In its attempt to increase rent collection, the City of Johannesburg’s blanket approach is becoming increasingly draconian. We are seeing a spiral of buildings falling behind, losing access to services, losing paying tenants, drifting into disrepair and ultimately becoming targets for hijacking.
When Herman Mashaba was mayor of Johannesburg, his administration put an emphasis on recovering buildings that had been “hijacked”. The administration placed many of those buildings in the hands of developers, making them functional again.
By doing so, the city created an environment that improved the safety of its citizens and fostered the growth of its economy. At the same time, it was able to increase its revenue base and generate some of the funding needed to improve the lives of its citizens.
Currently, in large parts of the city, we are seeing a reversal of this trend.
In its attempt to increase rent collection, the City of Johannesburg’s blanket approach is becoming increasingly draconian. We argue that, in places, this approach is causing buildings to go dark.
We are seeing buildings falling behind, losing access to services, losing paying tenants, drifting into disrepair and ultimately becoming targets for hijacking.
In a recent judgment, acting Judge C Badenhorst lambasted the City of Johannesburg’s abuse of power resulting from “robust yet unprincipled debt collection practices”.
As quoted by Roy Cokayne in an article on the MoneyWeb site, Badenhorst stated that “additionally, it underscores how a specific group of lawyers, frequently retained by the City of Johannesburg, persistently pursue unmeritorious arguments, undeterred by the facts of the individual cases”.
The judge goes on to note that “this culminates in unnecessary high court litigation for those few who can afford to seek relief, while many less fortunate customers no doubt remain at the mercy of an indifferent officialdom”.
Lose-lose scenario
However, our argument is not about the fairness of these practices. Nor is it about “what-about-ism”, that perhaps some segments of the city are getting a better deal than others.
Rather, we argue that the administration’s actions are counterproductive, both in the short term and even more critically, in the medium to longer term.
A case in point would be high-rise buildings in high-density suburbs. The 1970s saw high-rise buildings sectionalised to free up capital for development. This made sense at a time of growth.
However, if even a few owners are in financial trouble, the sectional title schemes start falling behind. We estimate that in Hillbrow alone, there are some 1,200 sectional buildings and that as many as half of them might be sliding into dysfunction.
We argue that the current approach is hurting the administration financially and the city economically. In the longer term, this regression is bad for the administration, bad for investors, bad for business, bad for those residents and, ultimately, bad for the city as a whole. In management speak, it’s a lose-lose scenario.
Management tools
From a management perspective, the current broad-brush approach is both unimaginative and counterproductive. Fortunately, there are tools that managers typically use that would help recover costs and win back the trust of residents. The tools include segmentation, triage and creating win-win solutions.
Segmentation is often the first element of a strategy, whether it is a marketing strategy, a procurement strategy, a customer service strategy or, as is the case here, a collection strategy. In this case, thinking of the citizen as a “customer”, there are different classes of customers with different needs, priorities and capacities. There are large businesses, small businesses, government buildings, the city’s own buildings, private estates, stand-alone residences and sectionalised property. Each of these has its own complexities and challenges.
It is important to understand the “customer”, both quantitatively and qualitatively, and to have collection targets that reflect this. In particular, when setting targets, we have always found that quantifying segments results in an overall target that is achievable, yet almost always exceeds an uninformed top-down stretch target.
A second tool for a results-orientated manager is triage. The term triage comes from the Crimean War, where medical staff focused their energy by dividing the wounded into those who would survive anyway, those who would die anyway and those where an intervention would have maximum impact.
Even within a segment, there will be some ratepayers who will need no intervention, some for whom intervention is indeed futile and others where the appropriate focus will lead to the optimum result.
In the case of high-rise buildings, some are run well by managing agents, some have already fallen into disrepair and some have administrators where the power of a managing agent is not sufficient to dig the scheme out of a financial hole.
For the sake of the city, a watching brief needs to be set for those buildings that are functioning; a solution needs to be accelerated for those deemed irretrievable; and win-win, time-bound solutions are needed in particular for competent administrators who have the city’s confidence.
This brings us to the need to create win-win solutions for the citizens and the city.
There is a saying that “No one wins a war, just as no one wins an earthquake.” The city needs lawyers who understand that often a bad settlement is better than a good trial; that the citizen is not the enemy; and that what is good for the city is good for the administration.
We are aware of the danger of giving the city’s officials, even very senior officials, discretion; everyone we know who is in any way involved with the City of Johannesburg has a story to tell. There are, however, ways that managers in large organisations are able to find solutions in a transparent fashion.
Out of the dark, into the light
Two critical resources are needed to revive a scheme that is in trouble: capital and trust.
Capital is needed for management, maintenance, repairs and to settle past debts — and the city does not have capital. The most obvious source of money is private investors.
For private capital to work, investors need to work closely with finance providers and use the municipal customer as a “co-creditor” with the city. Such a partnership has the potential to make property assets available for private loan purposes where the intention of the loan is strictly to pay off municipal arrears.
Without going into detail, the principle has been established for sectional title schemes which are able to enter into finance arrangements knowing that the funder has an effective lien on the levies collected and, if necessary, the property assets of the individual section owners. The cost of interest on arrears is correctly borne by the customer and not the city.
This brings us to trust. The rehabilitation process has a gestation period, and a positive outcome depends on mutual trust over that gestation period. In the case of a sectional title scheme, the city might well insist that an administrator or skilled manager is in place and that there is a plan agreed upon which will produce the desired result.
Without the ability to find a win-win, value is left on the table for the administration, the city and the citizens. The vision must be one of mutual dependency together to maximise value.
According to our calculations, the financial benefit to the administration is at least R1-billion, with the economic benefit to the city even greater.
We think it is worth using the city’s data to quantify this potential and, if the prize is indeed significant, to set such a differentiated and collaborative process in motion.
One of our engineering colleagues likes to joke about his profession that if brute force isn’t working, perhaps we aren’t using enough of it.
The city needs to collect on its accounts in order to function. The issue, however, is not how to get blood out of a stone; it is about dynamically pricing that blood in terms of revenue, timing and financing to achieve the optimum result. DM
Dr Michael Gering is a strategy consultant and has consulted in a variety of industries in South Africa and in Europe. He has a PhD in theoretical physics and an MBA from the Open Business School.
Robert Dale is a specialist in the valuation of properties and businesses. He is presently doing research at the University of Johannesburg.