Municipal Finance Management Bill: deliberations

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Finance Standing Committee

01 May 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
2 May 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 continued deliberations from Clause12 and completed Clause16.

MINUTES
Chapter 3, Part II
Clause12 - Cash Management and Investment

Mr Momoniat said that Clause 12(1) was in line with the PFMA to develop a framework for cash management and investment. Municipalities still at times put spare cash that can amount to tens of millions into risky investments. The primary objective of the Clause is to preserve the capital. Clause 12(2) just follows on from this.

The idea behind Subclause(3) is that banks must report on all municipal accounts that they have opened. It is important to know what is happening with the bank accounts of municipalities. Treasury will however have to look at this Clause when the banking provisions in part one of the chapter is looked at.

Subclause(4) tries to capture the other side of the coin whereby institutions which municipalities have invested with are obliged to report to National Treasury.

An issue was raised when the PFMA was debated that provisions like these are contrary to bank/client confidentiality. Mr Momoniat submitted that because municipalities hold public funds the confidentiality argument falls away.

Ms Borman (DP) asked how practical Subclause(4) was. How would a bank know that this is the rule, especially in the rural areas?

Mr Pillay replied that this provision had been workshopped with the banking sector and they are happy with the clause. He said that it would be up to the head office to notify branches of the requirement. The banking sector never raised this as a serious concern and understood the context thereof.

Ms Hogan commented that in their submission the Banking Council did not raise this issue so they should be happy with it.

Ms Taljaard was concerned about the confidentiality aspect of the obligation.

Ms Hogan replied that the institution is only obliged to report when the account is opened.

Mr Momoniat added that Treasury is looking towards moving in a direction where banks must report monthly especially on overdrafts.

Ms Hogan was concerned that such a move might be too onerous but it would be in regulation and the banking sector would be consulted.

Mr Momoniat commented that he did not know what Ms Taljaard meant by confidentiality in the public service. If a municipality is concealing that they are running a huge overdraft there is no problem if Treasury would like to know something like this.

Mr Kompela (ANC) felt that there must be confidentiality because it seems that anybody can get information on the bank accounts.

Mr Mnguni (ANC) agreed with Treasury that public funds are involved and transparency is needed. For this reason it must be clear that Treasury can investigate to detect any dangerous situations.

Ms Hogan, commenting on Mr Kompela's view, said that National government took the policy decision that it would not guarantee loans of other spheres of government. Banks became reckless and provided excessive credit to municipalities believing that national government would not allow a sphere of government to collapse. However, it came as a shock to the system when they were not bailed out. If there is no such safeguards then capping the budget would mean nothing because municipalities would just borrow more money.

Ms Fubes (ANC) said that she agreed with the clause because it was impossible not to regulate this kind of thing. It is government's duty to safeguard that national fiscus.

Ms Hogan referred to Clause12 (3)(b), which states that banks must disclose information when requested. It is not that banks must report all the time.

Mr Momoniat replied that it was the same as Clause 7(5) of the PFMA. He suggested that the reference to provincial treasury is taken out, i.e. banks should not have to report to them as well. It would be better to have one body dealing with the banks to keep costs down. The Kwazulu Natal Province submitted that Treasury must notify the relevant departments once they have the information but Mr Momoniat submitted that this was not necessary because Treasury will provide the information to all relevant Departments for them to perform their oversight role.

A Member (ANC) thought taking out the reference to provincial treasury was problematic because then goodwill would be relied on to pass the information to them. In the future there might be other persons in Treasury who could not act in good faith.

Ms Hogan suggested that there should be a provision that obliges Treasury to pass on the information to provinces.

Ms Hogan asked what institutions are referred to in sub (4).

Mr Pillay replied that there are many small investment companies with dubious schemes that municipalities invest in and get burned. These are the types of institutions that are referred to.

Mr Momoniat added that when a municipality invests it must be low risk to ensure that the capital is preserved. Municipalities used to invest in property like a new shopping mall. It would not take off and they would loose out. Sometimes the investment is not even in within the boundaries of the municipality making the investment. The Clause is a mechanism to get the information from the institutions, sometimes it might not even be known that the investment is unlawful.

Mr Glaasen (Consultant - Treasury) advised that there are Municipal Finance Management regulations that deal with investments and more particularly what is prohibited.

Mr Carrim added that the sub 4(b) also needs to be changed in line with the discussion about sub 3(b) in that the information must be passed to provinces.

Clause13 - Disposal of Assets
Mr Pillay told the Committee that assets are purchased with public funds. The Clause is trying to empower municipalities to take decisions to protect assets from irregular disposal. The assets that are protected are the minimum essential assets so that municipalities can continue to provide key services. Should it be decided to dispose of an asset the process in Clause13 must be followed and it must be ensured that the sale of the asset does not undermine service delivery. The requirement that the sale of an asset must be at fair market value is to protect public funds that paid for the asset.

Mr Glaasen added that assets that provide a minimum essential service cannot be disposed of. Ultimately if it is used for this purpose the council must control the asset and it cannot be sold without the councils knowledge.

Mr Moloto (ANC) felt that there is not a sufficient definition of minimum essential service.

Treasury said that there was a definition in Clause1.

Ms Lobe (ANC) said that it was not the same as the one in the Systems Act and it must be aligned to the definition in that Act.

The Systems Act defines 'basic municipal service' as:

"a municipal service that is necessary to ensure an acceptable and reasonable quality of life and, if provided, would endanger public health or safety or the environment".

The MFM Bill defines "minimum essential municipal services" as:

"a service, which, if not provided, would pose a threat to public health or safety".

Ms Hogan felt that the two definitions were different concepts. The definition in the Systems Act referred to quality of life and the environment thus was much broader. She used the example of the Breede River matter. Where people use the area as recreation but the municipality wants to sell off the area so that it can generate income. She said that the sale of this asset is not a danger to public health and safety.

Ms Lobe reiterated that there is no difference between the two definitions and that the same language needs to be used.

Mr Carrim said that his committee had debated this issue at length and it was felt that the definition of minimum essential service should be provided by the executive. He suggested that the committee report should comment on the need for the executive to come up with the definition.

Ms Hogan agreed and said that if the definition of the Systems Act is used it will not broaden the scope of the Bill.

Ms Taljaard said that if there is no consistency and since the MFM Bill seeks supremacy over other pieces of legislation then there is a danger that service agreement provisions under the Systems Act could fall away.

Mr Momoniat explained that Treasury went for a minimalist approach so that municipalities have autonomy in deciding on PPPs.

Mr Glaasen referred to Clause 27 that deals with security for debt and said that financial institutions were concerned that if a wide definition is used then assets which they could hold as security could be subject to any type of challenge in court when it is time to foreclose. Any type of asset could arguably fall under 'quality of life'.

Ms Mahlangu felt that recreational facilities are important and municipalities should not be allowed to simply sell it because it will not pose a threat to public health and safety.

M Lobe commented that S 8(1) of the Systems Act allows municipalities to dispose of assets for service delivery agreements and the MFM Bill was therefore contradictory.

Mr Carrim added that local government is desperate to get PPP's and suggested that the definition of essential service should be in line with the Bill of Rights. He said that his committee had instructed the drafters of the Systems Act to do this and there were extensive negotiations around the definition. He felt it was important to see where government is going because the local government manifesto of the majority party is more in line with the Systems Act than the MFM Bill.

Ms Hogan asked what types of assets could be disposed of.

The Members felt it would not be useful to go through an exercise of listing the types of assets that could be disposed of.

Mr Momoniat said that the discussion shows that what is essential in one area might nor be essential in another. The intention is not to restrict the approach of municipalities all that Treasury wants is that assets must not be dealt with in secret.

An ANC member of the Provincial and Local Government Committee asked why the environment is left out of the MFM Bill definition.

Mr Momoniat replied that it would broaden the provision and the intention was to let municipalities apply its mind to certain assets.

Ms Mahlangu said that Treasury must take into consideration the discussion of the Committee and that of Mr Carrim that the definition should be in line with the Bill of Rights.

Ms Hogan tried to sum up the discussion by saying that everyone agrees that there must be a limitation as to what a municipality can sell. Everyone also agrees that assets that are used in the delivery of basic services cannot be sold. Some argue that the definition in the Systems Act should be used in that it provides protection to assets that add to the quality of life. Ms Hogan saw merit in both positions but felt if there are two different definitions the two different definitions could be played off against each other in Court.

Mr Momoniat said that the Systems Act deals with the process of PPP's and does not deal with the disposal of assets.

Ms Hogan suggested that the quality of life aspect should be contained in a separate provision and there should be a process whereby a council must first apply its mind before the asset is disposed of.

Mr Momoniat said that this could be done.

Clause14 - acquisition and disposal of minority interests in companies and other entities.
Mr Momoniat said that the question in this Clause is what type of entity do you want the municipality to enter into. If the municipality is the majority partner it is fine. There is however a problem if the municipality is a minority shareholder. The Clause allows for circumstances when a municipality can hold the minority interest but the general approach is that the municipality must have the majority interest.

Mr Glaasen added that if you create a company where the municipality is the minority interest holder the majority shareholder controls the public assets.

Ms Hogan felt that this was a useful provision.

Ms Taljaard commented that S 76 of the Systems Act provides a mechanism where the municipality can enter service delivery agreements and this is much wider than Clause14 in the Bill. She added that the private sector is reluctant to assume the risk if they get a minority interest.

Mr Glaasen used the example of the Calvin Plant that was needed by the Johannesburg municipality to provide electricity because it could be bought from Eskom. There was discussion about taking up a minority interest in the Plant with the private sector partner being the majority shareholder. The municipality decided not to because it would loose control of the asset. As an alternative an agreement was reached whereby the private company owned the asset. He was illustrating that it was not necessary to go into a deal where the municipality is the minority shareholder. There are other ways of attracting the private sector to invest.

Mr Momoniat told the Committee to ask themselves whether they want municipalities to go into partnerships where it is the minority partner.

Ms Borman asked why there is this reservation about having the smaller share.

Mr Momoniat reiterated that it was a question of control. The asset was paid for with public funds and if problems should emerge the municipality would not be in the position to fix the problem. Service agreements can cater for the need of the private sector to be the majority partner.

Mr Glaasen knew of examples overseas where municipalities were the minority shareholder and then the private majority would cut service standards etc to cater for their shareholders who are only interested in profit.

Ms Taljaard asked if corporate governance principles would not cover the concern of minority partnerships.

Ms Hogan replied that corporate governance is no protection because the majority could still move in a completely different direction from what municipalities require.

Mr Carrim felt that for now it was safer to have the clause.

Ms Fubes said that rate-payers did not expect municipalities to take high risks with their money so she also agreed with the clause.

Mr Momoniat said that entities will be discussed again so this issue can be revisited.

Ms Hogan looked at the WECLOGO submission on this Clause.

They submit that this section is unnecessarily restrictive. It limits the ability of a municipality to hold a minority interest in certain categories. This would prohibit a municipality from interacting with the private sector in possible joint ventures. For example, the creation of a juristic entity to promote tourism in a municipality. The municipality may not wish to control the entity and the tourism industry may want the municipality to play a lesser role.

Mr Glaasen did not agree with the submission because he never saw a venture that was not structured without an agreement.

Chapter 4 - Municipal Budgets
Mr Momoniat told the Committee that currently budgets are the size of telephone books, they change at every council meeting and the councillors are not empowered so therefore they do not understand it. The chapter wants to empower the political heads in municipalities by putting in place the culture of a three year budget. There must be one main annual budget. One adjustment budget. There must be a link between the IDP and the budget in that if there is not enough funds the IDP must be revised downwards. The chapter is a bit more detailed than its equivalent in the PFMA because the whole culture must be changed. Another important feature is that a draft budget must be published before the main budget. He added that municipalities are far from three year budgets. At present 35 are doing it but only ten are close to getting it right because it is very difficult. He felt that the provisions are too soft because if the council does not approve a budget it should be resolved and new elections held.

Mr Carrim said that Mr Momoniat was right because if there is no budget it should ultimately mean a re-election. This issue needs to be flagged because it needs to be addressed because S 139 only caters for executive failures and since the failure to approve the budget is a legislative failure it seems that there is very little that can be done.

Mr Momoniat continued with the Clause by Clause discussion.

Clause15 - Annual appropriations
The purpose of Clause 15(2) is to have a three year appropriation for capital projects. This is a new idea and not contained in the PFMA. The PFMA will be amended accordingly in due course. The rationale is that for capital expenditure the project is in effect approved in the first year but spending thereon can be revised either way during the subsequent years.

Ms Hogan commented that the Clause makes no reference to capital expenditure.

Mr Momoniat agreed that it is drafted clumsily and he will attend to clarifying it.

Mr Carrim said that he supported the idea but never knew that the Clause was actually referring to multi-year budgeting. He asked if those words can be used in the redraft to make it more clear.

Ms Hogan was sceptical about the Clause because there has not been sufficient time spent on thinking this through. It is not even done at provincial and national level so it is a worry that local government is pushed into it. For now though she said that the Committee should continue with the Bill.

Clause 16(1)
Mr Momoniat said that the operating budget must be balanced. This means that there can be a deficit but there must be surplus funds available at the beginning of the year to fund the deficit. There can be no borrowing to fund the deficit.

Ms Hogan was unclear by the concept 'balanced budget' that at the same time can have a deficit.

Mr Momoniat said that he would look at the formulation of the clause.

The FFC asked if the operating budget included current expenditure and amortised expenditure.

Mr Momoniat said yes. The terms used are in line wit the GFS classifications.

Ms Joemat pointed out that the Institute for Municipal Officers submitted that in 16(1)(c) the wording should be ' fully funded' budget rather than a balanced budget.

Mr Momoniat undertook to look at the wording in the whole of 16(1)(a) - (c).

Clause 16(1)(d)
This Clause relates to the growth factor discussed earlier but Mr Pillay added that the focus in this Clauseis that the municipality must first look at realistic revenue before looking at expenditure. Thereafter the broader growth factor must be considered.

Mr Doe said that the practice at local government level is to look at expenditure first and then determine the rates increases accordingly. He felt that the Clause is over regulation bit understood the argument made by Treasury.

Clause 16(1)(e)
The Clause states that the annual budget of the municipality must within the available resources reflect the IDP.

Mr Carrim thought that this provision needs to be more towards the front of the clause. He was also of the opinion that the Clause was too loose and did not understand what 'within the available resources' meant.

Mr Momoniat replied that developing IDP's is a dynamic process. If it is to be done properly the budget has to take into account the IDP. Once you have the budget then the IDP must take into account the budget. At this point the IDP has to be revised accordingly. Treasury is trying to show the link between the IDP and the budget and felt that soft words has to be used. He added that a good IDP will take into account budgetary resources. One cannot say that the budget must reflect the IDP. Such a statement could open up the budget to legal challenge.

Mr Carrim was not happy with the explanation. DPLG states that a high percentage of municipalities have successful IDP's. He would have no problem with the loose formulation of the Clause if it was cross referenced with the Systems Act.

Mr Momoniat had no problem with cross referencing

Ms Hogan identified with Mr Momoniat's argument and did not share Mr Carrim's concern.

Mr Carrim said that if the cross referencing is done then the wording is not so important anymore.

Ms Hogan confirmed that Treasury would attend to the cross reference.

Clause 16(3)
Mr Momoniat said that the Clause is similar to the one in the PFMA and is sets out what the budget must contain. He added that it would take about five years before every municipality is at this point.

Ms Hogan asked where in the Bill it is said to be a transitional programme.

Mr Momoniat replied that Clause120, the last Clause, states that certain provisions will be phased in.

The submissions on Clause16 will be looked at during the next sitting.

The meeting was adjourned.

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