Municipal Finance Management Bill: deliberations

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Finance Standing Committee

30 April 2002
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Meeting Summary

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Meeting report

30 April 2002

Ms Hogan (ANC)

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

Deliberations continued from Clause 5(2)(c) and went through to Clause 11. The Committee and Treasury were in agreement an all issues of principle. In clauses were it was felt that the provision is too prescriptive Treasury undertook to look at it and come up with a new draft. The constitutional issues were not dealt with in this sitting.

Clause 5(2)(c)
Mr Momoniat (Treasury) said that the wording is straight from Section 216 of the Constitution that requires Treasury to prescribe uniform norms and standards.

Ms Hogan asked if Clause 106 of the Bill was the uniform norms and standards that are prescribed in the Bill.

Mr Momoniat replied that Clause 106 is a catch-all provision and that the norms and standards are covered in many specific clauses. An example is the format of the budget.

Ms Taljaard (DP) looked at Clause 5(2)(c)(i) and (ii) and asked if it was not more than the Constitution envisaged. The Constitution in Section 216 limits the role of Treasury to ensuring transparency and expenditure control. The Bill states that norms and standards must be prescribed for financial management. She suggested that financial management might be broader than transparency and expenditure control.

Adv. Grove (Treasury) replied that in a nutshell, norms and standards are rules to secure sound and proper financial administration. There is no need to limit this ordinary meaning. He said that some opinions suggest that there is a limitation in Section 216 but this will be dealt with when the constitutionality issues are discussed.

Ms Taljaard commented that it was difficult not to discuss the constitutional issues as the provisions are being discussed.

Ms Hogan agreed but said that norms and standards were one of the constitutional issues and it will be dealt with later.

Mr Carrim (ANC) said that when the Municipal Structures Act was considered by the constitutional court he was surprised by the latitude National Government has to legislate on issues of local government. He felt that the provisions in the Bill were not a problem.

Ms Hogan said that the Committee could return to this debate.

Clause 5(2)(d)
In terms of this clause the Treasury can determine the annual growth factor for the municipal budget.

Mr Momoniat said that this was a more difficult clause and Treasury is not sure that they want this power. On the other hand there are real macro economic issues involved. Municipalities sometimes increase certain revenues beyond inflation. What are needed are realistic budgets. This clause was originally not in the Bill but certain municipalities have begged Treasury to put it in because it keeps sanity in the budget. The average growth factor is about 5 - 6% and if municipalities want to increase more than this then they must justify it.

Mr Felix (Councillor, SALGA) said that a concern was that the capping of the growth of the budget could limit the shift of local government from an administrative functionary to a body that can contribute to development. Local government was faced with real problems that cause them not to fulfil their function. He added that government must assist local government in this shift rather than capping the growth factor.

Ms Hogan replied that the provision seeks to prevent the shock increases that are implemented by municipalities. She felt that often the basis for the increase is questionable and it was a real concern that municipalities try to squeeze money out of a system that cannot produce more.

Ms Carrim also saw the reasonableness of capping because the truth at local government level is that it is needed. It was however not the ideal measure in his opinion and should be phased out over time. He asked if it was possible if Treasury could separate the operational budget from the developmental side. The usual scenario is that salaries increase by 6% and then there is nothing for development.

Mr Momoniat agreed but at this stage the need for the capping tool is needed. He added that salaries in the public sector would never go down. If it is to increase by 6% in one year the real increase is closer to 8 - 10% in total. At the moment the growth factor is 6% but this is not even a ceiling because the municipalities are not collecting the revenue. When the revenue collection is lower than expected then an adjustment budget is needed to revise expenditure. Municipalities however do not revise expenditure. A couple of years are needed for budgetary reform to take effect by means of empowering the councillors. At the moment information is hid from the councillors by the officials of the municipality.

Mr Felix said that a compatible approach must be looked for so that local government can meet all the challenges. The Bill as it stands does not facilitate the Integrated Development Plan (IDP) process and capping does not empower local government to shift from being an administrative local government to being a developmental one.

Ms Hogan commented that if the budget as a whole increases by 6% then only part of that goes to salaries. Gauteng was an example where a certain proportion of the budget was for capital expenditure. They managed to turn around the balance between the operational budget and the capital expenditure budget. She was of the view that local government must take the responsibility of turning things around.

Mr Carrim felt that no mention of the IDP process in the Bill was a glaring omission. One of the functions of Treasury should be to monitor the consistency between the budget and the IDP process. The core of the new municipal system is that there must be developmental planning.

Ms Hogan pointed out that the IDP is mentioned in Clause 16(1)(e) but the Committee can look at this and see how the IDP can be fit in. Also consideration can be given to allow municipalities an exemption from the determined growth factor for purposes of IDP.

Mr Momoniat said that the Bill is a financial management Bill. If there is no revenue there can be no development. In 1997 salaries were out of sync and there was no capital expenditure. The Bill is just trying to ensure good bookkeeping. He agreed that the developmental perspective needs to be shown but there would be no use for the IDP if there were no revenue. The Bill empowers councillors by getting them the strategic information that is needed to push developmental issues. In certain municipalities there are even 14th cheques with a 35% employer contribution to pension funds. The stabilisation of salaries must be ensured. The Division of Revenue Act had huge increases to local government and if local government turns things around more funds will go to them for development.

Ms Maabe (ANC, NCOP) agreed that capacitation of councillors was important. Her experience as a councillor proves that it is impossible to get information. There were instances where officials take packages and then buy entities while councillors know nothing about it.

Ms Fubbs (ANC, NCOP) agreed that sound financial management would free up resources for development. She felt that capping in no way hinders development. What will hamper development is the non-application of financial management.

Ms Mahlangu (ANC, NCOP) also agreed with the clause and also with Mr Carrim that the clause should be phased out over time. She commented that Directors in municipalities got paid more than Deputy Ministers. Also senior police officials are leaving the SAPS to work for the metro police where they will earn more than the Police Commissioner.

Mr Felix replied that s 12 of the Municipal Structures Act states that conditions of employment must be the same or better.

Mr Carrim suggested that at some stage there is a need for SALGA, the Department of Provincial and Local Government (DPLG) and Treasury to get together to see what are the practical problems for municipalities and if the Bill is appropriately addressing the problems. He corrected Mr Felix about Section 12 of the Structures Act noting that his committee had processed that Bill. Section 12 is there because of the Labour Relations Act in terms of when there is a merger. After the merger, the salaries that are used must be the higher of the two so that no one suffers a salary decrease. He said that Ms Mahlangu was not referring to this but the outrageous salary scale at local government. The Committee had considered having regulations to deal with salaries but that would have been unconstitutional. The most that the Minister can do is issue guidelines but they have no legal force.

Ms Hogan said that the clause is needed but municipalities could still justify a departure from the determined growth factor.

Clause 5(2)(e)
Mr Momoniat said that sub (ii) also comes from Section 216. The clause states that Treasury must monitor and assess compliance with this act and any applicable standards of generally recognised accounting practice and uniform expenditure classifications. Treasury will delegate some of this responsibility because it is impossible to monitor all 280 municipalities. It must still be figured out who will do the monitoring.

Clause 5(2)(f)
The clause states that Treasury may assist municipalities and entities in building their capacity for effective and efficient financial management.

Mr Momoniat said that this issue had been discussed yesterday and related to the "must" versus "may" debate.

Ms Borman (DP) said that DPLG is very involved in capacity building and wanted to know if Treasury will be working alone or if it will be a combined effort. She understood that the capacity building for financial management was more specialised.

Mr Momoniat replied that capacity building is a big challenge. As far as capacity building in terms of the PFMA is concerned, training at the national and provincial levels was not up to scratch. Private training institutions do not have much to offer. At the moment international persons are being placed in municipalities. This is part of the World Bank Programme. The problem is that the persons are not staying for long enough. If one municipality knows how to do it then that municipality can train others. The one and two-day workshops are not enough. It was submitted that courses are needed and at the end of the course officials must pass exams. Councillors and non-financial managers also need to be trained, so there is no simple answer.

Ms Taljaard pointed out that the Bill says that Treasury may provide capacity building. The constitutional language uses 'must'. She asked what form is the provision in the Bill going to take.

Mr Momoniat said that Treasury would come back to the Committee on that.

Ms Hogan suggested that it should be 'must' to keep in line with the Constitution.

Adv. Grove reminded the Committee that it had requested Treasury to come up with a new draft on this clause.

Mr Carrim agreed with Mr Momoniat's argument of the previous day that highlighted the need to ensure that chief financial officers do not avoid their responsibility by saying that Treasury had not provided capacity building - should the 'may' be changed to 'must'.

Clause 5(2)(g)
Treasury may review any system of financial management and internal control system.

Mr Momoniat said that the internal control system was very important. The Committee had brought this into the PFMA because it felt that it was very important. Treasury however needs to develop the capacity to go into the municipalities and monitor this. Even at national and provincial level the quality of internal controls are not there so the internal audit units cannot be relied on. As long as the internal arrangements are being developed it would be necessary to be able to go to municipalities and check. The internal audit committees should be within departments and be seen as a tool and not a spy of Treasury. The audit committees are important tools for financial management.

Ms Hogan asked Treasury to explain what is meant by 'review'

Adv. Grove replied that the word ' investigate' was used in the PFMA and he is not sure why 'review' was used. He said that he would get back to the Committee.

Ms Taljaard raised the possibility that the clause might be encroaching on the duties of the Auditor General.

Ms Hogan said that the Auditor General reports on issues and then there could be a review so there is no encroaching because the functions are different.

Ms Fubbs saw 'review' as a proactive method of intervention. One could see what is wrong and then fix it.

Adv. Grove advised that he had thought about the word 'review' and said that it could mean that the system adopted by municipalities could be set aside and replaced with something else. He was of the view that this was going too far. He suggested that Treasury be given more time to come up with a proper view on the clause.

Ms Hogan asked if the clause is needed.

Adv. Grove replied that there would just be an inconsistency with the PFMA.

Mr Kompela (ANC) felt that Clause 5(2) as a whole was too prescriptive as it went too far and Treasury should review it.

Dr. Woods (IFP) was happy with the words 'may review' if it related to financial management but not to internal controls because this was a corporate governance issue.

Mr Momoniat said that Treasury was not really worried about the micro internal matters and had no problem with taking out the reference to internal controls. Treasury in any event cannot enforce any changes on municipalities because it had no constitutional power to do so. The most Treasury can do is set the norm.

Adv. Grove felt that the word 'review' was too strong.

Ms Hogan said that Treasury would think about the rewording and whether it is needed.

Clause (5)(2)(h)
This empowers Treasury to withhold transfers to municipalities or municipal entities in terms of s 216 of the Constitution if there is a serious or consistent material breach of this act.

Mr Momoniat said that the Division of Revenue Act has a provision like this and it is now being made explicit in the Bill. Treasury does not like using this power. It is nothing new because the Constitution does give Treasury this power. Clause 5(3) obliges that consultation takes place before the decision to withhold funds is taken.

Ms Taljaard said that the power to stop the transfer is linked to s 216 in that there must be a breach of a norm or standard that is enacted in terms of s 216(1). If the norms and standards are not constitutional then the breach of such an unconstitutional norm or standard cannot trigger the 5(2)(h) provision.

Ms Hogan replied that those issues would be covered in the discussion on the constitutionality of the Bill. She asked if the non-payment of audit fees is a material breach.

Mr Momoniat said that he wished that Treasury did not have this power so that it cannot be blamed for not using it. There is a question of other creditors. Eskom and SARS for example could want Treasury to withhold funds if municipalities fail to pay them. He said that ultimately Treasury could withhold the funds and pay the Auditor General directly.

Ms Hogan felt that SARS and Eskom did not have the same justification as the Auditor General for this sort of action. The Auditor General was a constitutional body and it is disgraceful if municipalities do not pay audit fees or even taxes.

Mr Momoniat added that the ideal would be that SARS and the Auditor General deal with public bodies openly so that everyone gets to know about public sector debts early. Councillors need to know about the debt and do something. The 'naming and shaming' tactic should be used because it is focussed and specific.

Ms Hogan commented that there must still be intervention if the naming and shaming does not work.

Mr Lyle (ANC) asked if Treasury gives funds directly to entities.

Mr Momoniat answered that it did not.

Mr Carrim followed up by asking why does the clause provide that transfers to entities can be withheld if Treasury does not directly provide then with funds. Secondly, would it not be more appropriate for the Minister to have the final say about the withholding of the transfer rather than the Director General or the department.

Mr Momoniat agreed because officials do not always want to make these decisions. He had no problem with changing it to allow for political heads having the final say.

Ms Taljaard asked if the 'must' in section 216(2) of the Constitution overrides the provinces right to intervene in section 139 of the Constitution.

Adv. Grove said it did because the right in 216(2) is so explicit it cannot be read in any other way. He felt Clause 5(2)(h) was not needed because it is a power conferred upon Treasury in terms of the Constitution.

Ms Hogan said that the hardest issue was deciding what a uniform norm and standard is. There are an infinite number of opinions on the matter.

Dr Woods commented that the Committee needs to ensure that Chapter 9 bodies are able to do their work. He suggested that this was the appropriate opportunity to solve the problem of the non-payment of audit fees. He asked if it was practical to include a provision to deal with this.

Mr Momoniat said that a provision could be added.

Ms Hogan was inclined to believe that a prescriptive provision is needed because everyone knows that the non-payment of audit fees has serious financial implications for the Auditor General.

Mr Momoniat had no problem with the principle because if municipalities do not pay the audit fees someone needs to sort it out. At the moment nobody in the municipality or even the province does anything about it. The non-payment of the audit fees is financial misconduct.

Mr Kompela agreed because he knows of examples where there has been a lot of correspondence between the Auditor General and local authorities and the CFOs but nothing happens. He felt that there is no other way of ensuring that the audit fees get paid.

Mr Carrim said that it would be useful to know what the audit fees are. He asked if it was commensurate with the size of the budget.

Ms Hogan replied that it was a complex process for determining the fees but it related to time spent. She wanted to know who is responsible if the audit fees are not paid.

Mr Momoniat said that the municipal manager must be responsible. The council must take action against the municipal manager. The information of the non-payment must be given to the provincial legislature and the MEC. There must be checks to see if the municipal manager has been brought to book. The pattern of non-payment is only seen in 2 or 3 provinces and it seems that there is some kind of collusion in that all the Treasurers decide not to pay. This was a process that could be enacted and the withholding of funds would be the last resort. He suggested that the municipality and the provinces be given 30 days to act before Treasury steps in.

Ms Hogan asked where such a provision should be located.

Mr Momoniat replied that it should either be in this Bill or the Municipal Systems Act. He advised that Adv. Grove would draft a clause.

Ms Hogan commented that the Committee had not been looking at the submissions as was agreed to yesterday. They turned their attention to the summary of submissions:

The Municipal Demarcation Board (MDB) submits that the interventions by National Treasury must be measured against the oversight and intervention role of provinces and the NCOP in terms of section 1439 of the Constitution.

Mr Momoniat responded to this by saying that provinces have a definite role to play but are not playing it. He clarified that the withholding of the transfer is not an intervention - it is simply withholding. His view was that there is also a definite role for the NCOP. In the event that audit fees are not paid it would be more appropriate that it is taken up by the NCOP than the National Assembly.

The Department of Developmental Local government & Housing of the North West submitted that the approach in Clause 5(2)(h) is reactive and that a proactive approach is needed whereby close monitoring and reporting will prevent non-compliance.

Ms Hogan said that the 5(2)(h) concerns have been satisfactorily dealt with. She added that the clause raises another constitutional issue. It refers to a persistent breach of 'this' Act. SALGA submitted that it exceeds section 216 of the Constitution. The question is whether a breach of this Act amount to a breach of the norms and standards in section 216.

Mr Momoniat replied that sub (h) is from the Constitution but the wording 'of this Act' can be removed. He replied to Mr Carrim's comment on the need for the inclusion of municipal entities since Treasury does not transfer any funds to those bodies, saying that nobody knows what might happen in the future so it would be better to leave it in. The Committee agreed and Treasury will come up with a redraft to take care of the SALGA concern.

Clause 5(2)(i)
This clause empowers Treasury to take any further steps necessary to perform its functions effectively.

Mr Momoniat said that this was a standard clause but the wording was slightly different from the PFMA.

Ms Fubbs felt that it seemed open-ended and allowed the Treasury to do anything.

Mr Carrim suggested that the wording be changed to say that Treasury can take any appropriate step. Treasury will change the wording accordingly.

Clause 5(3)
The clause was discussed earlier and Mr Momoniat reiterated that he had no problem with making the final hurdle higher before the transfer is withheld. He said that the more consultation there is the better. He did not mind qualifying the power given to Treasury and suggested that Treasury would redraft and also place the clause elsewhere because it seemed to be out of place.

Clause 6 - Delegations
Mr Momoniat advised that he had been asked yesterday to provide a schedule of exactly who was doing what. At the moment Clause 6 is merely enabling. He commented on the Adv. Trengrove opinion that states that something like 5(2)(h) cannot be delegated. Treasury just has to take into account things that cannot be delegated.

Mr Carrim was not clear on the delegations to the MEC for Local Government who seems to be left out of the process.

Mr Momoniat agreed that the MEC for local government is the responsible political functionary and the clause might not do what is intended. He advised that he would discuss the matter with Adv. Grove who had drafted the clause. Mr Momoniat further suggested that the Premier of the Province should be involved because everything should go through the political head. As long as the Premier does not assign the delegation to the wrong MEC.

Ms Hogan commented that there should be a consultation with the Premier but it should not be left to the Premier to assign the function to the MEC.

Clause 6(2)
Mr Momoniat said that this was the standard delegation clause and is like the one in the PFMA. It states the standard issues such as the delegation must be in writing, any further delegations are prohibited and that National Treasury still has overall responsibility.

Ms Taljaard said that Treasury has specific duties in terms of the Constitution. One example is capacity building. She asked how one ensures that these constitutional duties do not become diluted through delegation.

Mr Momoniat replied that the focus should be on outputs. If there is something that DPLG can do better, there should be flexibility and sharing of functions. He also reminded her that he had earlier said that Treasury is aware that there are certain functions that cannot be delegated.

Mr Carrim agreed that National Treasury should not shed their responsibilities but as yet there is no evidence of that.

Clause 6(3)
There were no problems with this clause.

Chapter 3, Part 1: Clauses 7 - 11
This deals with the opening of municipal bank accounts.

Mr Momoniat said that the set-up for national and provinces is clear in that revenue must be deposited into a revenue fund. There is nothing like this for local government and it was felt that there should be something similar for local government. If an account is opened in the public sector it should not be a secret account. It was clear from the Auditor General reports that there are many secret accounts at local level. The provisions are very detailed because the problem is so serious. It is designed to say that only particular persons can open accounts and money must be withdrawn in terms of an appropriation. But Treasury is aware that municipalities are like businesses and are complex to deal with.

He continued that the Auditor General has suggested many times before that when the municipality gets money from the public sector it should go into one account only and this was the main concern.
Mr Momoniat advised that Treasury could soften up the provisions and make it less strict because the constitutional issues were not the main concern. He had no strong feelings on the clauses but did feel that Clause 7(1) was a bit loose.

Ms Hogan commented that one cannot be too strict because there are many accounts at municipal level.

Mr Pillay (Treasury) advised that there had been consultation with municipalities and the intention was clear that when municipalities receive money from the public sector it must go into one account. The practitioners understood this.

Mr Momoniat explained that when he said that 7(1) was too loose, he meant that if there are separate accounts at the end of the day it must all go into one account and be withdrawn in terms of Clause 11(1).

Ms Fubbs was concerned about the practicality of this.

Ms Joemat (ANC) suggested that the Auditor General can provide input on this and also on how accounts can be consolidated.

Mr Carrim said that secret accounts must be addressed.

Ms Fubbs suggested that SALGA might be asked on how exactly things work.

Ms Hogan asked if proper bookkeeping would not solve the problem of many bank accounts.

Mr Momoniat said that Treasury does not want to cripple municipalities. The issue is one of disclosure. He suggested that the detail can be dealt with in regulations. At the end of the day the non-disclosure of a bank account should be a crime.

Ms Hogan asked if Treasury would look at clauses 7 -11 and see how it could be made less prescriptive and the rest can be left to regulations where there would be a consultative process.

Mr Momoniat replied that Clause 11 would need to remain because it was different and related to the withdrawal of funds.

Ms Hogan commented that Clause 11 seemed to be very prescriptive.

Mr Momoniat replied that it has to be. It is the same for National and Provincial government.

Mr Pillay advised that the background on Chapter 11 is that it comes from the PFMA. It does not intend that every cheque needs to be signed. The Municipal Manager is given the responsibility for withdrawals and it must be done in terms of the budget. Treasury is well aware that there must be discretion for cash flow management. The intention is for good financial management and not to be overly prescriptive.

Mr Lyle (ANC) said that the day to day running of offices is not catered for.

Ms Hogan asked if Clause 11 will result in councillors having to scrutinise lists and lists of expenditure items.

Mr Momoniat said that the broad intention is that the appropriation of municipalities are simplified.

Mr Pillay advised that the budget of municipalities in terms of the norms and standards will have functional areas. If funds are appropriated, the council votes. Then the Municipal Manager is in charge to implement. The cheques that go out are an administrative process. Clause 11 is around responsibility and accountability. He said that he cannot read from it that each and every cheque needs to go through a long process.

Mr Momoniat said that Treasury is trying to modernise municipal budgets. It seems as if people are reading it wrongly and undertook to have a look at Clause 11 to make it clearer. Treasury will therefore look at clauses 7 -11.

The CEO of SALGA, Mr Mokoena, was asked for a comment on these clauses and he said that if municipalities spend within budget, it is fine. As long as political oversight is ensured, that is enough and all the other detail is not needed. He added that the current practices in municipalities take care of many of the issues that the provisions in clauses 7 - 11 want to do.

Ms Hogan concluded by saying that the Auditor General must be brought into the process to give comment on what had been discussed.


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