Municipal Finance Management Bill: deliberations

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Finance Standing Committee

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

The Committee concluded discussion on both Chapter 7 and 8. Treasury made available a proposed draft of the new Chapter 11. The draft is for discussion purposes only and is not in proper legal format. The proposed Chapter 11 is in line with the third option discussed on 24 May and requires an amendment to Section 139 of the Constitution.

Meeting report

Chapter 7 Duties of municipal officials:
Clause 42A Monthly Budget Reports
Mr Momoniat told the committee that this clause was the heart of the in-year reporting system and that the same worked very well at provincial level. The clause provides that the municipal manager must provide all the information listed in 42A(1)(a)-(g) within 10 days of the end of the month to the mayor and the National Treasury. If necessary the municipal manager must explain the variances in relation to the projected revenue and expenditure and take remedial steps to remain in budget.

Sub Clause 3 is felt to be very important by Treasury because it calls for the municipal manager to sign off on the information provided. Often the CFO submits the reports and the municipal manager denies any wrongdoing.

Mr Momoniat advised that currently these requirements are contained in the Division of Revenue Bill and now the MFM Bill makes it part of the normal reporting cycle.

Mr Smith (IFP) suggested that the report goes to the MEC for local government as well.

Mr Momoniat had no problem with the suggestion and would incorporate it.

Mr Dorfling (SALGA) referred to Clause 42A(1)(f) that obliges the actual expenditure incurred during the month on transfers to be reported. He felt that in respect of the equitable share this would be impossible because funds from that source are spent on a variety of things.

Mr Momoniat agreed and said that even some conditional grants would be difficult to report on. He said that Treasury will redraft the clause to state that information will only be furnished when required for a specific conditional grant. He added that a clause will also be added to oblige the mayor to consider the reports because what is wanted is interaction between the mayor and the municipal manager.

Ms Hogan suggested that in Clause 42A(1) a reference should be included that states the mayor and National Treasury must consider the reports.

Ms Joemat (ANC) asked if the 10 day period was practicable.

Mr Dorfling replied that 10 working days would be better.

Mr Momoniat felt that 10 days should be retained because municipalities must get into the habit of doing this.

Mr Dorfling reiterated that 10 days was not enough and that the deadline would not be met. He added that he had a problem with the fact that outsiders would be aware of problems before the Council.

Mr Momoniat replied that what it asked for is minimal. All Treasury is asking for are the figures. The variances and remedial steps is a discussion that should take place between the mayor and the municipal manager at the first instance. The information that must be provided will not be used to hold persons to account for audited purposes. What is asked for is the best figures that are available without trying to conceal anything. He added that the time period must be 10 days because if it were lengthened, other problems like the late transfer of grants would not go away.

Ms Hogan suggested 7 working days.

Mr Momoniat was fine with that.

Mr Smith asked if Clause 42A is applicable to entities.

Mr Momoniat said yes and added that the entities would therefore have to provide the information to the municipality even earlier.

Mr Smith followed on and said that if that was the case then the entity would have to be obliged to submit the information within a certain time period.

An official from DPLG said that it would be useful to get the information on debtors and creditors because that would assist in project viability.

Mr Momoniat replied that the provision of such information could be added to the list. It was however going into the nitty gritty.

Ms Hogan felt that the Bill should contain a limitation clause where the municipality will not be obliged to provide more information than they need for its own operations.

Me Carrim (ANC) though the requirements contained in the clause were correct but that it was too onerous. He did not know how municipalities were going to do it. His experience with the Systems Act has proved that point. He added that he had commented that the Systems Act would take 10-15 years to implement and that he was called in by the ANC to explain the comment. Later he heard that the very same person that called him was also saying publicly that the Act would take 10-15 years to implement.

Mr Momoniat felt that the clause could work and that he had no illusions as to the benefits that the clause would have.

Mr Smith commented that some municipal managers don't even have support staff to assist them with this added responsibility.

Ms Hogan appreciated the capacity problems but at the same time said that the information that is asked for is the foundation for good financial management. The clause is a vision of how everything should work and that there cannot be good financial management without this clause.

Mr Soni (SALGA) wanted the legislation to say how National Treasury would deal with the reports that it receives. The IDP has shown the departments only respond to reports three months later and this is not a good motivation to do the reports timeously.

Ms Hogan replied that there is a difference between accounting and reporting. Municipalities were not accounting to National Treasury, as this would be unconstitutional. Treasury just wants the information for an overall picture. It is the Council that must engage with the municipal manager when there are discrepancies.

Ms Taljaard said that Clause 42A(2) clearly state that it applies to adjustments budgets as well.

Mr Momoniat had no problem with that and would amend it accordingly.

Clause 42D - Reports on municipal entities and other undertakings
Mr Momoniat said that the clause just deals with the intention to establish municipal entities in that National Treasury must be informed thereof. He said that it would be better if only the Auditor-General is informed and Treasury could get the information from that office.

Ms Hogan asked why is the emphasis on the intention to establish.

Mr Momoniat asked that the committee rather return to this clause after the chapter on entities is concluded.

Clause 42E - Interference by Councillors
The clause provides that the municipal manager must report interference by councillors in the financial administration to the speaker. The Speaker must act in terms of the Code of Conduct contained in the Systems Act.

Mr Carrim suggested that the term 'undue influence' be used instead.

Mr Smith said that everything is dealt with in the Systems Act and he felt the whole 42E is not needed.

Mr Momoniat replied that Adv Grove had put it in and that he would check with him the reasons for the inclusion.

Mr Carrim felt that the clause should not be simply dismissed but that there should be a cross reference with the Systems Act.

The Treasury will redraft the clause.

Clause 42F - General reporting obligations
Mr Momoniat advised that this was in the original Bill and suggested that the limitation Ms Hogan referred to earlier be inserted here.

Ms Hogan raised a general concern about the absence of a provision that states that Treasury acts as a warehouse for the information collected.

Mr Momoniat replied that in practice Treasury already plays that role by passing the information on to the relevant parties. He had no objection to including a clause to that effect.

Chapter 7 Part 2 - Financial Administration
Clause 42G - Senior Management
The Clause is intended to make senior management more accountable. The senior financial management team is listed and the clause provides that the people listed are a consultative forum to facilitate proper and effective implementation of financial management and internal control systems.

Dealing with Clause 42H & I simultaneously Mr Momoniat said that 42H Makes everyone responsible for the implementation of the MFM Bill in so far as they implement the Bill. Clause 42I deals with delegations. It provides that the municipal manager must develop a system for delegation that will provide adequate checks and balances in the municipality's financial administration.

Treasury wanted Part 2 to capture the principle that any senior manager responsible for a vote must be accountable but Adv Grove has not captured this.

Ms Taljaard was concerned that performance contracts must take into account sub delegations because a situation should not arise where managers avoid responsibility because the performance contract does not take into account the sub delegation.

Mr Momoniat replied that government is trying to make the performance contract subject to an annual review. He would ask Adv Grove to check how this is dealt with in the Systems Act and to suggest other ways in which to deal with it.

Ms Hogan wanted to know if the consultative forum was permissible because the clause was prescribing the municipalities internal arrangements.

Ms Taljaard raised the same concern in respect of Clause 42I(2)(b) that empowers Treasury to prescribe anything in respect of a delegation.

Mr Carrim pointed out that Section 59(1) of the Systems Act states that the municipal council must develop a system of delegation.

Mr Momoniat replied that he was surprised that Section 59(1) said that in the light of all the responsibility that is placed on the municipal manager. He said that the municipal manager should decide on this because he takes the responsibility.

Responding to Ms Taljaard he said that he agreed with her and that the clause is not needed.

Mr Smith added to the point raised by Mr Carrim and said that the structure of a department is a political process first.

Ms Hogan said that delegations for financial administration are complex and suggested that the municipal manager must develop the system with that must be approved by the Council.

Mr Momoniat wanted to check with Mr Grove why this clause was put into the Bill.

Mr Carrim replied that the matter was one of policy and that the committee must decide on who develops the system of delegation not Adv Grove.

Ms Hogan commented that there is a strong feeling that the council should decide on the system of delegation.

Mr Smith said that the whole Clause 42I should be deleted.

Mr Momoniat said that all Treasury wanted was include all management that has been delegated powers to be included in the senior management team. He agreed that the provisions in the Systems Act deal with the matter of delegation adequately and that the clause would be taken out and only put back if Adv Grove can justify why it is included.

Chapter 8 - Budget and Treasury Office
The clauses in this chapter never changed from the tabled version. There is just one new clause in the form of 45A. The clause makes competency testing and training compulsory. This type of clause was not included in the PFMA where it has been subsequently been found that such a clause is needed. It is up to the Council to decide what will happen if a manager fails the competency test. It is the Minister of Finance that prescribes the competency levels.

Mr Mokoena (SALGA) commented that other spheres of government should also be obliged to train managers.

Mr Momoniat agreed.

Ms Hogan suggested that a clause should say that an agreement must be reached as to who will do what training so that it is clear who is responsible for training.

Ms Taljaard wanted Treasury to check if the clause is consistent with the Labour Relations Act because it makes the failing of a competency test a grounds for dismissal.

Chapter 11 - Financial Problems in Municipalities
Treasury made available a draft of the revised Chapter 11. The draft was only for discussion purposes and was not a proper legal draft.

Mr Momoniat referred the committee to the briefing by Treasury on 24 May 2002 on Financial Emergencies. (PMG minute dated 24 May 2002) Refreshing everyone's memory he said that currently municipalities are currently borrowing at a level of R20 billion. Government wants municipalities to borrow for capital expenditure and could reach a level of R80 billion. The problem is that nobody will lend money unless there is a proper mechanism that deals with an emergency.

He said that after the discussion in May the draft now allows for a political process to try and first fix the situation. A constitutional amendment will be needed. Mr Momoniat advised that the constitutional amendment will be discussed tomorrow. He continued that investors want to know what will happen when political intervention fails and they look at the worst case scenario. Within 30 - 60 day's investors want to know what is going to happen should a municipality fail to meet its debt repayments.

Mr Momoniat told the committee that there was a nervousness about the roles of the courts and whether the courts have the necessary sensitivity to deal with municipalities. There is a strong view that courts should stay out of a local government financial crisis. On the other hand he told the committee that creditors can already get a judgement but the only thing that is unclear is how far they can go once they have a judgment.

Ms Hogan asked how often has a municipality been taken to court.

A member of the SALGA delegation advised that Welkom was under a court judgment and that the municipality had to juggle what creditors get paid.

Ms Hogan commented that a judgment makes the whole situation even worse.

Mr Momoniat said that after one municipality fails people paint all municipalities with the same brush. So if one crashes the rates at which money is lent goes up and collateral gets higher. He added that even a big municipality like Johannesburg borrows at a high rate.

Mr Momoniat outlined the new Chapter 11 proposal:

In may the first option was no constitutional amendment and leave Chapter 11 as tabled save for the then Clause 100 that was unconstitutional. This option would have had no teeth if the council failed to co-operate.

The second option was an amendment to Section 229 of the Constitution and then revise Chapter 11 in accordance with the amendment.

The third option believed to be the better option and the one contained in the draft. It is also the committees preferred option per the discussion in May. This option would require a Section 139 amendment. The chapter now makes it obligatory for a municipality to intervene in the case of a financial emergency. The Section 139 amendment will not be subject to the veto by the NCOP in terms of Section 139(2) and is therefore a strong intervention.

Mr Momoniat said that in the normal operation of the municipality the province and national government supports, assist and monitors the municipality. When there is a serious problem that is not yet an emergency a financial watch can be initiated by the MEC for local government. If the MEC does not act then the Minister of Finance can initiate the financial watch. This process involves notice and consultation, a diagnosis of and the treatment of problems, technical support and instructions by the MEC.

A financial emergency is only for the most serious problems where a municipality needs protection from legal action or where there is actual default to a lender. Another factor that could trigger a financial emergency is if the municipality has been under financial watch for more than one year. Many parties can initiate a financial emergency viz. the MEC, a creditor or labour. An evidentiary hearing is held and an objective tests determines if the municipality is in a financial emergency. When a finical emergency is declared the MEC must immediately consult with parties and request a recovery plan if one does not already exist.

Chapter 11 establishes the Municipal Financial Recovery Service. It is a small unit that could develop plans and recommends what must be done to restore a municipality to financial health. The unit does not take control of the municipality. It is the responsibility of the municipality to implement the plan failing which the MEC becomes responsible for implementation.

In a financial watch the recovery plan is optional. In a finical emergency it is mandatory. If the recovery plan is prepared the Council must either adopt it or choose other recovery steps. The MEC can impose a plan if the Councils plan is deemed inadequate.

Chapter 11 provides extraordinary relief in that the court can suspend obligations to creditors if the municipality cannot pay and even terminate obligations to creditors if the municipality is not ever going to be able to pay.

Mr Momoniat advised that what is going to happen now is firstly the adoption of the constitutional amendment before Chapter 11 is adopted. The Section 139 amendment will be gazetted on 5 July 2002 and the Justice Committee will process it. If the constitutional amendment has not been adopted in time Chapter 11 will be dropped from the Bill and included when the NCOP processes the Bill. He added that the constitutional amendment has nothing to do with the role of the court but deals with question of whether the provincial executive can impose a recovery plan on a municipality.

Mr Momoniat commenced to take the committee through Chapter 11 clause by clause.

Clause 88 is introductory in nature. Mr Momoniat said that it is included in the draft to put everything in context. The clause starts off stating that provincial and national government must support the development of financial management capacity in municipalities.

Mr Dorfling wanted to know what support and assist means at a point in time before a problem arises. He wanted national and provincial government to provide more guidance to municipalities and one way to do this was for National Treasury to respond to monthly reports that are submitted.

Ms Hogan said that SALGA should think about what kind of support would be helpful to municipalities.

Mr Glasser referred the committee to Clause 104 that sets out the functions of the Municipal Financial Recovery Service (MFRS). He said that one the functions is to assist any municipality that is experiencing financial difficulties to identify the cause of the difficulty and to find potential solutions. The unit would therefore support and assist even before a major problem develops.

Clause 89 - Provincial financial watch
The clause obliges the provincial MEC for local government to place a municipality under financial watch when he becomes aware of serious, chronic or recurrent financial problems.

Clause 90 - National financial watch
If the MEC does not act the Minister of Finance after consultation with the Minister for Local government can place the municipality under financial watch.

Clause 91 - Serious, chronic, or recurrent financial problems
The conditions for a serious, chronic, or recurrent financial problem are contained in this clause in (a)-(j).

Mr Momoniat said that all the clauses from 91 - 93 say what a financial watch is. Clause 92 provides the possible solutions to the financial problems and Clause 93 states that the MEC or the Minister of Finance can terminate the financial watch at any time.

Mr Carrim said that the list in Clause 91 is extensive and that 99% of municipalities would qualify for financial watch. Many municipalities were at least falling foul of one of the listed items under the clause. He felt the fact that one of the items were breached was not always enough to signal a serious, chronic or recurrent financial problem.

Ms Hogan said that the words serious, chronic and recurrent suggest that there is already a serious problem. One of the items listed is the failure to pay the Auditor General but this was certainly not a sign of a serious, chronic and recurrent financial problem.

Mr Momoniat said that the list can be likened to telling a drunk that he has a problem. The MEC must just tell the municipality that it has a problem and then the municipality at the first instance must try and solve the problem itself.

Ms Hogan commented that the financial watch was then a pre-cursor to a financial emergency and felt that the list was correct because one was not talking about minor problems. She wanted to look at the list in Clause 91 to see if they were indeed indicators of a potentially serious problem.

Mr Carrim was not happy with the list because he understood that the clause meant that if the municipality fell foul of one of the items listed in Clause 91 then the MEC would be obliged to declare a financial watch.

Mr Glasser explained that the list only serves as an indicator. The MEC would still have to apply his mind whether a financial watch is necessary.

Members felt that Clause 89 did not say this and also interpreted it in the way Mr Carrim did. It was agreed that Clause 89 should be rephrased to reflect the intention expressed by Mr Glasser.

Mr Momoniat also said that Clause 90 can be taken out because National government only needs to get involved at the financial emergency stage.

Mr Carrim also asked Treasury why there were clauses where the Minister of Finance decided things on his own without consultation with the Minister for Local Government.

Mr Momoniat replied that when the problem is dealt with at national level creditors would have more faith in a solution if it is the Minister of Finance. He added that it would be fine to include that the Minister of Finance must act after consultation with the Minister of Local Government.

Mr Soni (SALGA) again raised the point that municipalities need more support and assistance before these provisions are ever required.

Ms Hogan asked what would happen with the monthly reports that must be given to Treasury.

Mr Momoniat replied that Treasury would only look at the top few municipalities and the rest would go to the province.

Ms Hogan commented that the province would therefore need tremendous capacity to deal with this. She agreed that it was important for support and assistance to municipalities before problems are serious. In this regard the Clause 104 unit and the project viability reporting to DPLG needs to be reconciled. At the moment there are two streams of reporting that needs to be streamlined. For that reason she felt that project viability needed to be legislated. Ms Hogan felt that a single flow of information and early assistance to a municipality is at the heart of what they need. She asked if it could be agreed that DPLG and Treasury would discuss the reporting requirements so as to ensure a single stream of information. Ms Hogan said that the Bill would then have to be held back because the process envisaged is a huge one.

Mr Momoniat said that holding the Bill back would not be necessary because government is already doing a lot in respect of capacity building and it just has to be built on.

Mr Dorfling agreed that the Bill did not have to be held back and suggested that the indicators in Clause 91 be included in regulations.

Ms Hogan questioned the need for a financial watch at all because all the avenues should be explored as to how to solve the financial problem in the municipality. If the problem cannot be solved the one could go straight into a financial emergency. Ms Hogan thought that the start of a financial watch would send a shock wave and then when a financial emergency is declared another shock wave follows. She was also concerned that an MEC could for purely political reasons simply declare a financial watch.

Mr Momoniat commented that there is also the flip side of the coin where a mayor could be higher ranked in a pert and the MEC would not want to impose a financial watch.

Discussion on Clause 91 will continue at the next sitting.

The meeting was adjourned.

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