The Informal/Formal Interface of Investment in Township Areas

Rob McGaffin (research courtesy of Urban Landmark)

In this presentation, the three following examples will be used to explore the informal/formal interface of investment in the township areas:

• Roll-out of retail centres in the township areas
• Roll-out of transport infrastructure in township areas
• Household investment in township areas

RETAIL CENTRES

Relative Scale of Development – Amount of formal shopping centre space developed in township and rural areas relative to the total.

…..Mixed Reactions to ‘mall’ developments:

Pan Africa Mall in Alexandra:

‘Spokesperson of the Greater Alexandra Chamber of Commerce and Industry’s youth wing, John Makgoka, said the body would embark on a protest this week to discourage consumers from shopping at the mall until it was “fully owned” by locals. “The people of Alexandra will fight for what belongs to them. We will cripple the tenants until they leave.” (Soweton, 15 June 2009)

Tebogo Mogashoa of Pan Africa Development Company says, “Pan Africa Shopping Centre represents the dreams and aspirations of the Alexandra people. We developed it for them.” (Eprop, 18 August 2009)

Impact of Centres

The study ‘Taking Stock: the development of retail centres in emerging economy areas’, conducted by Urban LandMark¹ in 2011, examined 6 centres to better understand the impact of this type of development on local consumers, local businesses and the local economy. The results of the survey showed:

¹Demacon Market Studies (2010) The impact of the development of formal retail centres in 'emerging economy' areas in South Africa

1.0 Impact on Consumers:

1.1. Impact of shopping patterns:

• Decrease in external shopping from 55% to 38%
• 71% of formal shopping done at new centre
• 31% said they shopped less frequently outside the area
• 66% said that local expenditure had increased
• Shopping at local businesses dropped from about 23% to 20%

1.2. Impact on time and travel costs:

• Travel time to formal centres dropped by 57%
• Travel time to small businesses dropped by 25%
• Travel costs to formal centres dropped by 36%
• Travel costs to small businesses dropped by 21%

2.0 Impact on Small Businesses:

2.1. Impact of centre in terms of location:

• Safety & security – 54% (same), 32% (incr)
• Visibility – 39% (same), 41% (incr)
• Transport interchanges – 36% (same), 51% (incr)
• Banking – 50% (same), 41% (incr)
• Foot-traffic – 30% (same), 48% (incr)

2.2. Impact on business performance

• 75% saw growth of 5-10%, 25% saw a decline of 5-10%
• Employment – 64% (same), 14% (incr)
• Profit – 40% (same), 31% (incr)
• Turn-over – 42% (same), 29% (incr)
• Supply - 13% of stock bought from the centre

2.3. Factors stopping the relocation to the centre:

• Lack of customers
• Lack of funding
• High rentals
• Low profits
• Competition from nationals
  ....50/50 split between those businesses wanting to (and not) relocate to the centre

  2008 research of retail development in Soweto by Professor Andre Lighthelm, Research Director of the Bureau of Market Research at UNISA, similarly found that that the impact of shopping mall development on existing small businesses could not be explained uni-dimensionally, purely portraying a decline in small business activity.

  “While some small businesses expect to close their doors, several small businesses were established due to mall development. This is particularly true of street vendors with their ability to intercept large numbers of township consumers at the new malls.”

  “A third of the respondents surveyed in Soweto predict an expansion of their business turnover, while another third expects a contraction. Some regard the newly developed malls as their main competitor, while others experience stiff competition from fellow small businesses.”
  (Small business sustainability on a changed trade environment: the Soweto case, 2009)

  Opportunities & Challenges

  One of the main challenges is to manage the relationship between the formal and informal activities such that a positive interface between the two is created. If this is done, opportunities exist for formal retail to act as a magnet to create a larger customer base for the smaller interprises, which can enhance their growth and viability. By increasing the customer base, turn-overs and gross profits of the smaller businesses can be increased, which in turn enables some of them (where appropriate) to pay market rentals for, albeit smaller, formal spaces (e.g. Johannesburg CBD traders).

  In addition, a positive informal/formal retail development in a township area can create an obvious focal point for investment and therefore act as a strong catalyst for nodal development. The creation of such focal points are important considering that many of these township areas were developed as dormitory towns and often lacked an economic logic with respect to locations that lent themselves to viable investment.

  INFRASTRUCTURE

  Context

  Infrastructure similarly has the potential to set up an economic logic in a township, and a location for investment in areas previously designed as dormitories.

  However, the large infrastructure roll-out programme is occuring in a context of:

  • Increasing pressure on finances across the different spheres of government
  • Increasing pressure to increase inclusionary development, especially housing

  The challenge is how one facilitates access by the poor to the well located sites generated by the infrastructure i.e. how do we increase the bidding power of the poor for these key sites?

  The question therefore is whether the provision of transport infrastructure can generate sufficient additional (incremental) value to either:

  • Fund or partially fund the infrastructure over a reasonable pay-back period
    or
  • Generate enough surplus returns such that inclusionary development can be incorporated into a project without reducing the rates of return required to induce the investment in the first place.

  3 case studies

  In order to answer this, Urban LandMark commissioned a study on the impact of transport infrastructure on property values1. The study looked at three case-studies consisting of different types of transport infrastructure, namely a BRT station (Mooki Street, Soweto), a major road interchange (PWV9 near Diepsloot) and a metrorail station (Khayelitsha, Cape Town). The aim of the study was to assess the degree to which such infrastructure impacts upon property values and the possible mechanisms that could be used to capture any increased value that could be used to cross-subsidise the poor or pay for the infrastructure itself.

  Using a number of residual and comparative methods, the study found that assuming the development conditions were in place, the infrastructure could generate surplus property values. The study suggests that this value increase will differ by the different types of transport infrastructure but due to the limited number of case-studies, this would need to be verified with further research.

  ² ADEC (2011)Value Capture from Transit –orientated development and other transport interchanges.

  Value Capture Mechanisms

  “Value-capture” is a term used to describe the process of extracting (in different ways) the additional value that accrues to a property as a result of some public investment such as the provision of public transport or a school. It is the extraction of the value over and above the value that the property would have if the public investment had not taken place. It is usually argued that as the additional value was created as a result of the state’s actions and not the owner, it is justifiable for the state to lay claim to this value through various mechanisms for some public purpose such as paying for public transport.

  Drawing on local and international evidence, the Urban LandMark study identified a number of mechanisms as potential ways to capture some or all of the increased value that occurs as a result of the provision of tranport infrastructure. There are two broad categories of value-capture mechanisms, although the distinguishing line can be blurred from time to time and some mechanisms can exhibit qualities from both categories.

  The first category includes those mechanisms that try to use the increased value to bring about, or facilitate, a broader planning outcome (“use or social/spatial restructuring outcome”) such as densification and inclusionary housing. The second category includes those mechanisms that extract income in the guise of a tax or a tariff from the increment value to finance the infrastructure or some other development (“income or cost recovery outcome”). Examples of value capture mechanisms include:

  Use Mechanisms:

  • Land Banking
  • Zoning Tools
  • Air Rights
  • Business Improvement District

  Income Mechanisms:

  • Development Contributions
  • Land Value Increment Taxes
  • Land Increment Financing

  Opportunities & Challenges

  Value Capture can offer many opportunities such as increasing the revenue collection by municipalities and allowing greater flexibility in local expenditure. It can also create the potential for cross-subsidisation for developmental purposes to occur and the improved infrastructure provision can improve the access of the poor to the City. This provision includes not only the roads and railway lines but also the the quantity and quality of the rolling stock that runs on these roads and lines. The quote below highlights the daily challenges of the poor in trying to access the work and other opportunities offered in a city.

  “A concerned city woman has told of how she witnessed a mother being forced from an overcrowded train and separated from her child.
  On Monday, while waiting at Bellville station for her regular 5.50pm train to Strand, Gloria Solomons, 60, was horrified when she saw the woman forced out of a packed carriage.
  …..people were hanging out of the carriage.” (IOLNEWS, 22/06/2011)

  However, there are also a number of associated challenges in that certain development conditions need to be in place to maximise value creation and these conditions may change over time. Value creation is also more likely to occur in developed parts of the City, therefore introducing the danger of reinforcing current inequitable and inefficient city structures. In addition, there is a need to gain control of sites before the value increase is factored into the land price and value capture mechansims need to be applied in a manner that does not deter development in the first place. Lastly, value-capture is often seen as a panacea for all development problems and therefore often results in conflicting policies being imposed.

  HOUSEHOLD INVESTMENT

  Research³ in places like Du Noon in Cape Town shows evidence of significant household investment in township areas. Substantial, multi-storey houses and shops have been built by households without the use of formal loans or government assistance. Instead people have used savings and income generated through business and residential rentals to develop, often ironically through quite informal means, very formal structures.

  Opportunities & Challenges

  This investment is however not ubiquitous in all township areas and the Du Noon case seems to suggest that certain investment conditions need to exist to induce households to invest their savings and income in particular locations. The opportunity for household investment appears to occur when a location is characterized by having good access to jobs and city services. This proximity generates a high demand for space and consequently relatively high rentals (rate per m2) can be charged to justify the investment in the first place. However, due to the affordability constraints in these areas, tenants are only able to rent a small amount of space at these rates. The challenge therefore lies in providing such compact space in a manner that is efficient and avoids the ills of over-crowding.

  Conclusion

  The above examples show that there is significant investment occuring in township areas. These examples also suggest that there is not a defining line between the formal and informal worlds but that they rather represent points on a continuum of market activity in these areas. Furthermore, it is important to recognise that these worlds interface with each other and often exist in response to the other. It is in the management of this interface that some of the greatest opportunities and challenges lie in maximising the level of needed investment in these areas.

  ³This section draws on work undertaken by Heinrich Wolfe and UCT Honours Students