Municipal Finance Management Bill: deliberations on Chapter 11

Meeting report

FINANCE PORTFOLIO COMMITTEE
2 August 2002
MUNICIPAL FINANCE MANAGEMENT BILL: DELIBERATIONS ON CHAPTER 11

Chairperson: Ms B Hogan (ANC)

Relevant documents
Draft Chapter 11: Financial Problems in Municipalities
Loxton Opinion on Chapter 11

SUMMARY
Chapter 11 of the Bill is aimed at involving the MEC for Provincial and Local Government in addressing the serious, chronic or recurrent financial problems of a municipality. Should the municipality itself not ensure its finances are in check and a financial problem should then arise, a financial watch will be declared, which is similar to a financial probationary period. The worst case scenario would be the declaration of a state of emergency, in which the MEC intervenes and develops and implements a financial recovery plan (FRP) should the municipality in question refuse to co-operate.

The local government support grant and restructuring grant could be employed as a short-term solution, and its effect on the equitable share was discussed, as well as whether municipalities operating without a tax-base could devise their own FRP. Clause 97 allows the declaration of a state of financial emergency to be issued by a high court, and it was debated whether the courts have sufficient knowledge of the intricacies and core issues regarding local government to make this decision.

A legal opinion was obtained by the National Treasury regarding the constitutionality of Chapter 11 and the legal opinion concluded that Section 139 would have to be amended to allow the MEC to intervene in the budget of municipalities, which is prohibited under the current version of Section 139.

The definition of the term "executive obligation" in Section 139 was discussed, as it relates to the distinction created between executive and legislative functions regarding budgetary determinations, and the effect of the Fedsure judgment in this regard. It was debated whether the proposed amendments to Section 139 amounted to constitutional tampering, or whether it was a sincere attempt at correcting existing provisions which do not properly capture the intricacies of the local government sphere. The "effective steps" to be taken by the MEC in Section 139(3) was discussed, and whether it corresponds to those steps outlined in Chapter 11 of the Bill.

MINUTES
Chapter 11: Financial Problems in Municipalities
Mr Ismail Momoniat, Deputy Director-General: National Treasury, explained that Clause 91 of the Bill seeks to involve the MEC for Provincial and Local Government in addressing the serious, chronic or recurrent financial problems with a municipality. It would then involve the fulfillment of certain, not all, conditions detailed in Clause 91, and a financial watch could then be declared.

Clause 96 deals with conditions for a declaration of a state of financial emergency, in which case "real signals" are shown that the municipality is unable to cover its expenses and debts. The ideal situation would be for this municipality to make strategic payments to its creditor(s) while trying to pay-off its accumulated debt.

Clause 98 provides that the municipality has a credible Financial Recovery Plan (FRP) in place which would lead to it being able to extinguish its debts. The intrinsic delay in effecting this shift has to be accounted for. Similar provisions apply to the financial watch as well, but are not as stringent.

The Chair asked if this means that the FRP can be drawn up under a financial watch as well as in a state of financial emergency.

Mr Momoniat agreed, saying that all the stringent conditions only become operational once a serious financial watch has been declared.

The Chair replied that the problem created by Mr Momoniat's statement is that a distinction is created between a serious and non-serious financial watch. The decision to declare a financial watch should properly fall within the discretionary power of the MEC, as such a decision cannot be prescribed nor governed by legislation. It is essentially a judgment call whether the introduction of a FRP is desirable, and in this regard the MEC would be guided by the Mayor of the specific municipality in question.

Mr Momoniat agreed with the Chair.

The Chair contended that the MEC could even contract the services of a consultant to monitor the situation for a period of time, and they would then make recommendations to the MEC as to the decision to be taken. Further, if a viability problem arises, as was the case with the damage caused by the mining industry in Welkom to that municipality, it might be necessary to issue a grant to remedy the situation. Negotiations could thus be entered into with the National Treasury about the actual amount of the grant, and this could be included in the FRP.

Mr Momoniat added that, as a short-term solution, a local government support grant or even a restructuring grant could be allocated.

Mr Y Carrim (ANC) pointed out that the local government restructuring grant only applies to cases of municipal financial mismanagement, and would thus provide no relief in the current context. The failings by the municipality could also be caused by political tension, and this aspect is not considered here.

The Chair informed Mr Carrim that Mr Momoniat is not proposing that that grant be used as the solution to this problem. She reminded him that during the previous meeting, it was stated that the political problems evident within the municipality occur in response to external shock. This aspect has to be included in the Bill, and has to be resolved with reference to the equitable share.

Mr Momoniat stated that the intention here is to use the grants as tools to resolve this problem, and the problem with relying on the equitable share is that the formula would then be altered. It would thus be desirable to employ tools such as the conditional grants as a short-term solution.

The Chair agreed saying that the formula cannot be changed to cater for one municipality. The decision has to be made by the MEC - whose input has to be included in Clause 94(5)(a).

Mr Momoniat informed the Chair that the decision was intentionally taken to omit the MEC from that provision because it is expected that the MEC and the relevant municipality are constantly consulting each other throughout this process, provided the municipality co-operates. Clauses 94 and 95 have rather far-reaching powers, and the FRP will only be successful if the municipality itself buys into the FRP and acknowledges the situation it is in. This was precisely the reason behind the near collapse of the Johannesburg municipality - it failed to acknowledge the financial trouble it was in. It took two Ministers to make the municipality aware of its position. Should the municipality in question fail or refuse to buy into the FRP, the rehabilitation process would amount to nothing more than a half-hearted attempt at implementing the FRP.

Mr Matthew Glasser, a consultant for the Treasury, added that this remedy is only triggered when the municipality defaults on a payment to one of its lenders.

Mr Momoniat stated that a court declaration was introduced in Clause 97 because the state of financial emergency declared in Clause 96 affects the legal rights of the parties involved. Clause 97(3)(d) is the imposition clause, in terms of which the MEC can intervene and compel the municipality to implement the FRP.

The Chair requested clarity on the Municipal Financial Recovery Service (MFRS) dealt with in Part 5 of this chapter.

Mr Momoniat replied that the MFRS is at the centre of this process as it is requested to devise the FRP, and caters for those serious cases of financial distress. The municipality needs the capacity to develop its own FRP, and the MFRS is only employed in a state of financial emergency.

The Chair asked whether the FRP is devised "in-house" by the MEC

Mr Momoniat replied that this could be done, or the project could be outsourced to consultants.

The Chair stated that clarity is needed on this matter.

Mr Pillay, from National Treasury, pointed out that, at the outset, it is the prerogative of the municipality to develop its own FRP as it is best placed to tailor a plan to suit its needs. Should it fail to devise an adequate FRP or refuse to devise or implement one, the other processes kick in and one is then devised and adopted by the MEC.

Mr P Smith (IFP) stated that four distinct financial situations arise from this chapter:
- the municipality is not experiencing any financial difficulty and all its transactions and financial matters are above board;
- the financial reports indicate irregularities, and remedial action is needed;
- matters are of a more serious nature and a financial watch is declared;
- the declaration of a state of financial emergency, in which case the municipality is in dire need of financial rehabilitation. There is thus a clear gradient of severity throughout these four scenarios, and even the financial watch situation incorporates degrees of financial difficulty. The only sanction imposed during the financial watch situation takes the form of a recommendation from the MEC regarding the FRP to be implemented. Should the municipality be uncooperative here, the MEC has to ensure that the council is consulted before proceeding to the next step.

Mr Glasser replied that this is a widely framed scenario, but should the MEC be of the opinion that an FRP must be implemented, the MEC can do so should the FRP devised by the municipality itself be inadequate. This is provided for in Clauses 94(6) and (7).

Mr Smith stated that this is precisely his concern, as that aspect is only located after the actual provision dealing with the financial watch, and should thus properly be placed towards the beginning of the chapter.

Mr Dorfling (SALGA) urged Members to be mindful of the principle of co-operative governance throughout their evaluation of this entire process. Should a financial problem be identified, the MEC can request the municipality itself to devise an FRP, and granting this option is important to the political context of the financial problem. Clause 94(1)(d) could then be added to allow consultation with the Treasury and Department of Provincial and Local Government, and Clause 94(3)(h) could also be inserted to include the specific conditional grant.

The current formulation of Clause 94(3)(c) seems negative, and should instead be placed after Clause 94(7). Time limits have to be clearly stipulated in this legislation - especially because the process outlined could take several years, as is the case with the current Butterworth matter, which remains unresolved.

Mr Glasser pointed out that the philosophy behind the current formulation of Clause 94(4) aims to require the MEC to be notified of the structural problems experienced by the municipality. It was considered appropriate to lodge the discretion to grant such municipalities additional funds with the Ministers [of Finance and Provincial & Local Government], and the municipality would have to operate to the best of its ability until additional funds are allocated.

The Chair stated that a provision within Clause 94(4) indicates that this situation may in fact be permanent, and not temporary.

Mr Glasser replied that Clause 94(4)(a)(i) is intended to have a permanent effect, whereas Clause 94(4)(a)(ii) would be of a temporary nature, as with the effects of the recent closing of a mine on the Welkom municipality.

The Chair questioned whether Clause 94(4)(a)(ii) did not have a permanent effect as well.

Mr Glasser responded that they are different but the remedies are the same. A plan has to be devised.

The Chair contended that the concern here is whether this is reflected in the records or not.

Mr Momoniat suggested that the conditional grant would immediately be available to the municipality here.

The Chair maintained that a judgement call would have to be made regarding the nature of the problem and the "external shock", as in the case of the Welkom municipality, and this very closely resembles a viability judgement. Furthermore, should the conditional grant be included in Clause 94(3)(h)?

Mr Momoniat replied that this could be effected.

Mr Glasser agreed with Mr Momoniat, on condition that the municipality has to apply for such grants and that they are not issued automatically.

The Chair suggested that the word "recommend" be inserted to accommodate Mr Glasser's concern.

Mr Momoniat disagreed, and suggested that the phrase "may apply" be included instead.

The Chair agreed, and requested clarity regarding the timeframe of the financial watch.

Mr Pillay commented that the financial watch in certain foreign jurisdictions could run for several years, but could also be terminated after a specific period of time.

The Chair asked if a provision should be included requiring the municipality to apply to have the financial watch lifted.

Mr Momoniat replied that this is not necessary, but could be included.

The Chair stated that the FRP itself has to specify the timeframe, as this cannot be prescribed via legislation.

Mr Momoniat contended that this provision has to be strengthened to put in place a more formal mechanism for the financial watch.

The Chair stated that a provision has to be included to allow the municipality in question to apply for the introduction of a financial watch.

Mr Glasser disagreed, as the municipality cannot be allowed to do that which the MEC can do himself.

Mr Momoniat stated that this cannot be viewed as a mechanism to receive additional funds as it is a two-way street, and a proper evaluation of the problem has to be conducted.

The Chair stated that the authority to declare the financial watch has to vest with the provincial or local executive and, should the municipality decide to devise its own FRP, the provincial structures and MFRS have to be consulted.

Ms R Taljaard (DP) contended that this is a different scenario to that in Clause 104(a), in which the municipality itself takes the initiative and attempts to address the problem. In this case the municipality, once placed under financial watch, would want to devise its own FRP, and the Bill does not provide a sufficient balance between these two differing scenarios.

The Chair suggested that Clause 88(2) could be relevant here, as it provides that the municipality itself has to keep itself in check, identify and also resolve any financial problems that may arise. A financial watch would then be declared should the municipality in question fail to abide by these principles.

Mr Momoniat assured Ms Taljaard that this aspect would be tightened up as these draft provisions are, at this stage, for discussion only.

The Chair contended that Clause 89 provides that the prerogative remains with the municipality to resolve its financial problems.

Prof Christina Murray (UCT Law Faculty), a constitutional law expert invited by Treasury, suggested that this prerogative vests with the legislature, and the intervention does not only apply when the municipality refuses to co-operate. Perhaps the wording of this provision should be adjusted to add clarity to the matter.

The Chair agreed.

Mr Carrim agreed with Prof Murray, but commented that municipalities are generally loathe to admit their financial problems.

The Chair stated that this is precisely the reason for the need to provide "a spark from underneath", so that the municipality might be urged to take charge.

Ms Taljaard contended that the necessary skills and qualifications of the "person or organisation charged with preparing the recovery plan" in Clause 94(1) have to be clarified.

The Chair suggested that the qualifications not be stipulated in the Bill.

Mr Glasser informed Ms Taljaard that the legislation is not completely silent on this matter, as Clause 92(d) provides that such a person or organisation must have a reasonable chance of providing a feasible solution.

Ms Taljaard stated that an argument could be made that, despite any arguments to the contrary, the recovery plan should be submitted to the municipal council as well in Clause 94(5).

The Chair requested the phrase "after consultation with the council" be inserted to accommodate Ms Taljaard's concern.

Mr A Lyle (ANC) questioned whether Chapter 11 applies to those rural municipalities that rely entirely on grants, as the chapter seems to target only those municipalities that are tax-based. His municipality in the Limpopo Province is not tax-based, and its status in terms of this Bill is thus uncertain.

Mr Pillay replied that this would be regulated via the equitable share, and measures have been put in place to address this matter. The FRP would explore all these options with reference to the particular municipality.

Mr Momoniat added that the equitable share must enable the municipality to provide for itself, and if this is not the case, the equitable share would have to be increased. This has in fact been done in the Limpopo Province and, to the extent that the municipality mismanages its funds, the relevant provisions of the Bill would also apply to them.

Mr Lyle stated that his original question has not been adequately answered, as it has not been made clear how a FRP can be instituted in those municipalities operating without a tax base.

The Chair contended that Mr Lyle seems to assume that all these problems are caused by revenue problems, when in fact these could be caused by a whole range of possible problems.

Mr Momoniat added that the revenue problem would be dealt with via the equitable share.

The Chair requested clarity on how exactly such municipalities would gain access to tools with which to identify and address the problems.

Mr Momoniat responded that various forums exist, such as the joint MinMec with the Department.

The Chair stated that the scenario sketched by the Bill is that even non-tax based municipalities can request an FRP when experiencing revenue-related problems, but she asked for clarity as to how exactly this would work. Furthermore, would the FRP include conditional grants instead of relying on the equitable share and, if so, how would this be accommodated under Clause 94(3)(h)?

Mr Momoniat responded that there are currently two grants being provided: the restructuring grant and the local government support grant. The former is tailored to address large financial problems and the latter to address smaller municipal problems. The restructuring grant is administered by the Treasury, whereas the local government support grant is handled by the relevant MEC.

The Chair stated that the FRP would essentially recommend that the MEC "step up" the support grant.

Mr Carrim suggested that the FRP would surely draw attention to the actual problems being experienced by the municipality in question, but if a newly established municipality is not aware of its own potential to draw funds from its limited resources these grants would also be available here, in theory. Also, Clause 94(4)(b) does not offer any possible solutions to the problems with the municipality, and therefore the use of "note" in that clause is inadequate and should be amended to require feasible solutions to be provided as well.

Furthermore, there seem to be several overlaps throughout Clause 94(2)(a) to (j), such as the similarity between the use of the term "actions" in both Clause 94(2)(e) and (h) and the "objectives" in Clause 94(2)(f) and (g). These examples do not seem to be sufficiently distinguishable to be dealt with in separate provisions, and would be better placed in a single provision. Also, Clause 94(2)(c) creates a significant problem for local government structures, as it deals with major policy decisions which should properly be handled by the MEC.

The Chair contended that is could also be challenged as unconstitutional, as it could affect the remuneration of members of the legislature.

Mr Carrim continued that Clause 94(2)(d) seems fruitless, and Clause 94(6)(b) has to be made consequent upon Clause 94(6)(a). Surely the word "assure" in Clause 95(e) should be replaced with "ensure", and there seems to be a disparity between "lender or investor" in Clause 96(b) and "creditor" of the municipality in Clause 97(f).

With regard to the remainder of Clause 97 as it pertains to the high court declaration, the court structure is not adequately familiar with the specific nature and problems facing the local government sphere, and do not have sufficient practical knowledge of its workings. It's problems cannot therefore be decided purely as a legal issue, as there are other important factors at play that have to be considered. The result would be a finding that, upon a strict legal analysis of the situation, no legal conflict exists between the Bill and the Municipal Systems Act, and such analysis fails to recognise the unique policy or capacity-related incompetence of the municipality in question. Thus a strictly objective analysis by the courts would be problematic here.

The Chair agreed with Mr Carrim regarding the capacity of the court structure to understand the current context of the local government arena, but contended that there are several insolvency courts dealing with similar matters to Chapter 11, and are staffed with judges that have a background in commerce. The judges hearing the Clause 97 declaration will have a similar background.

The decision was taken to grant the power to declare a state of financial emergency with the courts, because it was argued that allowing the Minister to interfere and impose such a state would come under constitutional challenge. Also, these judges would also be provided with guidelines as to the nature of the financial problem, and they do not have to be provided with a very detailed account of the situation to declare a state of financial emergency in Clause 96. Should the municipality not agree with the decision taken by the court, it would have legal recourse to challenge that decision.

Mr Momoniat agreed that the political problems at play within the structures of the municipality have to be addressed before the process can be resolved. It seems that these political problems are far too often addressed at too late a stage in the process with the result that they, and indeed the entire process, are not properly resolved, as is the case in the recent Butterworth matter. The aim here is that even when a state of financial emergency is declared, the MFRS would still take over here, with the result that the courts would not be afforded too much scope. Mr Carrim is thus assured that the courts, in Clause 97, would not be granted any undue leeway.

Ms Taljaard contended that, with regard to the implementation of Clause 95, its heading does not logically follow from Clauses 94(5) to (7).

Mr Smith referred to the point he made earlier that Clause 92(d) is not an effective process and Clause 94 seems to deal half with preparation and half with implementation. Clause 92(d) should therefore be amended by strengthening the provision to require the identification and resolution of possible problems. The current formulation only provides that the MFRS may be "requested" to "develop" an FRP. The provision thus has to be strengthened to force the development and implementation of a feasible FRP.

Furthermore, efforts have to made to ensure that the problems are resolved within the term of office of the current municipal council, as it could very well take a long time for the matter to be resolved. A provision should thus be included to the effect that the lifespan of the FRP would continue beyond the term of office of the municipal council.

Mr Momoniat replied that this could be accommodated within Clause 99.

Mr Carrim stated that there are several provisions within Chapter 11 in which reference is made to the municipal manager, but not to the municipal council, as is the case in Clause 100(2). This has to be remedied.

Mr Momoniat replied that this would be rectified.

Briefing on Loxton Opinion on Chapter 11
Mr Kahla, a member of the Treasury delegation, noted that Adv Loxton had been approached by Treasury to draft a legal opinion regarding the constitutionality of Chapter 11, especially the financial watch and financial emergency provisions. The opinion concluded that Section 139 of the Constitution would have to be amended to render it compatible with Chapter 11, as detailed in point 31 of the Loxton Opinion on Chapter 11.

The proposed amendment to Section 139(3) in point 31 of the opinion outlines the financial emergency provision., The proposed amendment to Section 139(4) categorises the interventions to be made in Section 139(3). The result is that Section 139(1) as amended provides what the municipality may do and Section 139(3) removes the discretion formerly granted to the MEC to intervene by now requiring intervention. This has to be read with Section 100 of the Constitution which deals with intervention by the national government should the provincial authorities fail to intervene, and now imposes a responsibility on the provincial government to intervene should the municipality fail to act.

Mr Glasser added that it was recognised at an early stage that the Constitution would have to be amended to allow the proper implementation of the state of financial emergency for those municipalities in need of assistance. The latest Constitutional amendment referred to in the opinion was published approximately thirty days ago, and is expected to be promulgated in the next few weeks. The Justice and Constitutional Development Portfolio Committee has considered this matter and fully supports the view expressed by the opinion. The opinion has concluded that the proposed amendments to the Constitution would render Chapter 11 constitutional.

Mr Momoniat added that the proposed amendments to Section 139 is aimed at regulating the entire process.

Discussion
The Chair stated that it is rather difficult for Members to apply their minds to this matter as they have not had sufficient time to consider the judgment on the Constitutional amendment. The conclusion reached by the opinion should therefore just be adopted by this Committee, and a decision has to be reached on the way forward in this regard.

Mr Momoniat replied that the opinion has been supplied to Members to familiarise them with the issues.

Ms Taljaard asked whether there is any prospect of a joint sitting with the Justice and Constitutional Affairs Portfolio Committee to discuss the constitutional amendments for Section 139, as they might run into problems should they not be aware of the proposed corresponding amendments and issues in the Bill, and Chapter 11 specifically.

The Chair agreed that it is important that this matter be discussed with that committee but suggested that it would have to take place on an informal basis, as was done during the deliberations on the Financial Intelligence Centre Bill when the Chairperson of that Committee was invited to attend. The Chairperson of that committee will be contacted in this regard.

The Chair asked if the proposed amendments to Section 139 are aimed at ensuring that the provincial structures intervene when the municipality itself does not fulfill its executive obligations.

Mr Momoniat stated that, for the purposes of Chapter 11, only Section 139(3) is largely needed. Yet the problem created here concerns the definition of the term "executive obligation" in Section 139(1). This problem could be easily remedied by the deletion of Clauses 139(1)(b) and (c).

Mr Kahla noted that Treasury has been grappling with issues such as whether the budget is strictly an executive or legislative function, and in this regard the Fedsure judgment was considered. The deletion of the word "executive" from Section 139(1) was also considered, so that the obligation could remain with the legislature.

Mr Momoniat added that the decision was taken to include Section 139(1)(c) to accommodate the other types of service delivery, those that are not directly relevant to the present concern.

Ms Taljaard asked if it was the specific intention of the drafters of the Bill to introduce a hybrid body which may execute "double features". The deletion of "executive" is problematic. The drafters of the Constitution's intent needs to be interrogated in accordance with doctrines of the interpretation of statutes. There must be a reason why the drafters specifically highlighted the executive obligations of local government as opposed to their legislative functions. The Fedsure judgment classified budgetary processes - the heart of the Bill - as a legislative function. As the Constitutional amendment seeks to also provide for intervention when there is failure to pass a budget or other difficulties with the Budget. Would it not be a problematic amendment to effect as the drafters might have wishes to expressly exclude intervention in legislative matters (which the budgetary process is) by specifically using the wording "executive obligation".

Prof Murray informed Members that Section 139 was initially based on Section 100 of the Constitution, which does not want the national legislature to intervene on behalf of the province. It has to be conceded that the provisions of the Constitution relating to local government might not read well because the drafters did not fully understand the core issues relating to that sphere of government. The result is that this proposed amendment to Section 139 should not be viewed so much a tampering with the constitutional provisions, but rather as a correction of shortcomings.

Mr Smith agreed, and was pleased that this matter is finally being addressed. He asked for clarity regarding the distinction between Sections 139(1)(a) and (c).

The Chair replied that Section 139(1)(c) relates specifically to those obligations dealing with the health and safety of the municipality.

Mr Smith suggested that Section 139(1)(c) would therefore be subsumed in the more general Section 139(1)(a).

Mr Momoniat replied that this matter was raised with the Department and it was also of the opinion that Section 139(1)(c) be omitted. Thus that provision could be deleted, if so desired.

Mr Smith questioned the inclusion of that provision if both the Department and the Treasury were not particularly interested in its retention in the Bill.

Mr Momoniat responded that the Justice and Constitutional Affairs Portfolio Committee had had a hand in this provision, and recommended its insertion to allow for a discussion on the inclusion of the term "executive" in Section 139(1), once the matter came before Parliament.

The Chair stated that this matter would be raised with that Portfolio Committee during the joint sitting, and recommended that SALGA also be present at that meeting.

Mr Soni, a member of the SALGA delegation, informed Members that SALGA is presently hosting a national conference on this very matter.

Mr Momoniat stated that the Loxton opinion seeks to clarify the constitutionality of a Chapter 11 provision which allows the MEC to dictate the budget of a municipality in accordance with the FRP, should the municipality in question refuse to co-operate.

The Chair asked whether the constitutional amendment is needed "to give Chapter 11 teeth".

Ms Taljaard stated that Section 139(1)(b) could be declared unconstitutional by the Fedsure judgment, unless the instrument [the budget] and its legislative nature can be distinguished.

The Chair replied that the budget has more reference to the executive arm of government than any other piece of legislation. The South African budget originates with the executive arm of government but the problem which then arises is that, should the legislature not pass the budget, the executive would not have the necessary funds with which to properly execute its functions. Should it fail to pass the budget, the legislature would be failing to exercise its legislative responsibility to ensure the executive does its job properly. This would not be a legal but a political failure. What then is to be done when the legislature fails to execute a task on which the whole of government is based? This would literally shut down government, as was the case with problems experienced with the budget during the Clinton administration.

Ms Taljaard stated that it also has to be realised that there is no clear distinction between the legislative and executive functions with regard to budgets, and acts of appropriation are where the distinction would reach its zenith. This could therefore also be a reflection of the political tensions at play within government.

The Chair contended that the legislature is not subject to the executive prerogative, and can therefore decide matters as it sees fit. The crucial issue then arises as to what happens when the legislature simply fails to exercise this prerogative? Surely remedial measures have to be put in place to deal with this eventuality.

Mr Momoniat replied that there is legislative tension in this regard, but the risk of failure to pass the budget is much higher at the municipal level. Section 139(1)(b) was argued for by the MEC himself and it is expected that, in the light of the Fedsure judgment, the MEC would pass the budget on behalf of the municipality.

Mr Kahla added that it is important to understand the background to this matter, and the net result of the proposed amendment is an attempt to resolve the current problems via Section 139(6) as introduced by the Loxton opinion.

Mr Smith returned to his earlier question regarding the financial watch, and asked whether the steps taken in Chapter 11 correspond with those required in Section 139(2).

The Chair asked when exactly Section 139 would come into operation, and under which circumstances would the MEC declare a financial watch.

Mr Momoniat replied that this depends on the facts of the particular case, but the circumstances are largely detailed in proposed Section 139(3) of the opinion.

Mr Smith stated that this is precisely where the gap is created, because if Section 139(2) only relates to the situation in which the municipality fails to co-operate and the subsequent interference by the provincial structures, the corresponding provisions in Chapter 11 of the Bill have to be linked to it.

The Chair suggested that this concern be resolved by cross-referencing the relevant provisions in Chapter 11 with Section 139(2)(a).

Mr Glasser stated that it is the intention that Section 139(3) deal with the intervention regarding the state of financial emergency, not Section 139(2), as Section 139(3) is mandatory, whereas Sections 139(1) and (2) are not.

Ms Taljaard agreed with Mr Smith that Sections 139(1) and (2) could include both a financial watch and an FRP.

Mr Smith contended that the MEC can impose the implementation of an FRP, even during a financial watch situation, and its imposition is therefore also mandatory.

Prof Murray stated that it is crucial here that Chapter 11 imposes an obligation on the MEC to intervene in these circumstances but it is not clear, constitutionally, how the MEC would be obliged to act here. The proposed Section 139(3) requires the MEC to proceed in accordance with an FRP and to take effective steps to resolve the financial problems. The question then arises as to whether the "effective steps" to be taken can be prescribed by legislation, or whether they should be left to the discretion of the MEC.

Furthermore, the wording of Section 139(6)(b) is problematic, as the precise meaning of the phrase "implementation of this section" is unclear. This uncertainty is made more problematic as this is an important element, and it does lend itself to the interpretation that the MEC is left largely to his own devices in implementing the section. The result is that Section 139(6) affords added protection to the MEC, as well as the more detailed obligations of the MEC as contained in Chapter 11 of the Bill.

Ms Taljaard requested clarity regarding the imposition of the FRP.

Mr Glasser recognised that the current formulation of Section 139(3) is not the clearest possible statement of its objectives, but is workable nonetheless. Its aims are two-fold:
- to define the conditions under which an MEC can intervene and the requirements of such action;
- the "effective steps" to be taken once such intervention is warranted.
The crucial question then arises as to whether the "serious or persistent breach" required in Section 139(3) corresponds with the relevant provisions in Chapter 11 of the Bill, and whether the effective steps to be taken in preparing the FRP are the same in each. A close evaluation of the two sections will reveal that they do not match each other one-for-one exactly but, as confirmed by the opinion, the two do not conflict.

This entire process thus began with a decision taken by Cabinet to tackle the problems caused by borrowing of funds by municipalities, and with this came the Bill and the proposed constitutional amendments and the tools with which to effect the implementation of these amendments

Ms Taljaard stated that the definition of the term "basic services" in Section 139(3) is problematic, in as far as it corresponds to the existing definition in the Municipal Systems Act and the definition of the phrase "delivery of services" in Chapter 11 of the Bill. This matter has not yet been resolved.

The Chair agreed.

Mr Glasser informed Members that the decision was taken to include the term "basic services" in the proposed amendment because the municipality in question might have no available funds with which to pay its creditors, and would thus also not be able to provide the basic services. Its inclusion thus moves beyond the scope of the aims of Chapter 11.

Mr Momoniat added that Sections 227(1) and 214 of the Constitution deal with the vertical division issues, and the Constitution itself therefore includes a notion of basic services with regard to funding.

The Chair requested clarity regarding the use of the phrase "financial commitment" rather than "financial obligations" in Section 139(3).

Mr Glasser replied that he is not certain as to the reasoning for its inclusion, but it could be altered.

The Chair suggested that it be altered to "financial obligations", as this would then link the provision directly to the budget.

Ms Taljaard reminded Members that the important issue regarding "municipal entities" has not yet been discussed, and should be considered as a matter of importance.

The Chair agreed.

Mr Momoniat agreed, and contended that the proposed amendment to Section 139(3) would apply to municipal entities as well. This matter will be considered further.

Ms Taljaard asked whether the Joint Tagging Mechanism (JTM) is aware of this matter, as it could mark a huge shift for Parliament.

Mr Momoniat informed Members that Chapter 11 will be reformulated and that draft would be made available to Members before its joint sitting with the Justice and Constitutional Development Portfolio Committee.

There were no further questions or comments and the meeting was adjourned.