Municipal Finance Management Bill: deliberations

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Finance Standing Committee

28 April 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
29 April 2002
MUNICIPAL FINANCE MANAGEMENT BILL: DELIBERATIONS

Chairperson:
Ms Hogan (ANC)

Relevant Documents
Municipal Finance Management Bill [B1 - 2002]
Summary of Submissions on the Municipal Finance Management Bill

SUMMARY
The Committee started deliberations on the Bill. A summary of submissions was compiled by the research section and the committee proceeded to work through that document. All the constitutional issues will be discussed when the legal opinions can be reconciled. A member suggested that National Treasury should give the rationale for certain of the provisions. The procedure then changed whereby during the clause by clause analysis National Treasure would provide the reason for why the provision says what it does.
The summary of submissions is awaited but the parts discussed during today's sitting is included in the minutes.
Discussion went as far as clause 5.
Members of the Portfolio Committee on Provincial & Local Government were also present.

MINUTES
The chair advised that two legal opinions had been received. One from Adv. David Unterhalter (at the request of the Committee) and another from Adv Trengrove (at the request of the Municipal Demarcation Board). The opinion from Treasury is still awaited. The Chair advised that the constitutional issues will be left in abeyance until the legal opinions can be reconciled.

Chapter 1
"SALGA submits that if regard is had to the provisions of the Constitution concerning the obligations placed on national and provincial government to support municipalities and to build capacity, it is important that the Bill includes, as one of its objects, measures to support municipalities to comply with the dictates of the Act. This additional object must of course be fleshed out in the Bill in Chapter 2 that deals with supervision."

Mr Momoniat (Treasury) said that he had no problem with the point made by SALGA but that capacity building was done in various ways under other pieces of legislation like the Division of Revenue Act. The MFM Bill does not really deal with capacity building.

The Chair referred to clause 5(2)(f) that states that capacity building is a function of National Treasury. She was however concerned about the role of provincial government in capacity building and whether any constitutional provisions are not being flouted.

Adv. Growe (Treasury)replied that the provinces have a constitutional obligation to build capacity in municipalities so it is not really necessary to put it in the Bill.

The chair was concerned that who has the responsibilities is fuzzy. She does not want the provinces to say that that it is not in the legislation and that it is Treasuries responsibility.

Mr Momoniat said that there is no harm in putting it in but that the accounting officer is a well paid official who also is the responsible person. Treasury does not want them using the excuse for not performing that Treasury did not build capacity. If the capacity building is prescribed then the accountability lines are blurred.

Ms Hogan said that the constitution in 154(1) uses the words ' national and provincial government must support and strengthen capacity of municipalities'. She said that the committee has to look at may v must and make it clear who has the responsibility of capacity building. The chair said that she was not clear.

Ms Taljaard (DP) said that SALGA raises many constitutional concerns and suggested that this be held in abeyance until the constitutional discussion because there are other relevant constitutional provisions like s 216 and s 155(6) to consider.

Mr Felix ( Councillor and SALGA rep) added that both tiers of government must take responsibility.

Prof. Turok (ANC) suggested a separate clause to clarify the responsibilities of all tiers of government.

The chair agreed because it was Treasury, the Department of Provincial and local Government and provinces who had a role to play. There must be clarity on how they interact.

Clause 1- Definitions
"The Knysna Municipality points out that the following have not been defined although they form an important part of the subject matter:
'Audit committee"
"Income"
'Revenue"
'Internal audit"

They further submit that 'long term debt" should mean debt of the municipality, otherwise outstanding debtors, that is, those debts that are owed to the municipality may also be termed long term debts."

Mr Momoniat suggested that the definitions must be dealt with last because it is better to deal with it in context. One will not want to amend definitions and deviate from internationally accepted definitions or want to make the definition to limited.

Ms Hogan said that she wanted to know the function of audit committees because from the Bill it is not clear. She agreed that it might not be best to define it but at least a clause should say what it is about. We need to clarify exactly what it is.

Mr Momoniat advised that the Auditor-General (AG) will be asked how to do this.

Ms Hogan said that the same should apply to 'internal audit'. It must be clear what is meant by this. In respect of 'income' and 'revenue' the chair suggested that it also be referred to the AG.

In respect of the second submission on long term debt the chair said that it is not clear from the definition who incurs the debt.

Adv. grove replied that clause 25 is clear that it is only in respect of debt incurred by the municipality.

The chair agreed that that clause 25 is clear but said that the definition is not clear. She asked if there was any harm in making the definition clear.

Prof. Turok felt that the definition is not needed because clause 25 is clear.

The chair replied that the definition is needed to define long term debt as being longer than one year. She instructed Treasury to make it cleat who the debtor is.

A member suggested an amendment to the clause but Mr Momoniat asked that the drafting be left to Treasury who still had to apply its mind on the wording.

'unauthorised expenditure": The Banking Council submits that an additional definition of "unauthorised liabilities" should be included. and that section 22 be amended so as to include "unauthorised liabilities". Alternatively. the definition of "unauthorised expenditure" could remain as is, if a definition of "expenditure is given, which included liabilities incurred through debt.

Ms Hogan asked whether the interest payments will be dealt with in terms of the procedure for unauthorised expenditure when the liability is unauthorised. She asked that Treasury provide a summary of how unauthorised liabilities will be dealt with. If it is not covered by the act then provision will have to be made therefor.

The Banking Council suggests that "intergovernmental transfers" be added as a definition. In addition to the implied definition in section 8(1), so-called off-budget funds from government grant programmes should be included.

Mr Momoniat said that Treasury is bringing in provisions of the Division of Revenue Act into the Bill. All transfers will have to be reflected on the local authorities' budget.

Ms Taljaard suggested that the AG also be requested to give an opinion on this.

The chair confirmed that Treasury will bring an amendment that will clear it up.

Prof. Turok reminded the department they had not commented on off - budget funds.

Mr Momoniat replied that the problem was that funds were not deposited into the main account. It is going to be clear that funds must go into an accredited account and spent in terms of the budget. There will therefore be no off - budget funds and any attempt to conceal will be a criminal offence.

"financing agreement": The Banking Council submits that this definition should include not only capital cost, but also costs including interest.

Treasury agreed that the definition must include interest costs.

The Auditor-General submits that the definition for "Auditor-General" should be replaced with: 'means the person appointed as Auditor-General in terms of section 193 of the Constitution and includes
(a) with regard to the auditing and/or investigating of accounts and/or financial statements

(i) a member of the staff of the Auditor-General, or

(ii) a person registered as an accountant and auditor under the Public Accountant's and Auditor Act, 1991 (Act No.80 of 1991), and appointed by the Auditor-General as auditor for the purpose;

(b) in all other instances a duly authorised member of the staff of the Auditor-General."

Mr Carrim (ANC) said that this was a reasonable suggestion. The chair agreed because the AG found many difficulties with auditing municipalities.

Adv. Grove said that there could be a problem with specifying who can perform the responsibilities of the AG when a provision in the Bill states that reports must be made to the AG. Treasury would not want the report to be made to a private auditor.

The chair said that the AG would have to be asked why there proposed definition is so specific.

Ms Borman (DP) suggested that a definition of 'accounting officer' is needed.

Mr Momoniat agreed.

Clause 2- Object of the Act
City of Cape Town and WECLOGO: Submits that this Act is not the appropriate legislation to deal with "assets and liabilities. They suggest that the Local Government Act is more relevant.

Mr Momoniat said that he thought that assets and liabilities and income and expenditure all goes together. If assets and liabilities are taken out then there will be serious trouble.

Ms Taljaard added that the submission also had to do with the alignment of the MFM bill with the Systems act.

The chair agreed with Mr Momoniat but said that the point raised by Ms Taljaard also touched on the constitutional issues that will be discussed later.

Clause 3
Clause 3 states that this Act prevails over all other laws in the vent of inconsistencies.

Mr Carrim submitted that cabinet Ministers should work more closely together. He said that the Systems Act is not perfect but it is only 18 months old and it is premature to say that it is not working. He suggested that DPLG make a submission on the contradictions and how it should be addressed.

Ms Taljaard agreed that it was good to iron out the inconsistencies to ensure certainty for business as far as the entities are concerned.

Mr Momoniat said that Bills can inadvertently change other Bills when amendment are made. He suggested that a solution might be to have the FFC look at the amendments first and see how it effects municipalities. This could prevent problems in the future.

Mr Carrim said that issues is that the Bill clearly contradicts what is said in the Systems Act.

Clause 4- Amendments To Act
Municipal Demarcation Board (MDB): Does not support this section. Submits that the Minister and MEC's responsible for local government, are primarily responsible for local government matters and their legislation should not be subject to other legislation or the consent of the Minister of Finance.

The constitutionality of the sections dealing with assets and liabilities is questioned and is dealt with under the appropriate sections.

The chair said that the constitutional issues will be held in abeyance. She added that the first submission of the MDB again raises the issue in clause 3 about the Bills that are falling under different Ministers.

Mr Momoniat said that all bills go through parliament and in theory all the ministers are happy and there is no conflict.

Ms Hogan asked if there was no agreement between Ministers if a bill could be introduced.

Mr Momoniat said yes because the clause just calls for consultation.

Mr Koornhof (UDM) agreed with Momoniat and said that if there is a conflict it is an executive issue.

Ms Hogan said that the FFC cam also be asked for an opinion on this.

Mr Carrim said that some issues in the Bill is of a governance nature and he cannot see what value the FFC could add.

The chair agreed because s 214(1) of the constitution relates to the division of revenue. She asked that Treasury provide a list of the FFC's constitutionally mandated functions.

Chapter 2- Supervision Over Local Government Finance Management
The Urban Sector Network proposes that the word 'supervision" be replaced by the word 'oversight" as this removes a hierarchical relationship and gives an impression of co-operation. While the important roles of National Treasury as stated in the Bill are appreciated and welcomed. it is important that these roles become more empowering and facilitative.

The chair agreed with this submission.

Mr Momoniat referred to s 100 & s 139 of the constitution where the word 'supervision' is used.

Mr Carrim pointed out that chapter 2 refers to the supervision of a sphere of government by a national department. That was different from the constitution where it relates to the supervision by a another sphere of government.

The chair said that this was also a constitutional issue and can be left in abeyance.

The Department Of Developmental Local Government & Housing. Province Of The North West. Office Of The MEC submits that sections 5, 6.18 and 19 do not define the role of the MEC for Local Government and that of the national minister responsible for local government.

Mr Momoniat advised that that treasury did not want to dictate who should be doing what. Provinces must come up with a proposal and it will be approved by Treasury. Treasury does not want to legislate on the internal workings of Provincial government.

Mr Carrim said that he might be wrong but that he got the sense there seems to be no rationale why DPLG is excluded and included in the various provisions. He said there must be a reason for the exclusion in some provisions and the inclusion in others. The reason however was not clear from the Bill. He added if the province is left to decide who is doing what there could be a Local Government MEC in one province performing a function done by the Finance MEC of another province. This would lead to a disjuncture at Minmec.

Mr Momoniat replied that it was a good point and suggested that maybe at the joint Minmec it could be ironed out as to who does what.

Ms Hogan was not comfortable of leaving the decision of responsibility to the political process. The function and scope of the MEC for Finance, MEC for Local Government and that of National Treasury and the Provincial Treasuries was not clear. She said that the bill needs to be looked at as a whole and see who has responsibilities and for what. She asked the Treasury to tabulate the responsibilities of all role players.

Ms Taljaard added that the responsibilities must be cross tabulated with the relevant constitutional provisions.

SALGA submits that this chapter patently ignores the constitutional regime which clearly contemplates a significant role for local government and leaves supervision to the National Treasury. There is a patent lack of consultation measures with MEC's. the Minister for Provincial and Local Government, and organised local government in relation to the prescription of uniform norms and standards, the establishment of monitoring processes, and the taking of appropriate steps where there has been a serious breach. The Bill must be amended to make adequate provision for supervision as contemplated in the Constitution.

Mr Carrim said that many municipalities will say that treasury is requiring them to be subservient and commented that his Committee, Provincial and Local Government does not accept this because SALGA claims that municipalities can do much more than they actually can.

The chair asked members to go back to the SALGA submission and see exactly what they are taking issue with.

Adv. Growe admitted that the Bill might be lacking in respect of consultation and this can be looked at. At the end of the day s 216 of the constitution vests certain functions in Treasury and provincial treasuries are there to assist national treasury in performing these functions. He said that the provincial treasuries are an extension of National Treasury.

Ms Taljaard said that it could not be said that provincial treasuries are an extension because provinces are spheres of government in their own right.

The chair commented that the Adv was not undermining provinces, it was just an interpretation of National Treasury's role. She added that it would be useful to see what can be done in respect of the consultation process. The bigger issue was the correct role of National Treasury abut this will be dealt with under the constitutional discussion.

Clause 5- Functions Of National Treasury
"5(2): City Of Cape Town and The Municipal Demarcation Board both expressed concerns about the monitoring powers of the National Treasury. National Treasury doesn't have monitoring powers conferred by law in any other spheres so why should local government be treated differently. They submit that this chapter gives extensive power to National Treasury and that no mention is made of the role of the elected spheres.

Despite the role envisaged in the Constitution and local government legislation for elected municipal councils and provinces pertaining to supervision, this chapter empowers the National Treasury, amongst others not only to monitor budgets but also to prescribe uniform treasury norms and standards and to review any system of financial management and internal control in any municipality. It is further submitted that this may be justified in terms of chapter 10 of the Constitution but the BOARD recommends that explicit provision be made for a consultation process and procedures to ensure that any envisaged Treasury regulations, instructions or guidelines are subject to proper consultation and consensus with organised local government. The Minister and MEC's responsible for local government and municipal labour unions.

In terms of section 216 of the Constitution the National Treasury may take appropriate steps. including withholding of funds in section 216(2), to address a serious or persistent material breach of the provisions contained in the Bill. The Constitution provides specifically that the National Treasury, with the concurrence of the Cabinet member responsible for national financial matters, may stop the transfer of funds to an organ of state only for a serious or persistent material breach of the measures pertaining to only three issues, namely, generally accepted accounting practice, uniform expenditure classifications, and uniform treasury norms and standards."

Mr Carrim said that one issue is constitutional but in his opinion the provision 5(2) is fine. More fundamentally, the question is what is appropriate. He said that the state of municipal finances was an important consideration. The ANC study group and his committee feel that a solution lies between the view of SALGA and MDB and that of Treasury. He was not convinced of the constitutional problems and suggested that the committee be briefed on the state of municipal finances at the moment because a better sense is needed about why Treasury is doing what it is in the provisions.

Ms Taljaard agreed with Mr Carrim. She suggested that the members read the AG's report of last year because municipal finances is dealt with.

The chair also referred members to this years report. she said that there has been many submissions on the constitutionality and the committee is bound to examine them. She suggested that Treasury should give a clause by clause analysis, then the committee should look at the submissions and then the constitutional issues. The bill will then be looked at from the point of view of the committee. She added that the department did give a briefing on the chapters and suggested that the process continue as it has been unless the members do want to go through each clause with treasury.

Mr Momoniat said that a quick overview of the context could be useful.

The chair agreed but as long as it will provide the committee with the rationale rather than just going over content.

Mr Carrim suggested that National treasury should give their input but then the committee should at the sane time consider the submissions on a clause by clause basis.

It was agreed that this would be the process going forward.

Mr Momoniat made a few comments in line with the request of the committee. On clause 5 he said that the Committee in the deliberations on section 6 of the PFMA had a strong hand in determining its contents. The clause has more 'musts' than Treasury originally wanted.
Clause 5 in the MFM bill is the additional functions of National treasury in respect of municipalities. Clause 5(2)(a) & (b) must be looked at against the following background. In the past it was impossible to look at all 843 municipal budgets. the purpose of clause 5 is not for Treasury to go through all the budgets of the new rationalised municipalities. Only the 30 biggest metro budgets will be looked at to monitor and alert if any danger signs are picked up. All the other smaller budgets will be the responsibility of the provinces in that Treasury will delegate this function to them.

Ms Hogan asked what will be monitored.

Mr Momoniat replied that the credibility of the budget will be looked at, i.e. does it cater for the priorities of the provincial or national government. Treasury does not want to intervene in municipal budgets. he used the Johannesburg Municipality as an example where Treasury was the only one who picked up that there was serious problems.

Ms Hogan said Treasury was therefore looking for systemic risk and will only look at the top 30 municipalities. If the big municipalities collapse there is a big risk for the whole country. She said that this explanation seems clear. She had a problem though with the delegation of the responsibility to provinces to monitor the smaller budgets because provinces were not there to ensure that there is no systemic risk. She asked what the legal basis was for provincial monitoring.

Mr Momoniat replied that Treasury has the power to delegate in terms of clause 6(1)(c) & (d). in any event provinces do have a monitoring role over local government. The monitoring also relates to the gathering of info, the transparency of figures, policy formulation and is crucial for intervention.

Ms Hogan commented that the explanation was clear and that she could not see SALGA disagreeing with this.

Mr Momoniat added that monitoring was important because it reduces the possibility of intervention. The idea is to alert municipalities of problems. It lays the basis for engagement. Provinces will know that they must look at municipalities all the time otherwise the first time you hear of problems is when intervention is necessary. It can be argued that for province to have intervention powers they must have monitoring powers.

Mr Carrim replied that some municipalities will argue that it is to rigid for big metros and to onerous for smaller ones.

Ms Hogan asked if it is just monitoring where is the rigidity.

Mr Carrim replied that the reverse side of monitoring is a request for information and this relates to capacity, increased costs and skills.

Ms Mahlangu said that the fears from local government have no basis. They come from the point of view of trying to maintain independence. She accepted Mr Momoniats' explanation.

The constitutional issues will be dealt with later.

There were no more questions and the meeting was adjourned. The discussion will continue from clause 5(1)(c).





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