Taxation Laws Amendment Bill: formal consideration; Municipal Finance Management Bill: constitutional discussion

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Finance Standing Committee

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

The Committee adopted the Taxation Laws Amendment Bill. SARS had inserted two new clauses: clauses 23 and 25. This relates to the liquidation steps.
The discussion on the Trengrove and Unterhalter opinion was concluded. The Murray opinion would be considered at a later date. The Committee will deal with the MFM Bill in the first week of recess but this is a tentative position. The Finance Portfolio Committee will only sit on Tuesday 25 June 2002 during next week to receive a report from the Governor of the Reserve Bank.

Meeting report

Taxation Laws Amendment Bill
Mr Tomasek (SARS) informed the Committee that there had only been two new clauses inserted in the tabled version that reflects a policy change. In clause 23 the amendment caters for a transitional period when liquidating. In essence a longer period is provided for the liquidation steps. This takes into account the submission of the South African Institute of Chartered Accountants. Clause 25 provides that if the liquidations steps are abandoned then the dividends paid to shareholders will become subject to Secondary Tax on Companies. He had nothing further to add.

Ms Hogan read the report and the Committee passed the Bill.

Municipal Finance Management Bill
The Constitutional discussion was continued. Mr Momoniat, Mr Kahla and Prof. Murray were present. Discussion commenced from clause 106 - point 51 in the Trengrove opinion.

Ms Hogan went through the opinion on this clause. Trengrove argues that the Bill requires a municipality to comply with certain instructions and guidelines. An example is that a municipality must comply with the cash management framework in clause 12(2). He says that if there is no obligation contained in the Bill itself then clause 106(2) does not empower Treasury to determine that a contravention of an instruction and guideline is a criminal offence. So if there is no obligation in the Bill then municipalities do not have to obey instructions. He concludes that it is acceptable to issue instructions if there is no obligation to obey.

Ms Hogan asked what an instruction was.

Mr Momoniat replied that Treasury would want it to be like a regulation that needs to be followed.

Prof. Murray said that she would assume that a framework would have to be mandatory. She found it difficult to follow this aspect of the opinion because the example used in clause 12 provides the framework. Clause 106 is the power to implement the framework. She though that it might just be a question of drafting so it might be good to link clause 106 with specific provisions in the Bill. She was also not convinced that there was no element of compliance implicit in clause 106 because once an obligation is imposed then the MEC can enforce compliance in terms of section 139. She added that a decision needs to be made whether Treasury or an MEC will enforce compliance where an obligation is imposed. The Prof. was of the view that many provisions do fall under a Treasury norm and standard.

Mr Momoniat said that it is clear that there is a gap in the legislation. It is also clear that the Constitution requires Treasury to enforce compliance with a Treasury norm and standard. He added that at the end of the day there is still only section 216 and section 139 that can be used to enforce compliance. In his view a direct approach needs to be considered so that it would not be necessary to run to the province each time.

Ms Hogan said that it was important to sort out what a norm and standard was to know what obligations can be imposed by parliament. She suggested that discussion around section 106 be stopped until there is a better understanding of what a uniform norm and standard is and what obligations can be imposed.

The next issue dealt with by Trengrove is the chapter on Financial Emergencies. Ms Hogan said that there had been an enormous discussion on this and that significant amendments were being attended to by Treasury.

Mr Momoniat advised that the meaning that Treasury wants attributed to this chapter is that a power would exist to impose the budget and Treasury knows that a Constitutional amendment is required for this.

Ms Taljaard (DP) asked if the Constitutional amendment will come before the Bill is passed.

Mr Momoniat replied that the Constitutional amendments will be ready before the MFM Bill has been passed by the NCOP.

Discussion on financial emergencies was held in abeyance.

Hereafter Trengrove concludes his opinion by saying that clause 6 is unConstitutional because the Minister cannot delegate Treasuries power to stop funds, the financial emergency provisions are problematic and the manner in which the various powers of National Treasury are exercised is important.

Ms Hogan said that the Committee should now wait for the amendments to see to what extent the changes addresses the Constitutional issues.

Ms Taljaard commented that the clarification of the uniform norm and standard, the interpretation of section 155(7) and the general question of the desirability of the legislation as far as it impedes municipalities still had to be considered by the Committee as areas of priority.

Ms Hogan replied that the Committee was aware of those issues and that the continuous repetition of the issues was not necessary. Ms Hogan said that the member should simply say if she had no confidence in the Committee to deal with the issues. The Trengrove opinion was considered and the Committee went on to look at the Unterhalter opinion.

Unterhalter Opinion
Ms Hogan asked if the Committee wanted to go through the whole opinion or if it would be okay to summarise it. Ms Hogan had summarised the opinion. There was no objection to looking at the opinion in summary form.

Ms Hogan said that Unterhalter looks at the chapter on municipal budgets and concludes that Treasury is given a specific central supervisory role. Unterhalter sees nature of the powers given to the Treasury as supervisory powers.

He gives a few examples of the powers viz. The growth factor, submitting a draft copy of the budget to Treasury etc.

MS Hogan said that the provisions referred to is not as exhaustive as in the Trengrove opinion.

She continued and said that Unterhalter looks at the provisions in the Constitution that empower local government and also at the provisions that grant powers to national government and Treasury. He counterbalances these powers. The question that he raises is whether the powers given to Treasury fall within section 216 or within the competence of national legislation.

Unterhalter makes two points. The first is that there is no problem with Treasury issuing a uniform norm and standard. The second is that the monitoring of budgets is an oversight function and goes beyond compliance with a uniform norm and standard. He justifies this point by referring to section 215(2) of the Constitution that does not give a supervisory function to Treasury in fact this function is not given to Treasury anywhere in the Constitution.

In respect of the second point he argues that section 6 of the PFMA states that Treasury must promote national government fiscal framework and macro-economic policy. He says that because the supervisory function is not diminishing the powers of a municipality because the recommendations are not obligatory, this power would probably survive Constitutional scrutiny.

When considering Treasury's power to determine the growth factor, he says that this power goes a bit further as now something is being imposed on a municipality. Unterhalter was of the view that this power does fall under section 216 as being a uniform norm and standard. This view is line with Constitutional court decisions and the intention in section 229. The argument is that income is controlled through the division of revenue and through section 229 and it would be odd if expenditure could also not be equally subject to national legislation.

In looking at clause 5(2)(h) Unterhalter was of the opinion that it was too wide as Treasury was given the power to stop transfers if there was a breach of the Act. This was already discussed and it will be made clear that transfers can only be stopped in terms of the Constitution.

Unterhalter considers clause 106 and says that it goes beyond section 216, but the chair said that this has been extensively discussed.

Ms Taljaard commented that the uniform growth factor could be potentially problematic because the same growth factor could not possibly be applied to all municipalities. She was concerned that if the growth factor was not the same for all municipalities then it could not be a uniform norm and standard.

Mr Momoniat said that Treasury envisages a uniform maximum. The growth factor would be within a range.

Ms Taljaard thought that the language did not reflect that intention.

Mr Momoniat added that the Bill also allows for exemptions from compliance to the growth factor.

Prof. Murray said that the word factor might have to be looked at. She told the Committee that the word uniform should not be looked at very narrowly. The idea is that all municipalities are tested by the same set of norms and standards to determine in what category they fall. The same for the exemption, all municipalities would be tested against the same norms and standards to see if they qualify. She said 'uniform' is flexible but what it does not mean is that municipalities are dealt with on an ad hoc basis.

Mr Kahla undertook to look at the language.

Next, Unterhalter looks at the powers that are given to National and Provincial Government in terms of section 155(7). He says that the Bill does not only regulate activities but determines outcomes. In the opinion he lists examples like the notification when a bank account is changed. The section does not allow other spheres to meddle in the day to day affairs of the municipality. He concludes that some powers in the Bill go beyond oversight of effective performance as envisaged by section 155(7).

Ms Hogan said that the Committee had to decide what was a inform norm and standard and whether what was in the Bill was indeed a uniform norm and standard. Another issue to decide was whether the powers granted in the Bill to Treasury is linked to the effective performance of municipalities. The rewording of clause 106 will assist in this because it will add clarity as to what is a uniform norm and standard and what is a power in terms of section 155(7).

Mr Kahla reminded the Committee that they have to bear in mind the interpretation of the meaning of regulate in clause 155(7). Unterhalter says it is a supervisory power. He points out that Trengrove says that regulate is synonymous with control/govern/ direct. Trengrove refers to case law to back this up.

Ms Hogan commented that this was a good point. There are two different meanings of what a regulate means. She said that she agreed that section 106 was confusing but was not convinced that some powers were overbroad. An example was the notification of change of bank account. The chair felt that Treasury needs to be told when the account that receives the transfers gets changed.

Mr Kahla also could not see which provisions were to broad.

Ms Taljaard commented that internationally authorities are debating the ambit of regulations and it is argued that regulation does not extend to control. The member was not convinced by the argument put forward that regulate extends to control.

Mr Kahla replied that as far as South Africa is concerned the meaning has been decided by the highest court and it does extend to control as long as there is assumption of the power of a municipality.

Ms Hogan said that everyone would agree that a framework can be established to regulate financial management at local government level as long as it does not impede the exercise of power. The chair said that the provisions of the Bill must be scrutinised from this point of view. She added that the Committee needs to hear from SALGA to what extent the powers in the Bill impede local government's ability to do it's job. She concluded by saying that the Committee has a better understanding of the Constitutional environment that it is working in and would proceed with the Bill on this basis.

The chair advised that she was reluctant to consider the Murray opinion. (Prof. Murray had left a few minutes earlier.)

The meeting was adjourned.

Appendix 1
THE TREASURY
LOCAL GOVERNMENT: MUNICIPAL FINANCE MANAGEMENT BILL
OPINION

INTRODUCTION
I have been asked to write an opinion on the Constitutionality of the Municipal Finance Management Bill, 2002, as introduced in the National Assembly. In addition to the Bill, I have been given a copy of an opinion written for the Municipal Demarcation Board by Wim Trengrove and Alfred Cockrell dealing with the same question as well as the Summary of Submissions made on the Municipal Finance Management Bill' prepared for the parliamentary Committee.

I agree with the Trengrove/Cockrell opinion. Accordingly I do not canvass all the aspects of the Bill here that maybe considered controversial. Instead I -

(i) draw attention to clause 46(1) about which Trengrove and Cockrell have not raised concerns but which I think may not pass Constitutional muster;

(ii) comment on those provisions which the Trengrove/Cockrell opinion suggests may be unConstitutional (clauses 5(2)(h). 6 and 88 - 105); and

(iii) raise some concerns about the meaning of section 216(1) of the Constitution and its interpretation in the Bill.

I should reiterate a point that the Trengrove / Cockrell opinion stresses. It may be Constitutional to grant the Treasury the powers set out in this Bill but they may nevertheless be exercised in an unConstitutional manner. This would have to be determined when the powers are exercised.

CLAUSE 46(1): ESTABLISHMENT OF MUNICIPAL ENTITIES
This clause allows municipalities to establish 'municipal entities' to provide a municipal service (para (a)). Municipal entities for other purposes may be established only for purposes that have been prescribed (para (b)).

This clause may be unduly restrictive. Whether or not it is depends, in part, on the way in which the phrase 'municipal services' is interpreted. If it is broadly interpreted to cover all Constitutional functions of a municipality then the clause is more likely to pass muster because it would mean that there would be very few circumstances in which a municipality would have to rely on clause 46(1)(b). If, however, it is interpreted to cover only functions that arc more narrowly understood as 'services', such as those envisaged in section 152(1)(b) of the Constitution, for example, it would exclude some Constitutional functions of municipalities (those envisaged in Constitution section 152(1)(c)-(e), for example). Under this interpretation a municipality would effectively be required to get permission to establish entities designed to promote social or economic development, for instance. This could be interpreted as depriving a municipality of its power to govern and would be unConstitutional.

PROVISIONS THAT THE TRENGROVE / COCKRELL OPINION SUGGESTS ARE UNCONSTITUTIONAL (OR PROBLEMATIC)

Clause 5(2)(h) (stopping funds)
This clause allows the national Treasury to stop funds to a municipality and municipal entities. As Trengrove and Cockrell note, it is broadly worded and would need to be 'read down' to conform with Constitution section 216 which permits the stopping of transfers of funds in certain circumstances only. To avoid confusion the clause could be redrafted more clearly.

Clause 6 (delegation of the power to stop funds)
As Trengrove and Cockrell point out, clause 6 purports to permit the Minister to delegate to other functionaries the power to stop a transfer of funds to municipalities. This would be unConstitutional. The clause could be read to mean that only delegations that pass Constitutional muster are permissible but it would be better to add a provision stipulating that the power to stop funds under Constitution section 216 cannot be delegated.

Municipalities in a financial emergency (clauses 88 - 105)
Clauses 88 - 105 establish a plan for dealing with municipal financial emergencies. The Trengrove / Cockrell opinion suggests that the clauses are susceptible to two different interpretations. One would render the plan unConstitutional. This interpretation assumes that the financial recovery specialist appointed to 'rescue' municipalities in financial emergencies would have the power to implement the financial recovery plan without the approval of the Council. Trengrove and Cockrell give two reasons for the unConstitutionality of this arrangement:

(i) it would deprive the municipality of executive power - this is impermissible under Constitution section 155(7); and

(ii) it would also violate Constitution section 151(4) that disallows any legislation that compromises or impedes a municipality's power to exercise its powers.

To these two concerns I would add a third, related one that would be relevant if a budget is considered to have legislative elements: the arrangement would go beyond a regulation of executive powers (permitted by section 55(7)) and would involve an interference with law-making powers.

The second interpretation of clauses 88 - 105 that Trengrove and Cockrell offer interprets them as requiring Council approval of a plan devised by the specialist. On this interpretation, they suggest the Bill would be Constitutional.

I fully agree with this reading of the Bill. I would also be concerned to leave the Bill as it is, without clarifying to which of the identified approaches the Bill is committed. In the light of the Constitutional amendment concerning financial emergencies proposed (but not adopted) last year I assume that the drafters of the Bill would prefer the former approach. This approach reflects concerns that Council members will not always be committed to the type of financial measures that will promote the long term health of the municipality demanded by the Constitutional because the more immediate issues that are likely to have led the to problems faced by the municipality may continue to inform Council decisions.

A number of options arise:

- a Constitutional amendment and textual amendments to clarify the intention of the Bill could secure the first interpretation identified by Trengrove and Cockrell.

- changes to the Bill could confirm that the second approach is intended (which protects Council decision-making)

- another approach could be devised.

WHAT IS COVERED BY SECTION 216(1) OF THE CONSTITUTION? ARE THE PROVISIONS OF THE BILL STOPPING THE TRANSFER OF FUNDS CONSTITUTIONAL?

Clause 5(2)(d) read with clause 16(I)(d)
These clauses envisage that the national Treasury will determine annual growth factors for municipalities. The Constitutional question is whether these provisions which grant considerable power to the national sphere undermine municipal integrity in an impermissible way. As the Trengrove/Cockrell opinion notes, an assessment of the Constitutionality of the provisions depends on the way in which we characterise the budget making power is it legislative or executive? If it is executive, as that opinion notes, clauses 5(2)(d) and 16(1 )(d) permit regulation of the executive authority of municipalities within the meaning of Constitution section 155(7) and are Constitutional.
If the budget making power is legislative in character, clauses 5(2)(d) and 16(I)(d) could perhaps be interpreted to fall within the scope of Constitution section 216(1) and (2). That section permits the national Treasury to impose and enforce 'uniform Treasury norms and standards'. But a limit on growth may not be a 'norm or standard' within the meaning of section 216(1). As far as I am aware, this section has not been interpreted judicially. However, in context, it is possible to argue that the 'transparency and expenditure control' envisaged by section 216 relate to formal accounting controls and not to matters that might be classified as policy such as growth rates.

Overall, however, it should be strained to argue that budget making is a purely legislative matter. It is perhaps better understood as a hybrid function, containing both legislative and executive elements. On this argument, the clauses may be permitted under Section 155(7) and would then be Constitutional.

Clauses 77 and 81
Clause 77 permits the Minister to withhold the transfer of funds to a municipality if the municipal manger for that municipality failed to fulfil obligations relating to the submission and tabling of annual financial statements. Clause 81 allows the National Treasury to Stop funds if the municipality does not rectify adverse findings by the Auditor-General.

Clause 77 will be Constitutional only if tile procedures relating to submission and tabling of statements are matters that fall under the list in Constitution section 2 16(1). Again it is not clear what generally recognised accounting practice' or 'uniform Treasury norms and standards' will be taken to mean but they may not include the process referred to in clause 77 because -

(i) the process does not relate to the way in which statements are compiled and audited and thus does not fall under the establishment of 'generally recognised accounting practice' or 'uniform expenditure classifications'. and

(ii) the process seems not to concern 'Treasury norms and standards' but, rather, the relationship between the municipality on tile one hand and the Auditor-General and Council on the other.

This matter might need clarification.

Moreover, clause 77 permits the Minister to stop transfer of funds after consulting the national Minister for Local Government. It will be seldom that this power could be Constitutionally exercised following a consultation with the national Minister for Local Government alone. Protection of the integrity of the municipality seems to require consultation with the municipality as well and it may be advisable for tile clause either to state this explicitly or to note that attention needs to be paid to the integrity of the municipality when deciding to Stop funds. For instance, the Council may have taken steps to have the municipal manger replaced. Under such circumstances, action by the National Treasury is likely to be an infringement of the council's integrity.

Clause 81 deals more obviously with matters covered by Constitution section 216(1) although the accounting practices established by Treasury and those established by the Auditor-General may, conceivably, differ. Certainly, it would be unConstitutional to bind the Auditor-General to accept practices decided upon by Treasury for the audits which he or she controls. If the Auditor-General and Treasury do establish different practices, the provision would form the basis for the stoppage of funds only if the practices established by the Treasury are disregarded and errors are not remedied as fast as is required.

Christina Murray
5 May 2002

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