Municipal Finance Management Bill: deliberations on Municipal Entities

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Finance Standing Committee

21 May 2002
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Meeting Summary

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Meeting report

22 May 2002

Ms Hogan (ANC)

Relevant Documents
Municipal Finance Management Bill [B1 - 2002]
Summary of Submissions on the Municipal Finance Management Bill
Briefing presentation on Chapter 9 of Bill (included in the minutes)

Treasury briefed the Committee on Chapter 9 that deals with Municipal Entities. Thereafter the Committee deliberated on Parts One and Two of the chapter. A few minor amendments were made to Part 1. In Part 2 the committee discussed the desirability of having councillors serve on the board of a municipal entity. Most members favoured the exclusion of councillors from the Board, as their presence would result in a conflict of interest and a blurring of the accountability arrangements. No final decision was taken and the issue will be returned to. At the next meeting the discussion on Chapter 9 will be held over in favour of Chapter 11 due to the availability of persons familiar with interventions.

Briefing on Chapter 9 - Municipal Entities
Mr Momoniat (National Treasury) briefed the committee on Municipal Entities. He said that it was a difficult chapter because of the limited information that is available. At the moment it is impossible to say exactly how many entities exist. He advised that it was important to read Chapter 9 of the MFM Bill with Chapter 8 of the Systems Act. Chapter 8 deals with services and it is a massive business. The municipal budget is R65 billion and the big metros take up R45 billion. Only about 40 metros have more than a R200 million budget and only about 30 have a budget of more than R300 million.

How do municipalities deliver?
Two thirds of a municipal budget is a business activity that gets allocated to electricity, water & sanitation and garbage/waste. Revenue generated is based on consumption. Examples of the size of the budget - Electricity: Johannesburg R2.8 billion, Cape Town R1 billion, Tshwane R1.5 billion;
Water & Sanitation: Jhb R 2 bn, Cpt R 1 bn, Tshwane R 1 bn.
The question that arises is how should a municipality provide such services?

Other types of entities
Apart from entities that could deliver the services mentioned above, there are other types of
entities that include Subsidised Services such as bus service in Johannesburg and Durban and
possibly metro rail in the near future.

Non-core services include:
- Theatres I Arts I Culture (e.g. Jhb Civic Theatre)
- Convention Centre (Cpt)
- Property management (Dbn)
- Motor car license fees (agent for province)
- Zoo (Jhb)
- Local tourism (Nelson - Mandela)

Current problems
The current problems that are faced are that there are no specific cost centres for each business activity, there is a separation of revenue and service activities, no dedicated inputs (engineers, security), no provider-customer relationship, no targeting of the poor for basic services and no sense of what it costs to deliver, electricity, water, etc.

Roles and Relationships
The Municipality is the shareholder / investor and provides capital and appoints the Directors of the entity. At the same time the municipality is the client of the entity because it purchases services for citizens. The Municipality also has the responsibility of enforcing the service delivery agreement. An additional role of the Municipality is one of a regulator to set standards and tariffs.

Mr Momoniat suggested that today's discussions should be confined to solely owned entities. This will assist in understanding the situation when two municipalities jointly own an entity. This is much more complicated.

Mr Glaasen commented on another type of entity namely the Public Private Partnerships (PPP's). when one looks at the reasons to establish solely owned entities these could include, ring fencing the finances and run the entity along business principles. Along with this goes risks of less accountability, a possible divergence from municipal policy, a dissipation of the municipalities investment and incurring liabilities that the municipality must honour. He said that PPP's have all these risks and new ones like the a need for a good service agreement and the private partner is only interested in profit.

When should municipalities form an entity?
Mr Momoniat continued.
Municipalities should form entities for big services like electricity, water & sanitation, for the smaller services like garbage/waste, bus service and for the non-core services like Zoos, convention centres and tourism. The approach adopted is that local governments must decide for themselves when to form an entity. The problem is that municipalities have a very little capacity to oversee the
activities of the entity (especially in the area of contract management capacity, financial
accountability and the accountability arrangements). Mr Momoniat was of the opinion that small
municipalities do not have the necessary capacity. The question therefore is how enabling must the
legislation be.

Pros and Cons of Entities
The advantages of entities is that it can run as a separate activity, there is operational
independence and protection from daily political interference and company legislation has
good governance mechanisms.

The disadvantages are that there is poor governance capacity (this is true for national and provincials levels as well), Section 21 companies/trusts are opaque and the greater the number of entities, the more fragmented the accountability arrangements. In a situation where the lights go out, councillors are contacted and in these circumstances an important consideration is what the responsibility of the board should be.

Another area of consideration is that an entity, if run like a business, will be subject to tax issues that could pose a difficulty.

Municipal Systems Act

Chapter 8 of the Systems Act applies: Municipal Services are included under clauses 73 to
82. It provides for a wider approach on service delivery mechanisms. The definition of municipal
entity provides for ownership and control and is the same as in the PFMA and the MFM
Bill. The definition is worded differently in the two pieces of legislation but means the same thing.
Treasury will harmonise the definitions in the Systems Act and the MFM Bill.

MFM Bill
These are the relevant provisions in the MFM Bill: Chapter 9- section 46 establishment, s47 listing, s48 multi jurisdictional service districts, s49 financial duties, s50 service delivery agreements, s51 disposal of assets, s53 governing boards, s54 selection process, s55 fiduciary duties, s58 accounting authorities, s59 duties of authorities, s60 information, s61 delegations, etc.

Nature of entities
Entities can take the following form:
- Companies without subsidiaries
- Companies with subsidiaries
- Co-operatives
- Trusts
- Funds
- Other forms of co-operate entity
- Sole ownership and Joint ownership
- Special Purpose Vehicles and structured deals?

This list is not exhaustive; there are as many entities as a clever person can come up with.

Establishment Process
Through regulation the following issues will be covered. All these tasks will have to be carried out by the municipality - it should not be left to the entity.
- There is a need for a founding legal document or statement, setting objectives, purpose, ownership, type, etc
- There is a need for a budget, business plans and service delivery agreement
- There is a need for a staffing plan especially a plan in respect of the transfer of municipal staff.
- Implementation plan - preferred mechanisms and timetables

Roles and Responsibilities
The approach to the key players in the MFM Bill is as follows:
- The Municipal Manager is an independent advisor and monitor - giving a perspective to the board on what council is thinking.
- The Municipality is the Policy-maker
- The Governing Board is responsible for operational oversight and the obligations of service delivery agreements
- The CEO of the entity is responsible for implementation

Auditor-General (Chapter 10)
The municipality is accountable to Council in first instance (Clause 69).
These are issues that are not yet included in the chapter but will be:
- If the AG gets no satisfactory response from the council then the AG must report to the provincial legislature
- If still no satisfactory response, report to Parliament
- Creation of public accounts committee in council to facilitate hearings before going to Council
- There must be one auditor for entities and the municipality
- Accountability to all councils in joint ownership arrangement.

Many Issues to Consider
The Systems Act and the MFM bill are enabling to allow for innovation. The question is whether it is
too enabling given where our municipalities are. What needs to be considered is whether
more checks are needed along the following lines:
- Municipalities can only form an entity if it has certain capacity
(e.g. contract management capacity)
- Municipal can only form subsidiary with approval beyond municipality (provincial or national govt approval?)
- Municipality can only form a jointly owned entity with approval beyond municipality
- Should we differentiate between trading and other entities?
- Should we allow all entities to borrow?

Way Forward
- Allow current enabling approach in Systems and MFM Bill
- Allow regulations to determine specific governance arranges
- Specify (in Act or regulation) hoops to be jumped before establishment, borrowing etc
- Review approach in 5 years time
- Approach on other types of service delivery agreements: PPPs? - Must it be equally enabling or must there be more hoops.

Ms Taljaard wanted to know if the constitutional opinions would be considered after the Treasury has completed a redraft of the Bill.

Ms Hogan replied that the opinions are based on the current version of the Bill and it will be considered in that context. The Chair then asked Treasury to go through the Chapter.

Clause by clause briefing and deliberations
Part 1 - Establishment of municipal entities
Mr Momoniat said that clause 46 is standard. An entity can only be created for the delivery of a municipal service in the municipality or for an area which the municipality forms part.

Clause 47 provides that a list of all entities that exist must be provided. It is envisaged that the financial statements each year will have a list of all the existing entities in a municipality.

Clause 48 - there is a cross-referencing with chapter 8 of the Systems Act and makes the MFM Bill applicable to the board of a multi-jurisdictional municipal service district.

Clause 49 states that the municipality must exercise ownership control over the entity.

Clause 50 deals with service delivery agreements. A copy of the agreement must be made available. Mr Momoniat said that all reporting requirements would be sorted out. The manner in which the information is available will be clarified.

Clause 51 deals with the disposal of assets. If the asset provides a minimum essential service it cannot be disposed of. If the asset delivers any other service the process followed in the clause must be followed. The principle is that council has the final say.

Mr Glaasen added that large assets must go through the process on an asset by asset basis but smaller assets can be dealt with on a list basis.

Ms Lobe (ANC) commented that the similarity of the provisions in chapter 8 of the Systems Act could lead to confusion and asked that there only be one piece of legislation that deals with the same thing.

Ms Taljaard commented that clause 46(1)(b) and clause 50 are too prescriptive, secondly, she wanted clarity on what was meant by regulator power' that cannot be transferred to the entity.

Mr Momoniat replied that what is probably meant is that the legislative powers of the council cannot be transferred to the entity. He added that the constitution does not allow such a transfer of responsibility.

Ms Hogan said that the clause is not needed if it is provided for in the Constitution.

Mr Momoniat had no problem with deleting it.

Mr Govender (JHB Municipality) said that he was not clear what was meant by clause 46(1)(a) where is said that service must be delivered in an area of which the municipality forms part.

Ms Glaasen replied that the intention is that if a service is provided in three municipalities, then a service is provided across the boundary but also in that municipality.

Mr Govender commented on clause 51 and said that if an entity wants to sell something then the board takes the decision. The municipality as the shareholder gives approval. Only the council can decide to sell the asset. This is an example of the process in Johannesburg.

Ms Hogan asked what was his point.

He clarified by saying that the procedure is in terms of the Company Act.

Mr Smith said that clause 51 is a blanket prohibition on the transfer of an asset if it delivers a minimum essential service. He asked if this was intended. He noted that there was no definition of a municipal service.

Mr Dorfling (SALGA) commented that the chapter does not provide for the disestablishing of an entity.

Mr Glaasen replied that he had not thought of a situation where the asset could be transferred to another entity or back to the municipality and said that it would have to be provided for. The point on disestablishment was also a good one and will be looked at.

Ms Lobe pointed out that section 81(2)(e) says how assets are dealt with a service delivery agreement has expired.

Ms Hogan said that the provision is very specific and Treasury will have to reword the clause to cater for the comments made.

Mr Mnguni (ANC) asked who has the overriding decision on the sale of an asset.

Mr Glaasen replied that it would have to be the council because they are responsible for providing the service.

Ms Hogan picked up on Mr Smith's previous comment and needed clarity on the blanket prohibition. If the asset was old and no longer efficiently delivering the essential service then surely it should be allowed to be sold.

Mr Glaasen replied that if the asset can no longer provide the essential service, then it is no longer an asset for the purpose of clause 51(1). If the clause is not clear then it probably needs to be made clearer.

Ms Hogan summarised by saying that clause 50(1) needs to be looked at as well as the dissolution of an entity.

Ms Taljaard commented that clause 50(1) provides that regulation can prescribe what the service delivery agreement must contain and said that the dissolution of an entity could be dealt with here by providing that the agreement must provide for what happens to the assets upon the dissolution of the

Ms Hogan again picking up on Mr Smith's comment asked the broad question about what is the definition of a municipal service. An entity can only be formed if it will provide a municipal service so it was important to know what the definition was.

Mr Carrim (ANC) said that it was the job of local government to apply its mind on the issue and that it was not relevant to the discussion now. He advised that the Local Government Amendment Bill will be before his Committee soon and it could be dealt with in there. He added that there were two issues. The first was what was a 'basic service' and the other was what was a 'municipal service'. For now there was an indirect decision that the constitution will suffice to determine what is a 'municipal service'.

Mr Momoniat agreed with Mr Carrim.

Ms Hogan also agreed but said that it should be noted that the fact that there is no definition of 'municipal service' is a serious omission and added that it should be dealt with in the Local Government Amendment Bill.

Mr Smith referred to clause 50 that allows the Minister of Finance to prescribe what should be included in the service delivery agreements. He pointed out that section 94 of the Systems Act says that the Minister for Provincial and Local Government must consult with the Minister of Finance in respect of financial matters. He was concerned that there should be more co-ordination because one would not want the situation where two ministers make regulations on the same issues.

Mr Momoniat said that this was an important issue. We do not want one Minister to do one thing and another Minister does a different thing. This will also be looked at when Treasury looks at the responsibility arrangements.

Ms Hogan said that in the financial services industry the regulators have a memorandum of understanding and wondered if something like this can be legislated. i.e. make it compulsory for all the role players to come to an agreement on who will be responsible for what.

Mr Smith commented that the overlap between the different pieces of legislation is the important issue. The Financial issues must be dealt with in the MFM Bill and the establishment of entities etc. must be dealt with in the local government legislation.

Mr Momoniat agreed that the overlaps must be minimised. He said that regulations do go through cabinet. He commented that co-ordination is important but not only at executive and departmental levels but also at committee level because often one committee does not know what the other is doing. He added that the committees are working together very well on the MFM Bill.

Part 2 - Governing Bodies or Boards of Municipal Entities
Mr Momoniat said that these clauses are not financial in nature but deal with what is expected of the board. Ideally this should be in the Systems Act.

Clause 52 states that the entity must have a governing board. Clause 53 provides for membership of the boards. Clause 53(3) and (4) deals with councillors. Mr Momoniat informed the committee that they should decide if councillors should serve on the boards or not.

Clause 54 is the process of selecting a board and is straightforward.

Clause 55 deals with the fiduciary duties of board members and is from the Company Act. Mr Momoniat said that these provisions would be brought into the PFMA as well.

Clause 56 deals with compensation for serving on a board. If it is decided that councillors are not to be on the board then sub (2) and (3) can be deleted.

Clause 57 sates that meetings of the board are open to the public unless there is a good reason to close it.

Ms Taljaard commented that councillors should not serve on the board.

Mr Smith agreed but said that the clause provides that councillors cannot serve on the board unless there are exceptional circumstances for them to do so. There was in fact no prohibition because each time exceptional circumstances will be pleaded.

Mr Govender advised that in Johannesburg councillors are not allowed to serve on boards. The municipality is invited as a shareholder to observe the meetings.

Mr Ngubeni (ANC) was worried that prohibiting councillors to serve on the board would be too prescriptive because the municipality might see the need to have representation on the board.

Mr Ralaane (ANC) asked if National and Provincial Legislature members were serving on other boards.

Ms Hogan advised that she served on the board of the Robben Island Council but did not get paid for it.

Mr Momoniat said that Monument Councils are different from entities like Transnet where there would be no members of legislatures on the board.

Mr Smith said that if councilors were on the board then there would be a deviation from the Code of Conduct in the Systems Act.

Ms Taljaard commented that Municipal Managers could serve as the administrative linkage between the board and the entity. There should be no political linkage.

Ms Hogan expressed concern about councilors on the board because what role do they serve on the board. If the council is there to ensure that the entity is performing its function then what is the job of the governing body. If they are there to monitor then there are other mechanisms available for this like the example in Johannesburg. She added if the councilors were on the board then there would be a confusion of the accountability arrangements.

Mr Nkosi did not agree and felt that the councilor could add value to the board. He also said that the agreements would be difficult to monitor.

Ms Hogan replied that that was exactly the point made by Mr Momoniat that municipalities should have the capacity to mange the contracts.

Mr Ralaane felt that the issue should be discussed further in study groups.

Mr Govender said that if the councilor were on the board then the councilor would have a fiduciary duty to that board. This will lead to a conflict of interest.

Ms Taljaard felt that the chair of the board and the municipal manager should work closely together. At the end of the day, it is the role of the municipal manger to provide the council with advice on the performance of the municipal entity.

Ms Hogan said that the conflict of interest is the biggest problem.

Mr Smith commented that it seems that the key argument for having councilors on the board is so that they can observe. He also felt that other mechanisms exist for monitoring and therefore the argument did not justify having councilors on the board.

Mr Momoniat said that conflict of interest also applied to officials. Excluding councilors had nothing to do with corruption it was about blurring the accountability arrangements. He added that in terns of clause 57 the municipality could send anyone at any time to observe the board meetings. A council should also ask for regular reports from the and if the council does not do this then there is a problem with the board. If the board does not report and the council is happy then the municipality as a shareholder can replace the board.

Ms Hogan concluded that all the arguments had been heard and the members should think about it.

Ms Taljaard commented that she had nothing to think about because she was convinced that councilors should not serve on the board.

Mr Smith referred to clause 53(2) that states that a member of the board must have the necessary skills and expertise in the services to be rendered. He said that the last reference to 'in the services to be rendered' was unnecessary. Ms Hogan agreed.

Mr Momoniat advised that the clause would be amended to cater for the comments.

Mr Ngubeni felt that a member of the board should have knowledge about the community that will be receiving the service.

Ms Hogan replied that 'expertise' was very broad and she could not imagine that a board would not have a member with knowledge of the local and community situation.

Mr Ngubeni followed up by saying that if the clause is interpreted in that way it would be fine but he was still worried.

Ma Hogan asked Treasury to draft a clause to reflect that a member on the board must have local expertise.

Mr Molekedi (SALGA) suggested that instead of referring to individual members as is currently being done, a clause should rather say that the board must have persons with the following skills, and then list those skills.

Mr Momoniat had in his briefing on entities said that there would be tax consequences that would have to be anticipated and dealt with. Mr Dorfling asked if it was possible if the legislation could contain provisions that will assist municipalities in that regard.

Ms Hogan replied that it would be impossible to legislate how municipalities should structure entities to minimise their tax liability.

Mr Bhayat (Jhb Municipality) advised that they hire tax consultants and then choose the most tax efficient route. As long as it does not amount to tax evasion, it is fine.

Ms Hogan, in reply to Ms Taljaard, confirmed that clause 53(2) would be revisited.

Mr Govender submitted that clause 57 is not needed. Members of the public do not need to sit in on board meetings because at the council level when the entity presents the business plan the public is involved.

Ms Hogan replied that there would have to be good reasons why the board meetings will be closed to the public but this can be discussed later. She advised that at the next meeting on Friday 24 May 2002 chapter 11 dealing with financial emergencies would be looked at because Mr Mohammed Baba who is familiar with intervention will be available.

The meeting was adjourned.


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