City of Johannesburg has used tax increment financing on a project. “I want to see how it was done to determine whether such a financing model can be implemented on a [wider scale].”
He also cited project bonds as another catalyst of infrastructure financing, through which investors were encouraged to put money into municipal or government infrastructure projects.
Project bonds must be distinguished from general obligation bonds, with the former being project-specific bonds that are ringfenced.
In this regard, a committee within the GTAC is working on getting some of the listing requirements for project bonds adopted by the JSE. Referring to the progress being made in this regard, Aiello said: “We have been working very hard . . . a little over two years . . . but I think we are making progress.”
He further highlighted that the proposal would be gazetted soon, in addition to some work had to be done in conjunction with the Financial Services Board. Following this, Aiello said, the proposal would probably be submitted for public comment again, after which the GTAC would set a “go-live” date for the listing requirements for project bonds in South Africa “some time around September”.
“I am cautiously optimistic that we will be off and running, and I think there is going to be a lot of demand because all the insurance companies, pension funds and long-term investors are looking for safe places to invest, and project bonds that are properly put together and properly listed provide a very important additional mechanism for those companies.”
Aiello said he was confident there would be demand for project bonds.