Municipal Finance Management Bill: deliberations

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Finance Standing Committee

02 May 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
3 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
Submission by the Department of Minerals & Energy Affairs - Appendix 1
Opinion by Ashira Consulting (Pty) (Ltd) - Re: Compatibility of specific provisions of the MFM Bill with Structures Act and the Systems Act
Portfolio Committee on Finance - Draft Programme - Appendix 2

SUMMARY
The Committee continued deliberations from Clause 16 until Clause 20.
At the meeting a submission by the Department of Minerals & Energy Affairs was handed out that requests amendments to the MFM Bill. The Department prepared a draft EDI Restructuring Bill that provides for the transferring of the distribution businesses of the municipalities and Eskom to the RED's. They submit that the MFM Bill impedes the transfer of assets and the rights of municipalities to acquire or hold interests in the RED's. This along with the opinion by Ashira Consulting was not discussed at this sitting at will be considered at a later stage.

MINUTES
Clause 16 - continued.


The Committee had to look at the submissions on Clause 16.

IMFO submitted that the reference to 'balanced budget' in 16(1)(c) be replaced by 'fully funded budget.' They also submitted that clarity was needed whether 16(1)(b) meant that the net amount of realistically anticipated revenue must be shown or if it must be the gross amount less a separate line item for doubtful debt.

This had been discussed when the Clause was dealt with. Ms Hogan had raised the issue and Treasury undertook to have a look at the wording of the Clause.

In respect of the second submission Mr Momoniat explained that municipalities include revenue that is owed to them even though there is no chance of collecting it. The Clause wants to end this practice.

Ms Hogan commented that the submission asks how this must be reflected in the budget.

Mr Momoniat advised that he would get back to the Committee on the wording.

16(1)(d): The FFC submits that a qualification should be included to indicate that the Minister's approval should be based on objectively determined and transparent criteria.

Ms Hogan said that she agreed with this submission and instructed Treasury to spell out how the power to approve a deviation be exercised.

16(2): City Of Cape Town; Weclogo: Clarification is required as to what "measurable objectives" means.

Ms Hogan thought that it was clear that 'measurable objectives' referred to outputs.

Dr Woods (IFP) added that measurable objectives is one of the elements of performance budgeting as envisaged in the PFMA. He felt that it should be made clear in this piece of legislation because it was not so clear in the PFMA. He suggested that Treasury should just say performance budgeting because 'measurable objectives' is open to interpretation.

Mr Carrim said that the Systems Act has a rigorous performance management system and it needs to be looked and cross referenced.

Mr Momoniat thought that it was a good idea and said that Clause 16(4) will also be looked at by Treasury because it would be better to have a national framework for all municipal managers to submit the information.

Ms Hogan agreed and said that it would therefore not be necessary to discuss 16(4) now.

Clause 17 - Budget Process
Ms Hogan said that the Systems Act has a detailed process and asked the Members not to be detracted by it for the moment. She wanted to first get an understanding of what this Bill is doing. The Committee would look at the compatibility of the different pieces of legislation later.

Mr Momoniat replied that the Systems Act does not have a budgetary process it just focuses on community participation.

Ms Hogan said that community participation is part of the budget process.

Mr Momoniat, commenting on the Clause in general, said that the councillor for finance would differ from municipality to municipality. In some it could be the mayor, in others an executive member of the council and in others a councillor that is responsible for financial matters. Treasury wants a draft budget four months before the end of the financial year. The time frame might change to three months because the Division of Revenue Bill would impact on the timing but the idea is that there will be draft budget at the latest at the end of March. The Clause also provides details for community participation.

Prof Turok asked if it was possible to improve the consultation process because in his constituency meaningful participation is not evident.

Mr Carrim asked if the councillor responsible for finance can not be the mayor or an executive member of the council only. He added that it was a very important task. Secondly, he said that the Systems Act says a great deal about participation but there is not much that one can put in law to improve participation. The problem raised by Prof Turok is evident in many areas but it is more a problem of practice.

Mr Momoniat agreed that if it is not the mayor who is responsible for financial matters then it should be an executive member of the council.

Ms Borman (DP) commented that the provision is confusing. It states that the responsible person must ensure that the draft budget is prepared ' at least a prescribed number of days, or if a number of days is not prescribed, at least four months…'

Mr Momoniat agreed and said that the wording should read something like 'in a prescribed period of time not shorter than three months.'

Mr Carrim suggested that the time frame must be determined after consultation with SALGA.

Mr Momoniat replied that this is done in practice anyway and he had no problem with putting it in.

Clause 17(2)
Mr Momoniat said that a notice in a newspaper of general circulation must state that the draft budget can be viewed and it must invite comment, and specify the time, date and place of public hearings. He added that he felt that the legislation should say that it must be put on a website.

Prof Turok commented that providing data did not equal democratisation. He said that issues need to be made available. He suggested that a policy paper on all the issues should be circulated to all the existing community organisations.

Ms Mahlangu felt that a newspaper and the web is a good idea but was concerned about communities who did not have access to computers and who did not receive a newspaper of general circulation. She said that there was a need for the information to be taken into these townships.

Ms Hogan added that one could also argue that the full budget is for specialist lobby groups but if communities got summaries so that they could see how they are affected in their own area would be ideal. She asked how information could be made available so that it can be used by communities in a specific ward.

Mr Mettler (SALGA) said that the IDP is the basis for the budget and it involves community participation. There is also participation when the IDP is reviewed annually.

Ms Hogan asked how the budget process was reconciled with the IDP.

Ms Lobe (ANC) said that there is the IDP participation and the end product is the budget. The Bill is cross referenced with the Systems Act in Clause 17(1)(b) and for this reason she felt that community participation is adequately covered in the Bill. It was just a question of getting the information to the people.

M Hogan replied that the problem is extracting the IDP from the budget. At the end of the day the budget is a financial document. Firstly the budget needs to be published as it is stated. But at the same time the budget needs to be explained. She suggested that the legislation must state that the budget must be in 'popular from' and then in regulation it can be spelt out what popular form is after consultation.

Mr Doe (SALGA) informed the Committee that ward representatives determine how much money can be spent in each ward.

Ms Hogan asked what happens when there is no money in the budget.

Mr Doe replied that the ward representatives concur up front on how much money is available for capital expenditure per ward.

Ms Hogan said that for now the process must be kept open because for participatory democracy specific information is needed. She added that most of the submissions has been covered in the discussion.


17(2)(b): City of Cape Town; WECLOGO: Clause 17(2) is unclear in its intention. Does it require public hearings at the council meeting at which the budget is tabled or does it merely mean that the public participation process, as provided for in the Local Government: Municipal Systems Act, must now begin? Section 16 of the Local Government: Municipal Systems Act requires a municipality to develop a system of participative governance and must create conditions for the local community to participate, inter alia, in the preparation of its budget. Each municipality will have developed a system of public participation to meet its individual need. Clause 17(2)(a)(iii) contributes to this confusion. The requirements of public participation need not be regulated as the Systems Act already governs the situation.

Ms Hogan felt that the intention is clear. in that the public hearings happen at the council meeting.

17(4): WECLOGO: Submits that the ambit of the comments permitted by National Treasury/Provincial Treasury needs to be set out. The Treasury may constitutionally only make comment on certain issues, such as whether the budget meets the framework set out in the Bill, but may not comment on the content of the budget.


Ms Hogan preferred that Treasury does not comment at the hearings.

The Clause also states that Treasury must within 40 days of receipt of the draft budget submit comments to the Treasury.

Mr Carrim felt that the 40 days could hold up the process.

Mr Momoniat replied that it was not the intention to hold up the provinces. Provinces are better placed to monitor especially in respect of the IDP's. Treasury will just look at certain macro - economic consideration like whether it is a balanced budget or if there are unrealistic tariff increases.

Ms Mahlangu asked what would happen if municipalities ignore the comments and Treasury is proven correct. She thought that it seemed unrealistic that Treasury could comment on the budget without having all the information about the IDP. She suggested that the IDP documentation be forwarded to Treasury so that their comment can take into account the IDP.

Mr Momoniat replied that Treasury has advised municipalities that the budget is not realistic. Some has taken the advice and some has not. He added that Treasury has no powers to take punitive measures but if there is a flagrant violation of the law then S 139 of the Constitution would apply.

Mr Carrim agreed with Ms Mahlangu and questioned how Treasury could look at the budget without looking at the IDP. He asked what DPLG and Treasury had been doing for the past three years because it seems that all the problems have to be sorted out by the Committee. He added that there are no clear answers given to the questions being raised.

Ms Hogan replied that Treasury's comments are technical in nature and the Provinces deal with the IDP's.

Mr Momoniat said that the monitoring role is technical but if Treasury finds that the budget is twice the size of the previous years, then it is also substantial. He reiterated that Treasury will look at the macro impact and will also train provinces to look at the same sort of issues.

Ms Hogan commented that sub (4) was an example of another Clause where it is not entirely clear who plays what role. She said that it would be nice to see a memorandum of understanding between the role players to say who is responsible for what.

Mr Momoniat replied that such a Clause would be helpful. He said that it could also be argued that provincial treasuries need to be much more involved because it is better placed to comment on whether the budget enhances the IDP.

Ms Hogan confirmed that the Bill needs a generic Clause requiring an agreement to specify the different responsibilities.

Mr Carrim just pointed out that the submission on sub (4) is more concerned about the consequence of the comment than the comment itself.

Clause 17(5)(a)(iv) states that the municipal manager must prepare the final budget taking into account the guidelines and policy statements issues by Treasury. Mr Momoniat said that in the light of discussions in the committee it would be better if this Clause is deleted.

17(5)(a): The Urban Sector Network submits that there should be some evidence of public comments having been taken into consideration when the final budget is tabled before the council. They say that "taking into account" is simply not sufficient.


Mr Momoniat advised that the language of the Clause is the same as in Section 214 of the Constitution.

17(7): The FFC says that it seems 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.


This submission is catered for in Clause 18(5) of the Bill.

Clause 18 - Approval of annual budgets
Mr Momoniat said that this is a standard Clause in respect of approving the budget. The question is what happens when the council does not approve the budget. For that reason Clause 18(2) states that the council must reconsider the budget within seven days of failing to approve it. Then in terms of 18(4) if the budget has still not been approved then the MEC for local government must direct the council to approve the budget within 14 days.

Ms Hogan said that the MEC had no power to do that.

Mr Momoniat agreed and said that it is intended more as persuasion rather than an actual power. He referred the committee to 19(2) and said that the municipality cannot legally withdraw money for the purposes in 19(2) if there is no approved budget. He added that it is a serious crisis if there is no budget at the start of the financial year. He asked who could do something if the budget is not passed because legally no money can be spent and at the moment nothing is done.

Mr Carrim commented that it is a serious issue that needs to be addressed but for now wanted to know what the likelihood was of a situation arising where no budget is approved.

Mr Mettler replied that it was not likely that it would happen. Past experiences shows that non approval is as a result of political problems but this was just in three or four municipalities. There has also been hung councils in the past but he said that there has been nothing similar under the new system of local government.

Mr Uys (NNP) said that he knew of a municipality that never passed a budget and it was already three months into the financial year. They just closed their eyes and went on like nothing is wrong. He said that this was the problem.

Mr Carrim felt that the leaders of Treasury, DPLG, and SALGA should discuss the issue.

Ms Hogan said that a constitutional amendment is needed to allow a S 139 intervention for a legislative failure. She said that discussion on Clause 19 should also be held in abeyance.

Mr Momoniat said that 18(4) can remain so long.

Ms Hogan replied that the MEC cannot tell the council to pass a budget. She directed Treasury to remove this Clause and see what is provided for in the Structures Act.

Clause 20 - Municipal adjustments budgets
Mr Momoniat said that one adjustments budget is necessary but the second and third one becomes a problem. For this reason the Clause states that there can only be a second and third adjustments budget with the approval of the MEC for local government. The Clause aims at discouraging more than one adjustments budget. Clause 29(4) further refers to the participation process in Clause 17 and states that it should also be followed for the purpose of the adjustments budget.

Ms Hogan felt that the same process is too expensive for the adjustments budget that is nothing new. She felt that it was not necessary for the public to comment on this. The adjustments budget does not allow expenditure on new items unless it is unforeseen and unavoidable. Also at national level the public has never been asked to comment on the adjustments budget. She asked if the Committee agreed that Clause 20(4) could come out. The Committee did not object to the suggestion.

Ms Taljaard said that in 20(1)(a) the MEC is acting in an executive level in the local government sphere.

Ms Hogan agreed that there was no need for this and asked if the committee agreed that the wording should be kept simple. The Clause should just say that the municipality can table an adjustments budget. The reference to the second and third and the approval of he MEC should be deleted.

The deliberations would continue at the next sitting.

The meeting was adjourned.

Appendix 1:

SUMMARY

1. SUBJECT
To inform the Minister as a matter of extreme urgency of the necessity of an amendment to certain Clauses of the Local Government: Municipal Finance Management Bill 1 of 2002 in order to reconcile the RED's model with this proposed legislation.

To request the Minister to sign the attached letter to the Minister of Provincial and Local Government explaining the situation and proposing an amendment to the Bill in order to exempt this Department from certain provisions of the Bill.

2. BASIC ISSUE INVOLVED
A Draft EDI Restructuring Bill has been prepared, with as its main purpose to provide the legislative mechanism for transferring the distribution businesses of the municipalities and Eskom to the REDs

However, after perusal of the Local Government: Municipal Finance, 2002, it became evident that there are three Clauses in the draft Bill that may impede firstly the transfer of municipal assets to REDs and secondly, the rights of municipalities to acquire or hold interests in companies and other entities, in particular the REDs.

3. RECOMMENDATION / ACTION REQUIRED
It is recommended that you sign the attached letter to the Minister of Provincial and Local Government, explaining the situation and proposing an amendment to the Bill in order to exempt this Department from certain Clauses of the Bill.

4. LEVEL OF URGENCY
Very Urgent

DEPUTY MINISTER

MINISTER

SUBJECT: PROPOSED AMENDMENT TO CERTAIN CLAUSES OF THE LOCAL GOVERNMENT: MUNICIPAL FINANCE MANAGEMENT BILL 1 OF 2002


AIM
1. To inform the Minister as a matter of extreme urgency of the necessity of an amendment to certain Clauses of the Local Government: Municipal Finance Management Bill, 2002 in order to reconcile the RED's model with this proposed legislation.

2. To request the Minister to sign the attached letter to the Minister of Provincial and Local
Government explaining the situation and proposed amendment to the Bill.

BACKGROUND
3. It had long been recognized that the fragmented nature of the EDI was inefficient and rationalization of distributors was necessary.

4. The intention is to use legislation to merge the existing 250 municipal electricity distributors with Eskom's national distribution business to form six (6) geographically defined REDs.

5. The legislation will empower the existing distributors to voluntarily form themselves into the REDs
by providing for transfer schemes to transfer employees, assets and liabilities to the new REDs under
the co-ordination of a government established EDI Holdings Company.

6. In the event that any distributor fails to voluntarily pass such a transfer scheme, the legislation will
empower the Minister of Minerals and Energy to pass a mandatory transfer scheme to achieve the
transfer of that distributor's business to the applicable RED.

7. The REDs will be companies, jointly owned by municipalities and Eskom. They will be controlled by boards of directors including representatives from the municipalities and Eskom In exchange for the electricity assets (movable, immovable and incorporeal) and liabilities transferred into the companies, the municipalities and Eskom will receive a shareholding in the companies.

8. The financial interests of municipalities will also be assured. They will continue to be able to levy a
tax on electricity sales in their areas to compensate them for the loss of surpluses currently being
earned from direct electricity sales. They will also receive dividends from the REDs as owners.

9. To comply with local government legislation, municipalities (as service authorities) will enter into
service delivery agreements (SDAs) with the REDs (as service providers). Municipalities may
collectively choose to form a Multi-Jurisdictional Municipal Service District (MMSD), which
will enter into a single SDA with the RED in the MMSD area.

DELIBERATION
10. A Draft EDI Restructuring Bill (Restructuring Bill) has been prepared, with as its main purpose to provide the legislative mechanism for transferring the distribution businesses of the municipalities and Eskom to the REDs

However, after perusal of the Local Government: Municipal Finance Management Bill, 2002,
(Hereinafter referred to as "the Bill") it became evident that there are three Clauses in the draft Bill that may impede firstly the transfer of municipal assets to REDs and secondly, the rights of municipalities to acquire or hold interests in companies and other entities, in particular the REDs.

The various Clauses that pose a problem to the implementation of the Restructuring Bill are
discussed in detail below:

13. Clause 13(1) of the Bill, which provides that a municipality may not transfer ownership, with or
without consideration, or otherwise permanently dispose of an asset needed to provide a minimum
essential municipal service.

14.Minimum essential municipal service is defined in the Bill as a service, which, if not provided,
would pose a threat to public health or safety.

15.It is submitted that the service of electricity would fall within this definition of minimum essential
municipal service.

16.This therefore means that with the application of Clause 13(1), municipalities may not transfer their assets used for their electricity distribution business to the REDs. It is submitted that the application of this section is contrary to the entire transfer scheme provisions as drafted in this Department's proposed EDI Restructuring Bill. REDs will be comprised of distribution assets of municipalities and Eskom and the mechanism for transfer of their assets to the Reds via transfer schemes transferring ownership of these assets to REDs, with due compensation therefore.

17.An exemption from the application of this Clause to the minimum essential municipal service of
electricity is requested in order to enable municipal electricity distribution assets to be transferred to
the REDs.

18. Clause 14(a) of the Bill provides that a municipality, a municipal entity or a subsidiary of a
municipal entity may acquire or hold a minority interest in any company or other entity, but only if the other interests are held by -
· another municipality or municipalities;
· the national or provincial government municipal entity over which that municipality or that other municipality or any of those other municipalities exercises sole or joint ownership control; or
· a subsidiary of a municipal entity referred to in bullet 3 above.

19. It is submitted that this Clause poses a problem because the intended shareholders in the REDs
are going to be municipalities and Eskom, to the extent of their contribution of distribution assets to the REDs.

20.As Clause 14(a) currently stands, municipalities are prohibited from acquiring interests in REDs,
since Eskom (which does not fall into any of the 4 bullets above), will also be holding interests in the
REDs.

21. An exemption from the application of this Clause is requested, as this would enable a municipality, a municipal entity or a subsidiary of a municipal entity to acquire an interest in the REDs.

22.ln addition to Clause 14(a), Clause 14(b) of the Bill provides that a municipality, a municipal entity,
or a subsidiary of a municipal entity may dispose of any interest, which it holds in terms of Clause
14(a) in a company or other entity, but only to-
· another municipality;
· the national or provincial government;
· a municipal entity referred to in section 14(a), or
· a subsidiary or a municipal entity referred to in section 14(a).

23. It is submitted that this section would also pose a problem for example with cases like
Johannesburg City Power, which in terms of this section would either itself or through its shareholder municipalities, be prohibited from disposing of its interest in the electricity distribution business to the REDs since REDs does not fall within the four bullet points referred to in Clause 14(b).

24. For the reasons stated above, an exemption from the application of this Clause is requested.

25. Clause 51(1) of the Bill provides that a municipal entity may not transfer ownership, with or
without consideration, or otherwise permanently dispose of an asset needed to provide a minimum essential municipal service.

26. As previously mentioned, a minimum essential municipal service is defined in the Bill as a service,
which, if not provided, would pose a threat to public health or safety.

27. It is submitted that the service of electricity would fall within this definition of minimum essential municipal service.

28.This therefore means that with the application of Clause 51(1), municipal entities involved in the
electricity distribution business like for example Johannesburg city power, may not transfer their
assets used for their electricity distribution business to the REDs. It is submitted that the application of
this Clause is contrary to the entire transfer scheme provisions as drafted in this Department's
proposed EDI Restructuring Bill. REDs will be comprised of distribution assets of municipalities,
including as necessary municipal entities and Eskom and the mechanism for transfer of these assets
to the REDs is via transfer schemes transferring ownership of these assets to REDs, with due
compensation therefore.

29. An exemption from the application of this Clause for the minimum essential municipal service of
electricity is hereby requested in order to enable municipal electricity distribution assets to be
transferred to the REDs.

RECOMMENDATION/PROPOSAL
30. In the light of the problems that Clauses 13(1), 14(a) and (b) and 51(1) of the Bill pose for the implementation of the Restructuring Bill it is recommended that you sign the letter to Mr. FS Mafumadi proposing and amendment to the Bill in order for this Department to be exempted from the various Clauses of the Bill. (Letter attached and flagged A).

Appendix 2:
PORTFOLIO COMMITTEE ON FINANCE
DRAFT PROGRAMME
(Subject to change) (Dated 29 April 2002)

Monday, 29 April 2002
09:30-13:00
Deliberations on MFMB

Tuesday, 30 April 2002
09:30-15:30
Deliberations on MFMB

Thursday, 2 May 2002
10:00 - 17:00
Deliberations on MFMB

Friday, 3 May 2002
09:30-13:00
Deliberations on MFMB

Tuesday, 07 May 2002
09:30 - 13:00
Deliberations on MFMB

Wednesday, 08 May 2002
09:30 - 13:00
Deliberations on MFMB

Friday, 10 May 2002
09:30 - 13:00
Budget Vote - STATS SA

Monday 13, May 2002
09:30 - 17:00
Budget Vote - National Treasury

Tuesday, 14 May 2002
09:30-13:00
Budget Vote SARS

Wednesday, 15 May 2002
09:30 - 13:00
Budget Vote -FFC

Friday, 17 May 2002
09:30 - 13:00

Tuesday, 21 May 2002
09:30 - 13:00
Deliberations on MFMB

Wednesday, 22 May 2002
09:00 - 13:00
Deliberations on MFMB

Friday, 24 May 2002
09:30-13:00
Deliberations on MFMB

Tuesday, 28 May 2002
09:00 - 13:00
Deliberations on MFMB

Friday, 31 May 2002
09:30 - 13:00
Deliberations on MFMB

Tuesday, 04 June 2002
09:30 - 13:00
Informal Briefing on Taxation Laws A/B

Friday, 07 June 2002
09:30 - 13:00
Hearings on Taxation Laws A/B

Tuesday, 11 June 2002
09:30 - 13:00
Hearings/Deliberation on Taxation Laws A/B

Wednesday, 12 June 2002
09:30 - 13:00
Hearings/Deliberations on Taxation Laws A/B

Friday, 14 June 2002
09:30 - 13:00
Hearings/Deliberations on Taxation Laws A/B

Tuesday, 18 June 2002
09:30 - 13:00
Legislation

Wednesday, 19 June 2002
09: 30 - 13:00
Meeting with the Public Investment Commission (PlC)

Friday, 21 June 2002
09:30 - 13:00
Formal Consideration of Taxation Laws A/B

Tuesday, 25 June 2002
09:30 - 13:00
Legislation

Friday, 28 June 2002
09:30 - 13:00
Meeting with Governor of SARB

(Friday, 28 June to Monday, 26 July - Recess)

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