Briefing and FFC submission

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Finance Standing Committee

12 February 2002
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FINANCE PORTFOLIO COMMITTEE
13 February 2002
MUNICIPAL FINANCE MANAGEMENT BILL: BRIEFING + FFC SUBMISSION

Chairperson:
Mr Moloto (ANC)(Acting)

Relevant Documents
Municipal Finance Management Bill [B1 - 2002]
PowerPoint Presentation by National Treasury
Financial and Fiscal Commission submission (see Appendix)

SUMMARY
National Treasury briefed the Committee on the Municipal Finance Management (MFM) Bill, giving a brief outline of where the Bill comes from and the principles on which it is based.

The Financial and Fiscal Commission made its recommendations on the Bill in terms of Section 203(2) of the Constitution. The FFC submitted that the Bill was well drafted and addresses the problems of accountability, transparency and the lack of management of municipal finances. A few areas that needed clarity were identified.

The Select Committee on Finance as well as the Portfolio Committee on Provincial and Local Government also attended the briefing.

MINUTES
Briefing on the Bill
Mr I Momoniat, Deputy Director General, briefed the committee.

He said that the MMF Bill is based on seven fiscal principles:
- Accountability and Autonomy of municipalities
- Good governance
- Redistribution
- Broaden access to service
- Revenue sharing and fiscal capacity
- Comprehensive vertical division
- Fiscal efficiency

The MMF Bill is the local government version of the Public Finance Management Act, it modernises local government and takes into account the specificity of local government. The last Intergovernmental Fiscal Review highlighted the challenges of local government and this is taken into account. The role of the mayor and the municipal manager is properly defined. The mayor is responsible for policy and outcomes while the municipal manager is responsible for implementation and outputs.

One of the more important differences between the MMF and the PFMA is that executive and legislative powers rest with the council. Thus at the local level there is no separation of powers. From a financial perspective, the difficulty one faces is how does one hold the mayoral committee accountable when the council also has executive powers?

Mr Momoniat identified the following underlying challenges for local government:
- Local government is an emerging sphere
- Governance framework needs to be developed
- Budget process and formats are in the dinosaur age
- the powers and functions of municipalities need to be clarified
- there is confusion on how to redistribute
- no recourse in the event of defaults.

Regarding redistribution, Mr Momoniat said it is an important objective. Redistribution is done efficiently through National Government. When local government is solely responsible for urban to rural redistribution then it could happen that cities are made weaker. He said that National Government must take responsibility for redistribution otherwise there could be perverse outcomes.

The MFM Bill introduces the following key budget reforms:
- three year budgets
- thinner and more strategic budget formats
- deepening the budget process by tabling the budget four months before the time. This also increases public participation.
- closing the gap between budgets and plans
- accounting reforms
- timely submission of financial statements.

Mr Momoniat noted that Section139 of the Constitution allows provincial government to intervene in local government in certain instances. The intervention referred to is only for executive failures but if a budget is not passed, it is a legislative failure. If a council should be dissolved and no budget is passed then it is a moot point whether spending can be allowed because nobody else can pass the budget. He added that this does happen. There are debates whether national government should intervene but Treasury has never said that it wants to intervene in municipalities. Mr Momoniat's opinion was that provinces are best placed to intervene but that it was a debate for the future.

Mr Momoniat briefly dealt with municipal borrowing and said that if one municipality defaults then all municipalities attract a negative sentiment. The most important thing that must occur when there is a default is that the council must take responsibility for it and the recovery plan.

Under key audit reforms Mr Momoniat suggested that thought should be given to establishing public account committees at local level to have public hearings much along the same lines as SCOPA (Standing Committee on Public Accounts). This could add to the audit reforms and go a long way in enhancing accountability and transparency.

The presentation was concluded by looking at the fey features of each chapter in the MMF Bill (see Memorandum at the back of the Bill).

Discussion
Mr Andrew(DP) wanted to know to what extent any case studies show that unfunded mandates are as a result of financial crises in municipalities.

Mr Momoniat replied that unfunded mandates are not a big problem. When there is a shift of new provincial functions then the Minister of Finance and the Minister of Provincial & Local Government must agree. He said that a process is needed to deal with the shifting of functions but Treasury had never found any problems in the case studies that they had done.

Mr Andrew asked if the MFM Bill will protect municipalities so that the problems of unfunded mandates will not arise in the future.

Mr Momoniat said it would not because unfunded mandates are not as a result of a legislative process but rather policy. There is no water-tight method to prevent the problem at the moment. He suggested that the FFC could have a role to play in finding the solution.

Prof. Turok (ANC) asked to what extent the Bill distinguishes crisis intervention from ongoing oversight and supervision.

Mr Momoniat replied that it is critical for councils to take responsibility for their own affairs. Budget reforms are also critical to transparency. Currently municipal treasurers do not know what is going on with their finances. The system has to be changed and already in 30 municipalities the three-year budget is being implemented. If this is a success then people can be held accountable. Treasury only wants national or provincial intervention when the council does not take ownership of their problems.

A member (ANC) asked if the municipalities could not redistribute properly because the functions and powers are not clear or just simply because they cannot do it.

Mr Momoniat said that there are different types of redistribution and municipalities can do this. All that is being said is that municipalities can only redistribute to a certain point and thereafter national grants are needed. Again capacity building and understanding the new system will be critical.

A member commented that the Bill does not link budgeting with planning and wanted to know why this was so.

Mr Momoniat replied that Treasury did not want to over regulate. If planning is linked to budgeting then the door is opened up for court action. It is important that the two are linked because the two shape each other, but if the council does not want to do this, they cannot be forced to.

Ms Borman (DP) asked if Treasury could indicate the percentage figure for mismanagement causing all the problems in municipalities.

Mr Momoniat said that he could not give a percentage figure. Budgets are submitted to Treasury but it is impossible to look at all of them and impossible to monitor. What can be picked up is if the municipalities are not collecting the revenue they should be collecting.

There were no further questions except for concluding remarks by Mr Carrim (ANC), Chair of the Provincial & Local Government Committee. He said the Finance Portfolio Committee is responsible for this Bill and his members will not be able to be present all the time. He raised the concern that all municipalities are not the same and that implementation might be a problem in some. The Bill may be fine but the programming for implementation is important. He said that capacity building and resources for implementation are further important considerations. Thirdly there has to be a synergy between the Bill and the Municipal Systems Act and cross referencing might be needed. Finally the Bill cannot be finalised without completing the powers and functions of local and district municipalities. He concluded by saying that he was uneasy about the constitutional amendments that are needed and the consequences thereof.

Financial and Fiscal Commission
Section 230(1) allows municipalities to raise loans in accordance with national legislation. Section 230(2) states that such legislation cannot be passed unless the FFC has made recommendations. The submission of the FFC is in accordance with this section.

Mr M Morobe, Chair of the FFC, indicated that the Bill is good and well drafted. He said that it was a significant step forward but many issues still had to be deliberated on. The submission points out the positive aspects of the Bill and then goes on to highlight problem areas in specific sections that need clarity (see Appendix for submission).

Discussion
A member (ANC) commented that the FFC wants the municipalities to be graded. He wanted clarity on exactly what this meant.

FFC Response: The FFC explained that municipalities within the same category can have differences. An example is the revenue raising capacity and the resources available to implement the legislation. Criteria have to be identified to regulate the activity of municipalities.

Mr Lyle (ANC) was intrigued that the FFC calls for different accounting principles for different municipalities because if one deals with R200 or R2 million the principles remain the same.

FFC Response: The FFC did not mean to convey this message. There is significant unequalness amongst the municipalities and the rules need to be applied sensitively to a specific municipality while taking into account the real situation. The point the FFC is trying to make relates to accountability.

Mr Smith (IFP) asked if the FFC has applied its mind to the cost implications of the Bill.

FFC Response: The FFC did not cost the Bill.

Prof Turok (ANC) was concerned that improvement districts could create greater disparity between municipalities and asked if the FFC had looked at this.

FFC Response: Certain municipalities have improvement districts and others do not. It can create disparity but the FFC has not looked at this.

Mr Andrew (DP) asked if the FFC has applied its mind to what objective criteria could be used to grade municipalities. Secondly, he wanted to know if the FFC or any other body has researched the human resource capacity in municipalities and if it is known where the shortfalls are. Are inappropriate people appointed or is there a lack of appropriate people?

FFC Response: The FFC has not applied its mind to the criteria to be used but revenue raising capacity would be an important one. The criteria should be established by all the interested parties.

Secondly, there is no documented research only anecdotal evidence on the human resource problem. Treasury has provided funds to develop capacity at local level and it would be good to know the impact of this initiative. Some of the problems include a high turnover of skilled workers, governance issues that cause frustration leading to resignations plus people are attracted to big cities so certain municipalities have a shortage of skilled workers.

Mr Smith said that the grading system was abolished long ago. Grading is linked to various factors. i.e. a municipality will be graded based on its needs. He asked if there was a way around this.

Dr Rabie (NNP) wanted clarity on why the FFC says the Bill is too rigid for large municipalities and too limited for smaller ones.

FFC Response: The questions that needs to be asked is whether all the rules are applicable to all municipalities in the same way. If one accepts that some are stronger and raise more revenue while others depend almost entirely on the equitable share, then one has to accept that municipalities must be treated differently and the rules cannot be the same.

There were no further questions and the meeting was adjourned

Appendix 1:
FINANCIAL AND FISCAL COMMISSION SUBMISSION ON THE MUNICIPAL FINANCE MANAGEMENT BILL TO PORTFOLIO COMMITTEE ON FINANCE 13 February 2002

1. Introduction
The Financial and Fiscal Commission is a statutory body established in terms of the Constitution and the Financial and Fiscal Commission Act, (Act No 99, 1997). This submission is made in accordance with Section 230 of the Constitution and Section 3(1) of the FFC Act of 1997

The Commission's submission outlines its response to the various provisions of the Bill. The Commission hopes that its comments will add value to the finalisation of this proposed legislation.

2. The Municipal Finance Management Bill
The Municipal Finance Management Bill, hereafter referred to as "the Bill," is aimed at securing transparency, accountability and sound management of revenue, expenditure, assets and liabilities of municipalities and municipal entities. Once it has been passed, the Act will prevail over any legislation with which it may be inconsistent and can only be amended by the Minister of Finance or only after consultation thereof. The Bill covers a wide range of issues including National and Provincial supervision, municipal revenue and budgets, municipal debt. budget and treasury processes and council responsibilities, municipal entities and financial misconduct.

3. General FFC Comments
The Financial and Fiscal Commission generally believes that this is a good and well-drafted Bill that will go a long way towards modernizing budgeting processes in the municipal spheres of government. The Bill defines clear lines of accountability between Councilors and municipal officials. The combination of discretion and oversight in a national context is well balanced. Municipalities are given discretion over own budgets and debt, with the proviso that they conform to reasonable requirements on budgeting and debt management, accountability and decision-making. There are, however, a number of issues that need to be clarified.

The commission is concerned that the Bill as currently stands caters for the whole range of municipalities from the big Metros through to the smallest poor fiscally weak local municipalities. We suggest that the Bill should provide for local authorities to be graded according to objective criteria, with different provisions and regulations applying in some cases to different grades. The FFC believes that the current rules may not be enough for smaller municipalities while they may also be too rigid for more well run and larger municipalities.

The FFC proposes that a Clause be added that reads: "... Minister may after consultation with the FFC adjust or relax any criteria imposed by the Bill for municipalities that meet objectively determined criteria." This should in effect imply a segmented approach to local government that recognizes the fact that the local government sphere is not uniform.

It is not clear in the Bill what the relationship is between accountability to the National Treasury and to the Provincial Treasury. Which sphere prevails in the event of conflicting budget recommendations? There is therefore a need to clarify further the lines of accountability, in many decentralized systems of government, accountability is normally hierarchical, with municipalities accountable to provinces, and provinces to central government.

The South African situation is more complex than most federal states in that National government has overall oversight of macroeconomic issues. Furthermore the spherical approach to intergovernmental relations in South Africa makes the lines of accountability difficult to implement As the Bill stands, it seems municipalities are accountable to both national and provincial government. This may end up blurring accountability in the future. However, it is also recognized that, in a case of conflict, the oversight role of National Treasury will prevail. More generally, the role of National Treasury with respect to municipalities seems quite open-ended and not very well defined in the Bill.

The rules for debt are reasonable. Municipalities have substantial discretion to issue debt albeit within prescribed limits. The proscription of national and provincial bailouts or debt guarantees is particularly welcomed by the FFC since this promotes hard budget constraints for municipalities.

However, it would be necessary to include in the Bill procedures that would be followed in cases of potential or actual defaults by municipalities. The modalities of intervention in such cases are particularly important especially with respect to those municipalities that have very little own revenues but are still expected to meet their constitutional mandates Any direct intervention by national and/or provincial government may send wrong signals about bailouts to municipalities and creditors, softening the budget constraint There is also a need to clarify what happens in situations where an outgoing Council incurs non-productive debt that may seem to be immoral for the incoming Council to honour.

4. Specific FFC Comments
Section 16
There is no specification in the Bill of what an operating budget Includes (for the purpose of balanced budgets). Presumably, both current expenditures and amortized capital expenditures (depreciation) are included.

It is not clear what (b) (ii) is meant to achieve. If this is meant to deal with debt accumulated before the implementation of this legislation, then it is appropriate. For the future however, it may be bad for municipal financial management.

Clause (c); The phrase "realistically anticipated" is unclear. The whole subsection needs to be expanded and integrated with the borrowing provisions.

Clause (d): a qualification should be included to indicate that the Minister's approval should be based on objectively determined and transparent criteria.

Section 17
The process requirements for the budget are reasonable, especially with respect to reporting to National Treasury. However, clause 2 (a) needs some clarification with respect to newspaper publication. The term "general circulation" needs to be defined

Clause (b) (1) requires that "a process of community participation in accordance with Chapter 4 of the Municipal Systems Act" be followed. It is unclear whether this Clause is really necessary. It may be onerous since it opens up the possibility that members of the public can delay the process through legal action It may also be superfluous in the light of Clause (2) (a) of the same section that sets out a process allowing -for public input through submissions and public hearings That seems adequate and less open to derailment.

The distinction between Clause (3) (a) and (b) is not clear, especially why the Provincial Treasury should not receive all the budgets of municipalities under its oversight.

After Clause (7) it seems that there should be a requirement for a copy of the final approved budget to be lodged with the National Treasury and the relevant Provincial Treasury.

Section 18 Subsection 4 authorises the MEC to direct Council to adopt a budget within 14 days if it has not done so within 14 days of the start of the financial year. The FFC believes that this may be too rigid a regulation since there could be major issues of difference within Council The FFC proposes that the regulation be that "such differences be resolved by council within the stated 14 days".

Section 22
Subsection (1) refers to "the person liable" for unauthorized expenditure. The FFC proposes that this phrase should be replaced with the phrase "the person responsible".

Section 24
Subsection (2) (b) is not clearly worded

Section 25
Subsection (3) (a) refers to municipalities incurring long-term debt for financing costs. Does this imply that debt can be issued for interest payments? Clarity is required. In fact the FFC proposes that financing costs not be included but be treated as operating expenditure.

Section 26
Clauses (a) through (f) should have a basic de-minimus rule applied.

Section 27
Subsection (3) (a): It is not clear what asset is being referred to. Is the asset being pledged as security or the asset being purchased? This needs clarification.

Section 29 This section must be subject to Section 27.

Section 39
There is a need to be more specific with respect to the information that National and Provincial Treasuries might request. Currently as It stands, this section seems to be very open-ended

Section 50
The FFC is concerned that there are other means of alienating assets other than those described in this section. This section should be linked with section 13 and broadened to cover those means that are not currently described.

Section 114
The FFC proposes that subsection (1) be amended to read " The Minister may in terms of criteria set in consultation with the FFC, then by notice published in the gazette....' A clause should be added that ensures the Minister states reasons for granting an exemption, e.g. grading of a municipality or natural disaster.

5. Conclusion
In general, the Bill goes a long way in addressing past problems associated with the lack of transparency, accountability and sound management of municipal finances. It augurs well for the reform of the management of municipal finances and its modernization. It is important that careful consideration be given to establishing clear lines of accountability and relationships among the spheres of government with respect to the various stipulations in the Bill. The combination of oversight and discretion in the Bill, while balanced, requires further deliberation in order to ensure that it establishes a firm foundation for strengthening inter-sphere co-operation over time.

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