Municipal Finance Management Bill: deliberations

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Finance Standing Committee

20 May 2002
Chairperson: Ms Hogan (ANC)
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Meeting Summary

The Committee continued deliberations on Chapter 5 that deals with debt and completed all the clauses in this chapter. The Committee was satisfied with clauses 25, 27 28, 29 7 30. Treasury was instructed to redraft clause 26 to make it clear how it applies to long and short term debt. Currently clause 26 applies to both but the committee felt that certain provisions are not necessary for short term debt. At the next sitting deliberations will continue from Chapter 9 on Municipal Entities.

Meeting report

Mr Glasser ( National Treasury - Consultant) continued from clause 25.

Clause 25 - Long Term Debt
He said that the clause spells out when municipalities can incur long term debt. In terms of clause 25(2)(a) & (b) long term debt can be accessed only for the purpose of capital expenditure on plant, property or equipment, the achieving of objects in terms of section 152 of the Constitution or for refinancing existing long term debt. He advised the committee of perhaps extending the scope but it was decided by Treasury to keep it limited. When a municipality has heavy long term obligations, the idea behind sub 2(b) is for the debt to be re-financed so that the municipality can save money.

Clause 25(3) relates to all the related costs of long term debt that is seen to be as capital expenditure for the purposes of this section.

Clause 25(4) allows a municipality to use long term debt for financial restructuring after a financial emergency if it is done in terms of an approved recovery plan. Mr Glasser said that this clause links up with chapter 11 on emergency situations.

The Committee then looked at the submissions on clause 25.

WHITE & CASE submit that this section, read together with the definition of "long term debt" namely "debt that is repayable over a period exceeding one year", means that a municipality may incur long-term monetary indebtedness (whether contingent or otherwise) under the specified forms of financing arrangements (including guarantees) only for its capital expenditure requirements.

Mr Glasser responded by saying that no new resource implications are anticipated.

The Bill does not regulate the power of a municipality to incur long-term monetary indebtedness (of a "non-contingent" nature) under any financing arrangement that is not specified in the definition of "debt". Nor does it regulate the power of a municipality to incur any such indebtedness for its operational expenditure requirements.

Mr Glasser did not agree with this comment because of the broad definition of debt in the definition section. He added that he had discussions with a representative of White & Case and they want municipalities to guarantee certain arrangements that are not debts. This Treasury has resisted. An example is payments in terms of a contract of service that should not be guaranteed by the municipality.

Ms Hogan agreed that this would be too inflexible.

WHITE & CASE submit that the power of a municipality to incur long-term monetary liabilities and obligations for its own operational expenditure derives implicitly from the Municipal Systems Act. Accordingly, a municipality may incur, and budget for, any monetary indebtedness relating to its operational requirements (for services and goods) without having to comply with the provisions of Chapter 5 of this Bill.

Mr Glasser disagreed in that the Constitution is clear that there can be no borrowing for operational requirements.

Mr Smith asked if a municipality could guarantee the debt of an entity.

Mr Glasser replied that clause 29 would be relevant. He said that clause 29 that deals with municipal guarantees and clause 27 that deal with security will be amended to bring it in line with the new section 230A of the Constitution that allows borrowing to attract investment. The amendment will therefore try and say that guarantees and security can be given for contractual agreements.

One of the requirements for a municipal guarantee is that the debt must be reflected on the municipalities consolidated financial statements. Mr Dorfling (Councillor - SALGA) asked how would the debt be reflected if the service that is provided crosses municipal boundaries.

Mr Glasser said that this was a good point but the Bill does empower municipalities to go into partnership when forming an entity to deliver services. The liabilities of each partner should be contained in the agreement.

Mr Smith (IFP) commented that it must be made clear that clause 29 only applies to long term debt.

Mr Glasser had no problem with this.

Mr Momoniat (Treasury) added that there would still need to be requirements for short term debt.

Mr Dorfling suggested that the provisions on short term debt should allow for borrowing if financing is needed for emergency operational expenditure.

Mr Momoniat replied that this would be unconstitutional because the Constitution is clear. He said that this Bill should not be cluttered with suggestions of that nature because it belongs to a separate discussion. If the emergency arises early in the year a simple solution would be a transfer of part of the equitable share to help the municipality cope with the emergency. If the emergency is late in the year then section 16 of the Public Finance Management Act could apply.

The committee returned to discussion on clause 25

Ms Hogan asked that all public comments on municipal entities be kept in abeyance until deliberations on Chapter 9.

Mr Smith asked what framework is referred to in clause 25(2)(b).

Mr Glasser replied that the framework wants to make sure that if the municipality enters into a debt re financing agreement it will save them money and not just be a source of commission for the lending institution.

Mr Bhayat (Director - Expenditure - Johannesburg Municipality) making a general comment on long term debt said that municipalities were unsure about entering into structured loan agreements using special purpose vehicles.

Mr Glasser explained that an example of a structure loan agreement is that the Bank could benefit from a tax point of view but the agreement would provide that if SARS should take a different stance then the municipality would be liable. In effect a loan agreement that is structured at 8% could end up being one that is actually 15% should SARS clamp down on the specific arrangement.

Mr Momoniat added that it was disgraceful the way private sector used such deals and felt that municipalities should be protected. This area is not addressed in the Bill. Treasury does not encourage such deals because it is dangerous and warned that municipalities should enter into such deals with open eyes.

Mr Dorfling agreed with the sentiments expressed with Treasury.

Mr Glasser added that it was a policy question on how to approach this because it was a toll by which municipalities could access funds.

Ms Hogan said that that banks and municipalities are not on an equal footing and one assumes that municipalities have lots of capacity in provincial Treasuries.

Mr Glasser agreed that quantifying the consequences is a challenge.

Mr Momoniat added that the contracts are done in secret and for this there is a feeling that something must be wrong. One of the reasons is that the lending institution does not want its competitors to know about it, but another reason is that they do not want SARS to find out. He said that the legislation is enabling not prohibiting but structured agreements is a dilemma.

Ms Hogan commented that one way to prevent this is to make it compulsory for the agreements to be lodged with SARS.

Mr Bhayat said that currently Johannesburg has a proposal from RMB and the proposal has been submitted to SARS. SARS has not given a response and it seems that they wait for the deal to be signed then take action. He added special purpose vehicles should not be prohibited. The issue is that municipalities need to know which are acceptable.

Mr Glasser advised the committee that an approach in certain countries is that all information about public funds is in the open.

Ms Hogan concluded by saying that it a matter that must be dealt with by Treasury. The Committee would not be able to resolve it because it needs much more attention.

Clause 26 Conditions on which debt may be incurred
This clause lists the conditions under which a debt may be incurred.

Ms Hogan asked if the clause relates to short term or long term debt.

Mr Glasser replied that it applies to all debt but some of the provisions would not apply to all short term debt.

Ms Hogan said that it was not clear.

Mr Glasser continued and said that by the language used, it is clear that long and short term debt is included. He said that both forms should be included.

Mr Smith was not sure how the procedures in clause 16 on the budget process relates to the procedures in clause 26. He felt that it was a duplication.

Mr Glasser replied that the budget presents a plan. It is the intention that is formed. The budget will say that R200 000 will need to be borrowed. When the money is borrowed is when the intention is acted on and now the clause 26 procedure needs to be followed.

Ms Hogan said that clause 26 should have a reference to clause 16 & 17.

Mr Glasser said that would be fine.

Mr Dorfling submitted that clause 26(c) & (d) was too prescriptive.

Ms Hogan agreed that clause 269(c)(ii) might be an overkill. Sub (i) requires a draft resolution containing details of the intended loan. (ii) calls for public comment on the resolution.

Ms Maabe (ANC) felt that it was not prescriptive because public funds were dealt with and elected official needed time to ensure that they know what they are committing public funds to.

Ms Taljaard (DP) was not sure that clause 26 was a replication of the consultation in respect of the budget.

Mr Glasser commented that when the budget is looked at, the focus is on spending. A 20 year debt is a mortgage on the community and it makes sense to go through the process in clause 26.

Ms Hogan replied, "then what is actually looked at is long term debt". It was therefore important to differentiate between long term and short term debt. She instructed Treasury to draft new provisions that make it clear what applies to long term debt and what applies to short term debt. The principle should be that big borrowing should comply with the process in subsection (c).

The members agreed to this.

Mr Momoniat said that this was fine but as soon as the amount approved in the budget is exceeded then fresh approval needs to be obtained.

Mr Glasser concluded the discussion on clause 26 by saying that its purpose is that, within a few years, it will create an environment of more competitive borrowing where the banks will submit proposals and the municipality can decide on the best deal.

Clause 27 - Security
Mr Glasser advised that there were many comments stating that the section was too restrictive. Treasury will amend this clause to allow for the provision of security to attract investment. The amendments have been drafted and will be made available. The only change is that it would now be permissible to provide security for contractual obligations.

Clause 27(2) provides a list of circumstances when security may be provided. The list is not comprehensive, just illustrative.

When a municipality decides to provide security the council must apply its mind and decide if the asset is required for a minimum essential service. If the asset is necessary for this purpose, the council must indicate how the availability of the service that the asset provides will be protected. If the asset is not required for a minimum essential service, it can be pledged fully.

Mr Smith asked how sub (4) was different from the Municipal Systems / Structures Act. He also wanted to know what use is the asset if the lender cannot sell it in execution.

Mr Glasser replied that that the clause is very different from other legislation provides. In respect of the second part of the question he said that the use to the lender depends on the type of asset. If it is a water treatment plant, the asset cannot be moved so the lender would step in and run the plant and benefit from the revenue it generates.

Ms Lobe (ANC) favoured a scenario where the provisions would be strengthened to ensure that the provision of basic services are not jeopardised.

Mr Glasser replied that the provisions are empowering. The decisions are left to the municipality on how best to deal with the asset. Any agreements that are entered into will provide that the basic service is not interpreted by whoever takes over the asset.

Ms Taljaard asked what would be the impact on the tariff structure because this had a significant impact on the community.

Mr Glasser replied that tariffs are subject to the Systems Act and the Water Act.

Mr Smith asked if assets of entities can be pledged.

Mr Glasser replied that one approach is that the entity owns the asset and the board of the entity controls the asset. The other option is that the asset is retained by the municipality because it is a public asset.

Ms Hogan said that the clause is fairly clear.

Clause 28 - Disclosure
The clause calls for full disclosure of all information by any person involved in the borrowing of money to municipalities.

There were no comments on this clause.

Clause 29 - Municipal Guarantees
This was clause was discussed earlier.

Clause 30 - National & Provincial Guarantees
This clause states that National and Provincial Government will not guarantee any debt.

Mr Momoniat said that if this provision was not included then government is opened up to many moral hazard problems. The expectation of a guarantee creates risks so the clause is clear that there will be no guarantees. This was a fundamental principle of having separate spheres of government.

The committee agreed that this clause was needed.

Ms Hogan advised that Chapter 9 will be dealt with at the next sitting and the meeting was adjourned.

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