Municipal Finance Management Bill: deliberations on chapters 9 & 10

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Finance Standing Committee

27 May 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE
28 May 2002
MUNICIPAL FINANCE MANAGEMENT BILL: DELIBERATIONS ON CHAPTERS 9 & 10

Chairperson:
Ms Hogan (ANC)

Relevant Documents
Municipal Finance Management Bill [B1 - 2002]
Summary of Submissions on the Municipal Finance Management Bill

SUMMARY
The committee continued with their deliberations on municipal entities, concluding Part three, four and five of Chapter 9. Chapter 10 was started but not concluded. A principle issue was decided - the committee agreed that joint ownership of municipal entities should be allowed but the accountability arrangements must be sorted out. Part One of Chapter 10 will be redrafted to give effect to this principle and to give the provisions more clarity as a whole.

MINUTES
Chapter 9 - Municipal Entities
Part 3: Accounting Authorities
Mr Momoniat said that Part 3 was similar to the responsibilities of the accounting officer and so Treasury will take the discussions on that section into consideration.

Clause 58(1) states that a municipality must have an accounting authority. In terms of sub (2) if the municipality has a CEO that person is the accounting authority. If there is no CEO then the board
is the accounting authority. Sub clause (5) deals with joint ownership and Mr Momoniat asked that only entities owned by a municipality be discussed now. The discussions on subsidiaries should also be held over. It was Mr Momoniat's personal view that subsidiaries should not be allowed.

He said that clause 59 and 60 was not much different from what is found in clause 35 and added that a provision dealing with the fiduciary duties of the accounting authority is not in the Bill and will have to be included.

Mr Momoniat raised the question about how independent the board should be. If there are good service delivery agreements then the outputs will be set. Another question is how much fiscal powers should the council have. Should the council approve the budget of the entity? The council could change to the budget to the extent that it effects the service delivery agreement. Mr Momoniat raised these questions generally to point out the hard issues that need to be faced. He said that these issues get harder if the service agreements are bad.

Mr Smith (IFP) said that clause 58(3)(a) should fall away and become 58(2)(c) as it dealt with the same issue. He also said that clause 59(g) was confusing. As it stands, if the accounting authority is the board then the clause means that the board must compile the budget and submit it to themselves.

Mr Momoniat replied that what was meant is that the CEO must compile the budget and submit it to the board.

Mr Govender (City of Johannesburg) commented that it must be the municipality and not the accounting authority that assigns who the accounting authority is in terms of clause 58(3)

Ms Hogan agreed and Treasury will change the provision accordingly.

Ms Hogan referred to clause 59(1)(c)(i) that states that the accounting authority must take appropriate steps collect revenue due to the entity. She wanted clarity on this clause.

Mr Govender added that Johannesburg embark on shared services where separate bodies bills and collects the revenue. In the process of establishing utilities, they wanted to do their own collecting and Mr Govender was concerned that if the clause says that the accounting authority must collect, it will be used by the entities to say that they want to collect the revenue.

Mr Glasser replied that the idea is that entities are responsible for collection. He added that the wording would be clarified to allow for shared agreements.

Mr Smith (IFP) asked if the entity has the power to write arrears. He was asking the question against the background of the municipality deciding to write of arrears.

Mr Momoniat replied that the service delivery agreement should deal with the issues of policy up front.

Councillor Van Ronge said that if the council decided to write off debt entities could decide to continue collecting anyway because they are interested in the bottom line. For this reason he felt that political representation is needed on the board.

Ms Hogan reiterated Mr Momoniat's point that the service delivery agreement should deal with such issues up front.

Mr Govender agreed that the City of Johannesburg enters into agreements that reflect the policies.

Mr Carrim commented that the committee is creating unnecessary problems. It was dealt with in the Systems Act ten times over. He said that 'affective and appropriate steps' would allow for shared agreements.

Ms Hogan agreed that the clause does allow for the flexibility to enter agreements.

Part 4: Other officials of municipal entities
Mr Momoniat said that Clause 61 allows that accounting authority to delegate powers and duties to officials of the entity. He felt that the clause was too wide and suggested that the delegation be restricted to the CEO. The CEO could thereafter delegate downwards.

Clause 62 is the usual clause on the duties of all other officials of the entity - in respect of compliance with this Bill. He added that the clause should actually apply to management.

Ms Hogan confirmed that section 61 would be reworded as per Mr Momoniat's input.

Part 5: Business Plans expenditure and borrowing.

Clause 63 covers what happens annually in respect of the annual plan and states what it must conform to.

Clause 64 states that expenditure must be in accordance with a business plan.

In respect of clause 65 Mr Momoniat submitted that entities should not be allowed to borrow. This was his personal view. On the other hand he said that economically it made sense for entities to borrow because they collect revenue. If they do borrow the council must exercise oversight to prevent the liabilities from growing. He added that 5-6 municipalities will benefit from an entity being able to borrow, but at the same time it was these big municipalities that have massive entities that pose huge potential risks. He recognised that benefits but said that there could be big problems. Currently the clause allows entities to borrow if it is in accordance with the business plan.

Councillor Von Ronge suggested that clause 64(2) should be amended. Currently it states that the accounting authority must submit the business plan of the entity at least six months before the start of the financial year. He wanted the time for submission to be determined by the council.

Mr Momoniat said that this was fine.

Mr Govender commented that the business plans are projections and the practice in Johannesburg is that in the service delivery agreement deviations are allowed but it must be brought to council.

Mr Smith was not sure whose budget came first, the municipalities or the entities.

Mr Momoniat replied that the budget was a dynamic process. A draft is first submitted to the municipality but clause 63 refers to the final budget.

Councillor Von Ronge suggested that clause 63(1) should state that an entity must adopt an annual and multi-year plan. As it stands now they can adopt either. He was also concerned that there is no mention of the relationship between the budget and the IDP.

Treasury agreed to this amendment. Mr Momoniat added that if the municipality set up an entity and a new council came to power at a later date, there might not be the same kind of commitment to the entity. The same is true for the IDP. He added that one could plan far ahead but you could not legislate the politics. He identified this as a risk to entities and therefore a great degree of consensus is needed when entities are established.

Ms Hogan asked the members if they were happy with the financial arrangements in the Bill and they were. Ms Hogan asked Treasury to come up with a regularisation of the relationship between the budget and the IDP and to attend to the amendment to clause 63(1).

Chapter 10 - Financial reporting and auditing
Part 1: Annual financial statements
Mr Momoniat advised that there would be one change in that the same auditor must be used to for all the entities and the municipality.

Ms Hogan asked if the Auditor-General (AG) does not do the audit.

Mr Momoniat replied that the AG does not do the audit directly. At the moment the Bill is written in a way that allows for different auditors. Treasury wants to delete 82(1)(b).

Ms Hogan said that Treasury should speak to the AG about the language that must be used to specify that the same auditor must be used. She added that if 82(1)(b) is deleted then sub (2) and (3) must also be deleted.

Mr Govender made the point that in the case of Johannesburg it would mean that the same auditor would have to audit the 12 entities and the municipality. This would be cumbersome.

Ms Hogan was also concerned about that.

Ms Mahlangu suggested that the issue not be concluded now but referred to the AG.

Mr Smith suggested that if the Bill says that the AG is responsible for the audit, then the committee would have to be happy with whomever the AG appoints to do the audit.

Ms Maabe agreed and said that clause 82 should only have subsection (1)(a) that states that the AG must audit the financial statements of an entity.

Ms Hogan agreed and said that Ms Mabe's suggestion should be followed.

Councillor Von Ronge was concerned that the time frames contained in the provisions were too tight.

Mr moment replied that tight time frames are needed. When the PFMA was discussed the same complaints were received and now it is working successfully.

Ms Hogan agreed that the time lines were tight but for the sake of financial management it was needed. She added that certain provisions would be phased in as well.

Mr Govender commented that there are certain time frames in the Company Act that allow for up to 18 moths before reporting to the shareholders.

Mr Momoniat replied that there are a few things that will override the Company Act.

Ms Hogan asked if this could be done.

Mr Momoniat said yes. He added that opaque mechanisms in the Company Act are used especially in relation to section 21 companies. He said that the Bill puts in place a minimum governance framework that will override the Company Act.

Ma Hogan suggested that public accounts committees could be like the AGM.

Mr Momoniat replied that it was exactly what Treasury is going to do. Some form of public accounts committee will be incorporated in the Bill.

Ms Hogan said that public accounts committees must be a separate accountability arrangement. She asked if the annual report or the audited statements would go to the public accounts committees.

Mr Momoniat replied that the same problem exists in Parliament. SCOPA looks at the financial statements while the Portfolio Committees look at the annual report and also the financials. He said that what is wanted is a set of governance mechanisms that engages the reports and gives council a response. At the moment the information goes straight to council. The approach is too politicised because the ruling party just rejects the reports.

Ms Hogan said that all agrees that there should be public accounts committees and Treasury will incorporate it into the Bill.

Mr Momoniat added that Treasury will come up with a good practice guide in regulation form and the provisions in the Bill will be kept simple.

Ms Hogan asked what was the difference between clause 69 and 72.

Mr Momoniat said that clause 69 refers to the entity itself and then clause 72 refers to the municipality.

Mr Smith commented that the way Part 1 was drafted is very confusing.

Mr Momoniat agreed and said that Treasury will come up with a redraft.

Mr Momoniat continued with clause 72, 73 and 74 that deal with municipalities that have sole ownership of the entities and more particularly to the preparation of annual reports and financial statements, auditing of financial statements and the tabling of annual reports, financial statements and audit reports.

Ms Lobe (ANC) felt that clause 74 was the same as section 46 of the Systems Act and did not see the need for repetition.

Mr Momoniat replied that the Systems Act deals with the non-financial issues.

Ms Lobe disagreed and said that it was very similar to the Systems Act.

Mr Momoniat said that all the procedural matters can be rationalised and this will be attended to when Part 1 is redrafted.

Mr Smith referred to clause 72(2)(d)(v) that states that the annual report must contain details of the arrears of councillors. He suggested that this means that even if the councillor is in arrears for one day then the annual report would have to reflect this.

The members accepted the point and it was agreed that Treasury would amend the clause to state that the councillor must be 90 days in arrears.

Mr Von Ronge referred to clause 74(2) and asked why it was necessary to legislate that treasury is entitled to attend the meeting where the municipal council considers the consolidated financial statement.

Mr Momoniat replied that the reference to National Treasury could be deleted.

The end of the meeting was approaching and Mr Momoniat asked if he could discuss joint ownership while Mr Govender was present. He said that an important consideration is how joint ownership is dealt with. The governance issues are difficult to deal with. The question is whether the legislation should allow for everything. An example is where one municipality owns a 60% share and the other a 40% share. When the shareholding is split like that the question is how do the two municipalities agree on things, how does the investments get split. The reporting arrangements are complicated. Mr Momoniat's personal view is that joint ownership should not be allowed. He said that municipalities were not ready for it and that there are many problems with no answers. The same is true for subsidiaries.

What is not dealt with in the Bill is PPP's - both public-private and public-public.

Ms Lobe commented that joint ownership needs to be looked at to see how it could be made possible.

Mr Govender said that in Johannesburg a deal was entered where it holds a 49& share in one company. The other shareholder owns 51%. If Johannesburg never allowed the private company to get controlling interest then the much-needed investment would not have been made. He submitted that one needs to ask the question why such agreements are entered into and added that a lot of value can be gained from those agreements.

Ms Hogan said Mr Govender was talking about PPP's and Mr Momoniat was talking about municipalities having joint ownership, but the two do relate to each other.

Mr Govender said the same question must be asked in respect of subsidiaries i.e. what value do they bring to municipalities. He added that subs must be established in terms of the mandate of the entity. duties and obligations of the subsidiary are dealt with in the founding documents.

Mr Smith said that we should not ask if we want joint ownership. The fact is that it exists and we should make it work.

Ms Hogan commented that the Systems and Structures Acts allow these arrangements and this Bill should not undermine that. She said that he committee needs to start looking at accountability arrangements that bears in mind all the problems.

Mr Govender said that all the problems could be addressed in the shareholder agreement.

Mr Momoniat replied that he had seen very weak shareholder agreements. He proposed that the bill not prevent any joint ownership agreements but if this route is chosen then National approval must be obtained. There could also be tough regulations that will ensure that the shareholder agreements are clear.

Ms Hogan said that the principle is that joint ownership will be allowed and the accountability arrangements will have to be sorted out. She added that it was important to realise that this was a transition phase.

The meeting was adjourned.


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