Municipal Finance Management Bill: deliberations

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Finance Standing Committee

28 July 2002
Chairperson: Ms Hogan (ANC)
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Meeting Summary

During recess Treasury redrafted the chapters in accordance with the views that surfaced during the hearings. In today's sitting the committee aimed to complete an analysis of the redrafted chapters 2,3,5 and 8. Chapter 5 was nearly completed and discussion will continue from clause 27 at the next sitting. The main areas of discussion in today's sitting was on the disposal of capital assets and cash management/investment.

Meeting report

Mr Momoniat (DDG - Intergovernmental Relations) gave the members an update of the progress since the hearings. He said that there had been an extensive revision of the Bill, taking account views at the hearings and of members. The changes make the Bill more consistent with the constitution. There is more consistency with the Systems Act. Chapters 1-8 are completed, 10, 12 and 13 will be available on 31 July 2002 and chapter 9 (entities) and chapter 11 (financial emergencies) are only in first draft form.

Mr Momoniat proposed that in today's sitting a clause by clause analysis should be done of chapters 2, 3, 5 and 8. He suggested that the definition section be left until the end.

Before going through the new draft Mr Momoniat spelled out the functions of all the role-players. He felt that it was useful to go through the functions because the Bill is drafted on this basis.

The Municipality is responsible to the community. The Council must oversee the executive and the finances. Council approves policy. Council must set up public accounts committees but this cannot be legislated it will be done through Treasury guidelines. In the municipality the ordinary councillors play an oversight role over the executive and also play a bigger political role. The speaker presides over council meetings, reports to council, enforces the code of conduct. Mr Momoniat stressed that the speaker is not the head of the municipality and does not normally report to the provincial MEC or legislature. It is the Mayor who is head of the municipality. The mayor is the link to the provincial sphere and reports to the MEC when there is potential non-compliance or when non-compliance has occurred. The Mayor can be called by the provincial legislatures. The Mayor proposes policy and the Municipal Manager is responsible for implementation and outputs.

Mr Momoniat envisaged roles for the provincial legislature and the MEC's for finance and local government. The MEC for local government must ensure the municipality must follow all processes in respect of the IDP's and the budget related policy issues like rates and tariffs. The Province must ensure that the municipality meets deadlines in respect of the tabling and approval of the budget and the submission of financial statements. An important function for the MEC is to ensure that the municipality takes appropriate action after problems like unauthorised expenditure has been identified. The MEC for local government would be responsible for the section 139 intervention and the financial watch.

The MEC for Finance assists and oversees the budget proposal to test the credibility and priorities before the budget is tabled and approved; assess that capital budgets and plans, enforces the MFM Bill and monitors in year budget reporting by the province.

Mr Momoniat said that legislation cannot prescribe who does what in the provincial legislatures and for that reason agreement would have to be reached at Minmecs as to who does what.

It is Nationals' role to enforce section 216. Treasury would delegate to provinces budget assessments, the cooordination of IDP's with other spheres, compliance with MFM Bill to provincial Treasuries. Mr Momoniat said that most other roles would be delegated to the MEC for local government. There is no other role for national government except for setting policy and frameworks like procurement, banking and investments. Another further role for the Minister of Finance could relate to financial emergencies in terms of the new constitutional amendment.

Mr Momoniat proceeded to go through chapter by chapter.

Chapter 2 - Supervision over Local Government Finance Management
Clause 5(1) contains the general functions of National Treasury. Mr Momoniat said that the new draft contextualises the power of National Treasury. There is specific reference to chapter 3 of the constitution, the PFMA and section 216 of the constitution.

Ms Hogan asked why there is not a reference to other powers in Chapter 13 of the constitution. At the moment there is only a reference to section 216.

Mr Momoniat replied that Adv Growe did not want to refer to chapter 13 in its entirety because the chapter dealt with a range of other issues. He undertook to speak to the Advocate to see what other chapter 13 provisions could be included under clause 5(1).

In clause 5(2) the reference to uniform norms and standards is taken out and it is dealt with in chapter 12. Clause 5(2)(a)(ii) has an incorrect reference to sections 17 and 18 because the whole Bill is not yet finalised.

Clause 5(2)(c) is deleted.

Ms Hogan wanted clarity on where the norms and standards would be dealt with.

Mr Momoniat replied that it would be in chapter 12 but that he has not yet seen the chapter.

In clause 5(2)(d) the growth factor reference is replaced by a band. This is inline with comments that were not in favour with the growth factor expressed as a definite percentage.

Clause 5(2)(h) has been redrafted to be in line with section 216 of the constitution. At the hearings it was felt that the clause exceeded the powers granted in section 216. The old clause 5(3) is removed. It dealt with the power to stop funds that is now dealt with in chapter 4. A new sub 3 is a new one that states that the powers assigned to Treasury in terms of the MFM Bill are additional to those in the PFMA.

A new clause 5A is inserted. It deals with capacity building and now says that national government and provincial governments must assist municipalities in building their capacities for efficient, effective and transparent financial management. Clause 5A(2) provides that at the end of the day the municipality is responsible for implementing the MFM Bill.

Ms Taljaard (DP) felt that sub (2) gave government a way out.

Mr Smith (IFP) agreed with the principle but wanted more neutral language.

Members agreed that the word 'failure' should be replaced by ' shortcoming'.

Clause 6 - Delegations by National Treasury
Mr Momoniat advised that there is no longer a delegation to a specific provincial department or treasury in line with discussions earlier. For this reason sub (d) states that the Minister of Finance and the Premier agrees on a delegation to a provincial department head. In the tabled version the Premier was not directly involved. The agreement was with the MEC responsible for the department.

Mr Hanekom (ANC) found it strange that the clause allows powers assigned to National Treasury to be delegated by the Minister to the DG of the Treasury.

Mr Momoniat replied that the Minister delegated to the DG and the Dg could delegate further down.

Ms Taljaard was not convinced that the DG could delegate further down.

Mr Hanekom agreed that only the Minister could delegate to a lower down. The DG could assign powers to other officials.

Mr Momoniat said that if it is so then many pieces of legislation including the PFMA could have some problems.

Ms Hogan asked that Treasury get confirmation form the Public Service Commission on what the position o delegation is.

Mr Smith asked there was any provision for funding if provinces did get these extra powers through delegation.

Mr Momoniat replied that there was no provision for funding but added that provinces are waiting for the extra powers to compliment their existing ones.

Mr Hanekom pointed out that clause 6(2)(c) clears up the problem on delegation. It provides that the Minister may authorise the DG to delegate further down.

Chapter 3 - Municipal Revenue
Mr Momoniat said that there had been a substantial redraft of chapter 3. The definition section contains a new definition of primary bank account. If a municipality has one account then that account is the primary bank account. If a municipality has more than one account then it must designate one account as the primary bank account into which all transfers must flow.

Ms Hogan asked for an idea of what can be prescribed in terms of clause 7(1).

Mr Momoniat said that he could provide some idea but if the committee wanted more detail could go into the Bill as well.

Ms Hogan replied that she did not want the detail.

Mr Momoniat explained that Treasury might want to prescribe who is responsible for transfers form the primary account, how it is set up and the functioning of the accounts.

Clause 8 - Mr Momoniat advised that this is a new clause dealing with the primary bank account. It states that if there is more than one account, all grants, transfers and agency payments must be made into this account.

Clause 9 provides that the Auditor-General must be informed of all bank accounts of a municipality.

Clause 10 - There is no change in this clause. The municipal manager remains responsible to the Council for the municipal bank accounts.

Clause 11 in the tabled version only allowed the municipal manger or the chief financial officer to withdraw money from any municipal bank account. The amendments now provide that a senior official on the written authority of the municipal manager may also withdraw money.

Clause 11(2A) further provides that the authorisation to a senior official to withdraw must be I accordance with a prescribed framework.

Sub (3) changes the period of reporting on withdrawals. It confines reporting to a specific time frame. The municipal manager must now report within 30 days of the end of a quarter on all withdrawals.

Clause 11(1)(a)-(f) contains a specified list. Only in those circumstances listed can there be a withdrawal. Mr Dorfling (SALGA) felt that there could be other reasons why withdrawals need to be made. He referred to a situation where stock is kept and not reflected on the budget until it is needed.

Mr Pillay (Treasury) replied that additional purposes for withdrawals can be prescribed.

Mr Momoniat said that the aim of the Bill was to modernise municipal financial management and to empower council. The move is towards cash budgeting and not what is described by Mr Dorfling. He added that what is contained in the Bill is how municipalities should be working.

Ms Taljaard suggested that clause 11(1)(a) should include a reference to an adjustment budget. At the moment it is not clear that money can be withdrawn if it is for spending in terms of an adjustment budget.

Ms Hogan thought the idea had merit.

Mr Momoniat asked that the point made be returned to when chapter 4 is being dealt with.

Clause 12 is the first clause in part two of chapter 3 on cash, investment and asset management. Mr Momoniat advised that clause 12 had not changed much. The amendments provide that a municipality must invest cash that is not immediately required.

Clause 12(3) & (4) provides that a bank where a municipality holds an account or an institution that holds an investment for a municipality must disclose there details to the listed role players.

Mr Smith pointed out that if a municipality opens an account or invests on the first day of the financial year and closes it on the last then there is no duty to disclose this information.

Mr Momoniat agreed and would attend to it.

Mr Dorfling pointed out that banks must notify the AG of an account within 30 days after the end of the financial year of the details of the bank account. There was no same requirement for institutions holding investments. He though that it might just be a typo that excluded the AG from clause 12(4)(a).

Mr Momoniat agreed. He raised a separate issue on how to deal with situations where municipalities invest in buildings or casinos.

Mr Dorfling agreed that there is a problem when municipalities make investments that is not part of their core business.

Mr Momoniat added that if municipalities have spare cash they should rather lower rates.

Mr Smith felt that section 152 of the constitution states that municipalities must promote social and economic development and for this reason there is no reason why they should not be allowed to make legitimate investments in their economy.

Ms Taljaard commented that an investment framework must be a balance between supporting service delivery and not jeopardising the core business of a municipality. A framework should not be over prescriptive but should also not allow municipalities to invest in anything. Ms Taljaard was worried about how over prescriptive the current framework was.

Ms Hogan said that one of the issues is how to protect against bogus schemes.

Mr Hanekom said that investment is a fundamental policy issue. If the investment is low risk then it would be valid. But sometimes the objectives and the needs demand a higher risk. He used the Vredendaal Agricultural Commonage as an example. the investment was risky but it created employment.

Ms Hogan replied that the Vredendaal investment was not from surplus cash. The investment was on budget.

Dr Rabie (NNP) felt that speculation in property was senseless especially since the cost of capital was too high.

Mr Momoniat said it was not a problem when cash is injected into something that supports an activity like job creation. This is not the type of investment that needs to be worried about. When an investment is made to get some sort of monetary return is the problem and this should be discouraged.

Mr Pillay advised that when the section was developed Treasury looked at surplus cash and that capital investment via the budget was not touched by clause 12.

Ms Hogan said that clause 12(2) has no reference to surplus cash. She also wanted to know how a municipality could have surplus cash.

Mr Momoniat explained that if a municipality does not spend on capital projects as predicted, it could sit on a large pool of cash that is not immediately needed.

Mr Glasser (Treasury) responding to Ms Hogan's first query said that the draft regulations makes it clear that surplus cash is referred to. He agreed that it should be made clear in the Bill.

Ms Joemat (ANC) asked what happens at National level.

Mr Momoniat replied that the Corporation for Public Deposits (CPD) located at the Reserve Bank holds surplus cash for national and provinces. The intention is to reduce borrowing requirements. He added that all banking at national level is done through the Reserve Bank and surplus cash is not really an issue. Provinces bank commercially and there is a start to regulate investments they can keep.

Ms Hogan was concerned that surplus cash must arise out of cash flow. Municipalities should not be able to budget for a surplus.

Mr Momoniat agreed and said that something would be incorporated in the clause.

Ms Hogan was also concerned that municipalities could still budget to invest in a shady scheme.

Mr Momoniat agreed that this needs to be addressed.

Clause 13 - Disposal of Capital Assets
One of the main issues in this clause is the definition of a municipal service. It is not currently defined in the Constitution, Systems Act or the MFM Bill. There is a concern that if it is defined then there could be an impact on how the local share of revenue is divided.

In the MFM Bill it is the council who has the discretion to determine what a minimum essential service is. This is done deliberately because municipalities vary. The Systems Act is more concerned about what the service is while the MFM Bill looks at if the asset is needed to perform an essential service. Mr Momoniat felt there was no inconsistency between the two acts because the terns are used differently.

Mr Momoniat said that a service might be essential but the asset might not be needed to perform the service. If the asset is necessary for a minimum essential service then council may not dispose of the asset, may not pledge the asset without indicating how it will be protected, the creditor may not impede continued service and the asset may not be liquidated in terms of chapter 11.

Mr Momoniat referred to the previous discussions about how the Systems Act refers to a basic municipal service and the MFM Bill to a minimum essential municipal service. He points out that there is intended to be a difference and that even in the Systems Act there are few different terms used. These are listed in the Treasury presentation.

Ms Taljaard felt that the clause ties up the hands of municipalities in relation to the disposal of capital assets. One of the members concerns was whether an entity can use a capital asset as security for a debt.

Mr Glasser replied that a municipality has no water service. There can be no disagreement that this is a minimum essential service. The problem facing the municipality is how to fund this service. Typically the investor would want to step in to operate the water treatment plant and provide the service. The asset can then be pledged and the agreement would provide that the investor must operate the plant for the duration of the agreement, cannot cut off supply and if foreclosure takes place it cannot impede the provision of the service. On the other hand if the municipality has many water treatment plants, one may not be needed for the minimum essential service and the municipality has a freer hand in dealing with the creditor.

Ms Taljaard felt that faith should be placed in agreement rather than saying that ownership may not be transferred if the asset is needed to provide a minimum essential service.

Ms Hogan replied that the comment presumes a high level of legal expertise at municipal level and good faith bargaining.

Ms Taljaard felt that it should be a political decision at council level.

Ms Hogan asked what happens to an asset upon liquidation.

A representative from the Banking Council commented that investors are interested in the revenue that flows form the asset and not the asset per se. she added that because there is no definition decisions are contestable because the situation would vary from municipality to municipality.

Ms Hogan commented that it was difficult to separate the asset form the revenue.

Ms Taljaard said that a further problem due to the lack of a definition is that it could inhibit private involvement in PPP's.

Ms Glasser advised that potential investors gave their views on the clause and they felt fine with council making a finding. Once council made a finding then the investors knew where they stood. He added that he tried to come up with a definition but because circumstances vary so tremendously, he could not.

Mr Carrim said that sweeping statements had been made about the trust that should be placed in the contracts. He felt that experience has shown that the reverse is true and that few contracts have been concluded as they should have been. He added that there is no evidence to suggest that legislation of this nature will block private sector investment. In his opinion there was still a contradiction between basic and minimum service and that this was a fundamental issue that seems to have been decided already.

Ms Hogan advised that the Finance Committee was still getting an understanding so that it knows what it is passing. Nothing has been decided as yet.

Mr Momoniat said that the approach in the Bill was to make the process tough when making a decision to dispose of a capital asset that is decided not be essential. The Bill is block on the municipality making a wrong decision. He said that this is not the only approach. The provisions could be extended to make it more difficult for municipalities.

Mr Glasser reiterated that 'basic municipal service' as used in the Systems Act is not used for the same purpose as in the MFM Bill.

Ms Hogan felt that not all municipalities has the capacity to enter into the complex contracts that are needed to safeguard themselves sufficiently. There were to many problems with these contracts. She was also not confident enough that the contracts could be managed. The chairs main concern was that local government was in a developmental phase. Her concern had no ideological basis. She asked members to start thinking about definitions of a minimum essential service before the committee decides on this clause.

Mr Carrim understood the explanation by Treasury about the uses of 'basic' and 'minimum' in the various pieces of legislation but said that the explanation is not accessible to those at local government level. He said that he was tired of the inconsistencies in the legislation and wanted new legislation to be more consistent.

Mr Glasser replied that it would make sense to use the phrase 'basic municipal service' but asked the committee to hold over discussion until chapter 5 and chapter 11 is dealt with.

Ms Hogan asked the committee to move forward and said that discussion on clause 14 would also be held over.

Chapter 5 - Debt
Mr Momoniat provided the basic borrowing rules:
Long term debt can only be accessed for plant property and equipment.
Short term debt is only for cash flow management and must be repaid within the financial year
National government and province cannot guarantee municipal debt
The asset and the revenue form the asset can be pledged but only after council has decided that the asset is not needed for a 'minimum essential service'.

He advised that the chapter has been made more clear in line with the committees request that short and long term debt be dealt with separately.

Ms Taljaard reminded Treasury that they were to furnish the committee with definitions of capital expenditure and operational expenditure.

Clause 27 that deals with the provision of security is extended to allow for the furnishing of security for contractual obligations to secure investment..

The meeting was adjourned.

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