Municipal Finance Management Bill: deliberations on Chapter 11

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Finance Standing Committee

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

Treasury briefed the Committee on the Financial Emergency provisions. The Committee did not deliberate on the approach in the Bill because it was agreed that an alternative one is required. The Bill does not solve the problem in that the Council is not obliged to adopt any recovery plan. An alternative approach favoured by Treasury formed the basis of the discussion. The principle of that approach is that an early warning system must alert the council, province and national government that there might be a problem. Once a potential problem is identified, it is the duty of the Council to Act. If the Council fails to act, then either the MEC for Local Government must impose the recovery plan and the budget. If the province fails to act, a role for national government needs to be examined. The members were in agreement with this principle. The committee felt that the approach is laborious as in certain situations a quicker response might be required. Treasury will come back to the committee with a draft framework that captures these principles.

Meeting report

Chapter 11 - Financial Emergencies: Briefing by Treasury
Mr Momoniat said that when everything is working well then there are three equal spheres of government with no interference. The normal role of the provinces and the national spheres towards local government is one of support, capacity building and monitoring. Provinces have power to intervene but a host of other national government departments also have an interest in the smooth running of local government.

If there is a failure, provinces can intervene in terms of Section 139 of the Constitution. The failure only relates to executive failures. This is the underlying reason why an amendment to Section 139 is needed. National Treasury in terms of Section 216 of the Constitution can withhold funds but this is only an indirect form of intervention.

Mr Momoniat said that when the problem is still small, it needs to be dealt with, that is, deal with the problem when it occurs. What needs to be figured out is at what point the municipal manager or mayor reports to the municipal council when there is a material problem. When the problem is reported the council must act and if the council fails to act then the province must act. He stressed that when an intervention does take place, it is not a signal that there is a move away from support and capacity building. Tools like the Division of Revenue Bill allocates funds for exactly those purposes. He accepted that support and capacity building was very important but monitoring was just as important. He submitted that it would be gross negligence if the council, province or national fails to monitor, pick up the problem early and correct it.

Intervention should be the last resort. When intervention does take place then the early steps of support, capacity building and monitoring have failed. It is therefore important that the legislation caters for the worst case scenario where nobody acts to remedy a problem. Mr Momoniat advised that it does happen and still is happening that nobody acts to solve problems. The question therefore is who acts and how do they act. Do we have to compel councils and provinces act. The bottom line is if there is no action, the problem just becomes worse.

Financial emergencies in the Bill refer to really serious and rare cases. He advised that over the past 5 years only 4 municipalities would have fallen into the category envisaged in the Bill.

Another question that needs to be considered is the balance between the autonomy of the council and the needs of the community. He asked if they wanted to take the view that council autonomy is so important that when the community is in a desperate state, nobody should intervene.

A potential moral hazard will exist if loans are guaranteed because the private sector will finance recklessly because they know that government will not let a city such as Johannesburg go down. Equity is provided up-front with allocations. Once allocations are received ,it is up to the municipality to act responsibly. If there is a clear financial emergency mechanism, the risk profile of the municipality reduces and they can borrow at a cheaper rate. When the bigger municipalities are able to borrow - then there will be more available to the poorer municipalities through the division of revenue. The threat of a strong intervention will also be a motivation for the council to solve its own problems sooner.

Problems that do exist are that there is non-payment of big suppliers like Eskom and the water boards. It is easy not to pay these public sector providers because they take longer to act. The longer they take to act, the bigger the problem gets. Mr Momoniat said that it would be better if these entities behaved like the private sector and recovered what is due to them as soon as possible. Municipalities also skip their statutory payments such as what is owed to SARS and the Auditor-General.
A serious problem is that small supplier are not paid on time. If small businesses do not get paid within 30 days, there is a serious risk that they can go bankrupt. This he submitted was contrary to government's policy of promoting small business. Further municipalities fail to collect the budgeted revenue. All that treasury wants is that they must collect what they say they are going to collect in the budget. It is not about wanting the municipality to collect more than they should. If a municipality has no revenue base then this is dealt with in the equitable share. If the problem is one of financial management then this can be fixed.

De Aar is an example where the court seized the assets of the municipality and the creditors were entitled to get their money as soon as it came into the municipal accounts. These are the kind of legal problems that municipalities face when they are in serious trouble.

The lessons from the eight strong interventions that have been carried out is that the problem developed over time. Strong intervention means that the functions of the council are taken over. Section 139 interventions are rarely effective because they happen too late, there is a lot of politics involved and the intervention is not very decisive. Not all problems were dealt with in terms of Section 139. In Johannesburg and Welkom the municipality took ownership of the problems and started to fix them. Sometimes using intervention as a bluff can be very effective.

A problem emerges when the problems are denied. In the case of Johannesburg the problem was stabilised, but there were many problem areas - before the municipal boundaries were redrawn - that got swallowed up by bigger municipalities. Time will tell what will happen in these areas.

There are three operational level categories for municipalities. Mr Momoniat advised that these figures were Treasury guestimates:

- 75% of municipalities are operating normally;
- 24.5% should be placed under a financial watch due to payments to suppliers being slow, payments of salaries and benefits are late and the revenue collection is not keeping pace with spending;
- only 0.5% fall into the category that can be classified as a financial emergency in that there is a default on loans or a service delivery breakdown.

Treasury has two objectives when approaching Chapter 11. These are:
- Credibility: The financial sector should see municipalities as reasonable credit risks and therefore make credit available for infrastructure. To achieve this credibility a process is needed that is predictable and prompt. Lenders will want to know that they will get their money back and in a short period of time. The Recovery plan must be seen as fair, i.e. there must be a fair and realistic prospect of getting your money back. Lastly there must be the implementation of revenue and expenditure control where necessary.
- Functionality: The Municipality must receive support to resolve financial problems to ensure that service delivery can continue. While the municipality restructures there must be protection from creditors and where absolutely necessary debt must be written off.

Taking these objectives into account Mr Momoniat highlighted the possible options:

Option 1 is reflected in the Bill. No constitutional amendment is needed. The lender, MEC or the municipality can ask the court to declare a financial emergency. A recovery plan must then be developed. The advantage of this option is that a constitutional amendment is not needed. It was submitted that this option will not work because the Municipal Finical Emergency Authority (MFEA) cannot impose the plan as the Council has a choice as to whether to adopt it.

Option 2 would require and amendment to Section 229A of the Constitution. The focus of this option is on a financial emergency and a lesser focus on initial monitoring to prevent it from arising in the first place. The MFEA would be able to impose the recovery plan and budget if the council does not want to.

Option 3 is the preferred option of Treasury. A Section 139 amendment would be required. There is a focus on financial watch to identify problems early, protect municipalities from creditors who want to rush to court, the MEC is compelled to act if the council fails to. If the MEC fails to act then the Minister must be given some kind of power to compel action. If the law compelled the MEC to act, a creditor could ask the court to order the MEC to act because he has that duty. The Minister's power would be based on this principle.

Once there is no service delivery as a result of a financial emergency or if there is an actual default to a lender then this also has to be dealt with under this option. Mr Momoniat reiterated that very few cases would fall into the financial emergency category.

If the municipality functions normally, the normal support and capacity building will be provided. Reporting and monitoring will continue. If the municipality needs to be more closely watched (financial watch), the council must be engaged with, there must be a diagnosis and treatment of the problems, technical support must be provided, consultations should take place and the MEC can give instructions. If the province fails to play its role, the Minister must step in. If the municipality is in a financial emergency then there must be a mandatory recovery plan and debts should be restructured without the lenders consent.

Financial Watch must be defined in the Bill. The Bill will have to require technical support, consultations and provide for the MEC to issues instructions. The Ministerial power to act if the province fails, should also be provided for.

If a financial emergency arises the Bill must require the MEC or Minister to impose the recovery plan if the council does not.

Mr Momoniat concluded by saying that a good Chapter 11 will help avoid a crisis, will help deal effectively with any crisis that occurs, will protect service delivery and will provide the availability of reasonably priced credit. He asked the Committee to discuss the matter in as much detail as possible.

Ms Hogan asked if the committee agreed that the executive and legislative authority must not be taken away from the municipality. She asked if they agreed that Option 1 was not an option because the whole process is undertaken and at the end of the day the council can decide not to adopt the recovery plan and the budget . She asked if the members could agree that the committee looks at the revised option to see if it is preferred. She referred to clause 100(2) and said that it leads to a dead end if the council can decide to implement the plan or not. Once the council refuses the plan then "we are back at the beginning".

Mr Felix (SALGA) commented that chapter 11 needs a number of definitions and the contradictions need to be openly discussed.

Ms Hogan clarified that she was proposing that chapter 11 not be discussed. Rather that the committee has a conceptual discussion and the drafters then bring new clauses, based on the discussion, for further consideration.

Mr Nkosi (SALGA) commented that financial emergency should be seen as a support mechanism to municipalities and not a take-over of a municipality.

The members agreed that the conceptual framework of Option 3 be discussed.

Ms Hogan commented that Option 3 was firstly about monitoring to see if there are any problems developing. It was a pre-emptive mechanism. She said that the MEC for local government in particular would play a monitoring role. She asked if problems like workers being paid late or the water board being paid late should arise, would the MEC act?

Mr Momoniat replied that the MEC could issue a directive in term of Section 139. He added that Section 139 will be extended to cover other failures like the failure to deliver services.

Ms Hogan commented that the MEC issues the instructions and it is clear that in terms of the Constitution the MEC can engage with the council in this way. The next step would be the corrective measures. At this stage the council will not have to prove any of this.

Mr Momoniat said that this was correct. At that moment there should be a very co-operative environment.

Mr Carrim (ANC) commented that the discussion is making the option more clear but he said that Treasury's point of view is correct but the full picture is not being made available.

Ms Hogan agreed but asked that the current process be continued with to understand Option 3 and more discussion can take place later. She asked what happens when the problems are not solved.

Mr Momoniat replied that it depends on the nature of the problem. There might be the need to go to court to get protection from creditors if there is a fundamental financial problem.

Ms Hogan commented that there was not yet a financial emergency but just symptoms of problems. For this reason it was important to define financial emergency.

Mr Momoniat replied that a financial emergency is an actual default to the lender or a service delivery collapse because there is no money and no arrangements can be made.

Ms Hogan said that in other words the municipality is dysfunctional. She added that a good definition of what triggers a financial emergency is needed.

Mr Momoniat said that when there is a default, a creditor will go to court. What is not wanted is a whole lot of creditors running to court. A mechanism is needed to say that nobody is going to get paid. The recovery plan must take the hard decisions to write off debts and restructure the payments. This affects the rights of creditors and therefore a legal process is needed.

Ms Hogan commented that there might be problems that cannot be solved without a financial emergency being declared. She said that in this situation the council or the MEC could go to court to have a financial emergency declared.

Mr Ngubeni (ANC) asked if the issue of political problems is catered for if these cause the problems in the municipality.

Mr Carrim (Chairperson of the Portfolio Committee on Provincial & Local Government) followed up and said that problems needed to be looked at comprehensively. He noted that Mr Bhabha (Chairperson of the Select Committee on Local Government with experience in interventions) had been unable to attend this meeting. However the input by an MEC would be able to shed light on the practical problems. The MEC had said that many of the interventions were political in nature. This cannot be addressed in the Bill alone so the question is what needs to be done. In Mooi River 40% of the township population was employed by one factory and when it closed down, the municipality collapsed. His point was that there are social and economic factors that could also lead to problems. He added that he hoped that Option 3 will be discussed with SALGA and that the constitutional amendments are also brought to the Committee so that the full picture is provided.

Ms Hogan said that for now the Committee was still looking at how Option 3 worked. She asked what happens when a financial emergency is anticipated.

Mr Momoniat replied that if the council itself realises that it cannot cope, the High Court can be approached for a financial emergency to be declared. The MEC or any creditor could also approach the court. It is a mechanism to buy time to resolve the problems and take the steps that are necessary for the municipality to begin to operate properly.

Mr Glasser added that if the municipality anticipates a problem and approaches the court, a hearing will be held with all the relevant role players being notified. The court will determine if the criteria for a financial emergency exists. If the MEC approaches the court, he will appoint a person to develop a plan with the council on how to face the problems. Writing off debt and reducing luxury expenditure will be the kinds of decisions that will have to be made. The plan and budget is placed before council who can adopt it or not. If it is not adopted, then the MEC can adopt it. The MEC is not determining the content of the budget but will say that expenditure will have to be reduced. It will then be up to the council to decide on where to reduce expenditure. The implementation process will follow and this can tale a long time.

Mr Momoniat added that the MEC will be able to impose the recovery plan and the budget. The constitutional amendment will cater for this.

Ms Hogan asked what would be the role of the Minister.

Mr Momoniat replied that the Minister should be able to compel intervention even where the MEC does not act. The exact details of role of the national sphere is still being discussed.

Ms Mabe (ANC) agreed that the Minister should be able to force the MEC to act because local government should not collapse because nobody wants to intervene.

Ms Mahlangu (ANC, NCOP) commented that it was wrong to assume that the MEC will act on time because it was the experience of the NCOP that often the MEC does not act in time. She added that the role of the NCOP in the process is not mentioned in the Bill and felt that the NCOP role should be clarified.

Ms Hogan agreed and said that a mechanism must be conceived where the MEC for local government does intervene. Not just at the point of a financial emergency but much earlier than that. She added that the question about the role of the NCOP is an important one. The role of the provincial legislature should also be considered in this regard.

Ms Lobe felt that the process as explained seemed wide and laborious. The time that passed before the recovery plan is implemented is very long. Overall the member was satisfied with Option 3 but felt it should take into account other issues that could lead to problems, not just financial matters.

Mr Hunter (Senior Manager - City of Johannesburg) submitted that the provincial departments do not have the capacity to manage an intervention. They will not have the capacity in the next ten years. Because the Constitution requires that the province performs this function he submitted that there was a flaw in the Constitution. He agreed that for some municipalities there cannot be a long drawn out process. If there are serious problems in a big metro then there are national implications. Using the example of the City of Johannesburg, he said that there were problems that the council denied existed. Only when the city started defaulting, did it face the problem and correct it. It was not the province who picked up the potential problem, national government picked up the problem. He preferred that national government intervene because it knows what it is doing. Provinces will just look at indicators but have no analytical understanding to interpret the indicators. He submitted if the Constitution is the problem, then it should be changed so that problems can be effectively dealt with.

He continued and said that if there is non-acknowledgement of the problem then the solution must be imposed. If the plan and the budget is imposed then one cannot rely on the existing council or managers to implement it. If there is resistance there might be a need for new senior managers.

He concluded by saying that he was worried about an extended process because some municipalities could not afford it.

Ms Hogan replied that Treasury had said that they would be looking at the 30 big metropolitan councils.

Mr Grobler (DP) also felt that intervention is sometimes too late and action was needed sooner.

Ms Hogan commented that there is a feeling amongst the members that the process is laborious and maybe something stronger is needed. She also said that the role of the provincial treasury needs to be looked at and more specifically the co-operation between the provincial treasury and the MEC for local government. Ms Hogan felt that the provincial treasury is well placed to perform a monitoring role.

Ms Mabe felt that there should be a mechanism for the municipality to go straight to the national government for assistance if things are out of control.

Mr Carrim said that he did not have enough time to respond fully to Mr Hunter's comments. He said that when the constitutional amendments were discussed last year, the view that national government should not interfere had minor support. The main objection was the extent of the powers given to national government. The second problem was how is national and provincial government going to interfere at the same time. He said that the Department of Provincial & Local Government was committed to capacity building and he submitted that the provinces should be strengthened and not excluded. He added that politics and democracy underpin intervention and a proper debate is needed about intergovernmental relations.

Ms Hogan said that it was useful hearing these views and asked if Treasury was now ready to start formulating Option 3. To which, Mr Momoniat said it was.

Ms Hogan advised that she had to leave and asked Ms Mahlangu to chair the meeting.

Mr Momoniat responded to the comments. He said that Treasury is not coming to the committee with all the solutions. He agreed that the discussion was useful and that Treasury was on the right track.
There were many reasons why municipalities get into trouble and therefore a monitoring mechanism is needed that is not just focussed on financial matters. The current problem is that a potential problem is identified but there is no effective response. Sometimes there is no response at all.
Even if the problem is not a financial one it becomes one because of the delayed response and therefore an effective intervention mechanism is needed. The council is the first line that must face the problem. If the council fails to act, the MEC must act. The legislation is not trying to spell out a whole range of non-financial problems because it is impossible to legislate for all the indicators.
Mr Momoniat did not want to comment on provincial capacity but said that if the MFEA is set up, the province can use this body if there is a lack of capacity. At the end of the day a mechanism that is adopted must give an investor confidence so that it will be easier and cheaper for municipalities to borrow. The role of the NCOP is important and must be looked at. He advised that Treasury will get back to the committee with a more coherent format. The format will be guided by today's discussion.

Mr Carrim said that he wanted to know about the nature of the intervention for non-financial emergencies and wanted clarity on the role of the courts. He felt that Option 3 was similar to the approach in the Municipal Systems Act. Overall he felt that Option 3 was a sensible approach.

Mr Momoniat replied that there is no specific intervention in the Systems Act. On the role of the courts, he said that the legislation was not taking away any existing rights that the court may have.

Ms Mahlangu concluded that discussion on Option 3 would continue once the option is properly formulated and adjourned the meeting.

Appendix 1
Summary of interventions:
troubles went on for 5 years, (Up to the December 2000 elections. In the period since, disruptions and political troubles have continued) with municipal workers on strike, payment boycotts, political in-fighting, lawsuits, and near-complete service breakdown. Because of the lack of clarity about legal situation, a kind of gridlock developed, and the administrators appointed by the MEC could not act effectively. The publicly reported actions of the council and the mayor undermined public confidence not only in Butterworth, but also in municipalities generally. It is not clear that the Dec 2000 elections changed anything for the better. This situation clearly would have fallen within the scope of Chapter 11.

Noupoort is another example of a failure with both legislative and executive dimensions. Chaos resulted from both council and administrative problems. Three of seven Councillors had resigned and a fourth was in ill health and unable to attend meetings. A quorum could not be formed and regular Council meetings were not held. Municipal finances were a shambles. Wages and benefits could not be paid to municipal staff for a period. Various legal actions were started and others threatened. The Receiver of Revenue had seized money from the municipal bank accounts to cover VAT arrears. One factor in Noupoort's problems was an unemployment rate of 65%. An Administrator was ultimately brought in, and the municipality seems to have been on the path to recovery.

Ogies suffered chronic financial problems and service delivery failures over several years. As with several other municipalities in these case studies, provincial intervention was slow, and seems never to have been very effective. There was considerable confusion and imprecision about the financial situation. Three short-term approaches (two different municipal support teams and an Administrator) seem to have done little to resolve the situation. As in some other municipalities, there was a period when the Council stopped meeting for several months. Given the size of its debts in relation to its revenues, Ogies would have been a possible case for the write-off provisions of Chapter 11. (The financial data is not sufficiently clear to determine if the Eskom debt was capable of ever being
repaid without major restructuring.)

Stilfontein involved a chronic and unsustainable imbalance between income and expenditures. As a result, basic services were interrupted and infrastructure was allowed to deteriorate. The provincial intervention did not result in an increase in revenue collection, but did force a review of management practices (e.g. using two officials virtually full time to drive councillors to meetings) that clearly needed review. As in Wedela and Warrenton, strong and appropriate steps were ultimately taken, but the potential for Chapter 11 might have prompted an earlier and firmer provincial response.

Tweeling suffered severe problems over many years. For almost two years, the Council did not meet, apparently because of personality and political problems. A community payment boycott and inadequately staffed treasury operations both contributed to serious revenue shortfalls. This in turn caused basic services to fail, including refuse collection. Once the province finally intervened, the situation seems to have improved. The MEC's key directive in terms of Section 139, that the council must hold monthly meetings, may have gone further than constitutionally permissible. This suggests that the "executive" limitation in Section 139 may be unwise.

Viljoenskroon experienced chronic financial problems. These were coupled with low staff morale, which led to deterioration in service delivery. The community lost trust in the Council, apparently because of poor communication. This led to allegations of corruption, of abuse of Council assets and of misappropriation of Council monies. Against this background, non-payment for services became a growing problem. Provincial loans, repeated instructions, and management support teams did little to improve the situation. Ultimately, the Province appointed an administrator. It is not known whether this helped.

Warrenton involved chronic financial mismanagement, with expenditures unsustainably exceeding revenues over several years. At one point the municipality stopped paying staff salaries and benefits. Water and electric service was shut off for non-payment, and lawsuits were instituted. The provincial government appointed short term consultants, but the situation continued to deteriorate. The province also made repeated "loans" and provided other financial assistance, but this did not help. It appears that the Council performed its legislative functions adequately - it was able to approve a budget and other financial policies. The problem arose with the implementation of these policies, and the failure of Council to recognise the problems and act promptly. Ultimately, the Province's appointment of an Administrator was largely effective.

Wedela was a municipality with serious external economic stress. The gold mines around which it grew up were in decline, and the town's main employer had shut down. Council met regularly and approved realistic budgets. All parties seem to have viewed the amalgamation with another municipality as the ultimate solution. The procedure followed to intervene in Wedela was clumsy and dragged on, but seems to have been largely effective. Once the situation began to improve, Chapter 11 would not have been necessary, but the potential for Chapter 11 may have prompted an earlier and more aggressive response by the Province.


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