Municipal Finance Management Bill: deliberations

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Finance Standing Committee

09 September 2002
Chairperson: Ms Hogan (ANC)
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Meeting Summary

National Treasury provided the Committee with a new framework for Chapter 11 of the Municipal Finance Management Act. Based on the new draft the Committee had a conceptual discussion on how Chapter 11 should look. No decisions were taken and a technical committee will meet on Wednesday 18 September 2002 at 14h00 to try and finalise the discussion so that Treasury can redraft accordingly.

Meeting report

National Treasury was represented by Mr Momoniat and Mr Glasser.

Ms Hogan asked when a composite Bill would be ready.

Mr Momoniat replied that Adv Grove has estimated that it would be ready by 13 September. He advised that today the focus would be on the concept of Chapter 11 and not the specific wording of the draft provided.

Ms Taljaard (DP) commented that it was difficult to work in this manner. The content had to be in a clear and concrete Bill format.

Ms Hogan replied that only the conceptual issues and the desirability thereof would be dealt with for now. For this reason the chair felt that the discussion could go ahead and asked Mr Momoniat to start.

Mr Momoniat said that Chapter 11 is not a legally refined draft but contained many revisions. Treasury provided a broad framework of what should happen when there is a financial crisis. Also in the draft of Chapter 11 attached hereto Treasury provides explanatory commentary.

Mr Momoniat advised that the concept of Financial Watch and Financial Emergency as contained in the tabled version has been discarded. Treasury provided a table of the broad conceptual framework contained in the draft and is also attached hereto. The framework envisages two types of interventions. The first is a political intervention and the second is an emergency recovery. He distinguished the two:

A political intervention can be in terms of Section 155(6) or 139 of the constitution. The table sets out the nature of the intervention and can range from monitoring and support to the directive in terns of Section 139 and can also extend to the imposition of a recovery plan.

An emergency recovery only applies when legal rights are affected and therefore it kicks in when there is a default on a payment to an investor, when the municipality needs protection from investors or when the municipality wants its debt to be restructured etc. Currently if there is a default a creditor can go to court to obtain a judgment. Under the MFM Bill the municipality will be able to ask for three types of relief:

-90 day temporary protection so that a recovery plan can be developed.
-Temporary restructuring of the debt but the municipality must show that it cannot pay the debt at the moment.
-Permanent write-off of the debt but the municipality must first show that it can never pay the debt.

Mr Momoniat further distinguished a political intervention from the emergency recovery: the recovery plan in the case of a political intervention is prepared by any qualified person chosen by the MEC. In the case of an emergency recovery the plan is prepared by the Municipal Financial Recovery Agency established in Chapter 11.

Part 1: Preventative and remedial actions
Clause 89 - Identification and resolution of financial problems by municipalities themselves
Mr Momoniat said at the first instance the municipality must identify their own problems and prepare a financial recovery plan. A municipality can request assistance from organs of state if they cannot resolve the problem on their own. In this regard the monthly reports are of importance. Mr Momoniat felt that a mechanism was needed to ensure that the monthly reports that are provided by municipalities must be read by whomever are receiving them.

Clause 90 - Capacity building and support
The Clause provides the obligations of provincial and national government. Clause 90(4) states that the inadequate performance of these obligations is not an excuse for municipalities not to comply with the MFM Bill.

Clause 91 - Provincial Intervention
Mr Momoniat explained that the rationale behind the compulsory steps that an MEC is must take is because many interventions in the past have been too late. In terms of Clause 91(3), if a municipality has financial problems which are sufficiently serious or sustained and it is in the municipality's or the community's best interest that the provincial executive intervene, and the MEC does not intervene in terms of section 139 of the Constitution, the Minister responsible for local government may intervene in terms of Section 100 of the Constitution. Mr Momoniat said that this would require a constitutional amendment.

Clause 92 - Serious financial problems
Mr Momoniat said that the Constitution is silent as to when there is a serious financial problem. The question is therefore whether national legislation should define this. In Clause 92 indicators are provided to assist the MEC to determine if there is a serious financial problem. The MEC can ignore the indicators and can apply his/her judgement as to whether there is a serious financial problem.

Ms Taljaard interrupted and asked what was the aim of the current exercise undertaken by the Committee.

Ms Hogan replied that the Committee was looking at the conceptual framework of Chapter 11 and if it is correct.

Clause 93 - Allegations of serious financial problems
The Clause places an obligation on an MEC for local government to take allegations from the public in respect of a serious financial problem seriously provided it is not frivolous or unfounded. The MEC must respond to the allegation. Mr Momoniat linked the Clause to the Mandamus that was talked about by Adv De Lange (Justice Chairperson). A creditor would be able to get a mandamus from a court ordering the MEC to act.

Clause 94 - Identifying possible solutions
The Clause recognises the role of the mayor and the municipal council in identifying possible solutions and the MEC is obliged to first engage with the municipality before and during an intervention. Clause 94(2) provides that the province cannot bail out the municipality by making funds available and that additional funds can only be provided in terns of a recovery plan and must be conditioned on the implementation of the recovery plan.

Clause 95 - Terminating an intervention
The MEC must review an intervention at least every quarter and terminate the intervention once the serious financial problem has been resolved.

Discussion
Ms Taljaard referred to Clause 90(4) and thought that the Clause was unacceptable in the light of the section 139 amendment. She felt that the Clause provided national and provincial government with an opt out of providing the necessary support and capacity building al local government level.
Secondly, in Clause 91(1)(a) it is provided that before a political intervention a MEC must consult with the Mayor or any party which the MEC may deem appropriate. The member felt that the mayor should be involved in deciding whom the MEC consults with.
Thirdly, the member felt that too much discretion is given to the MEC all over the Chapter. Two such examples were in Clause 92 and in Clause 91(2).

Mr Momoniat replied that section 139 is wide but that the restraint thereof must be dealt with by the courts if an MEC acts improperly. He added that it was difficult to legislate for each and every failure that could occur and therefore the framework is broad.

In respect of Clause 91(1)(a) he said that sometimes it would be necessary for the MEC to go to other persons to establish that creditors are not being paid to establish that a serious problem exists. This is especially true when the municipality tries to conceal this.

On Clause 90(4) Mr Momoniat said that it was an important Clause. In the past the failure on the part of a municipality was clear but the MEC did nothing. In such a situation the MEC should be held accountable by the provincial legislature. He added that each government must take responsibility for its actions. If the MEC does not monitor and support the provincial legislature must exercise oversight but one cannot have a municipality say that they have failed because the province did not deliver properly. The three spheres of government were each responsible and accountable. Mr Momoniat said that this was difficult to legislate.

Ms Hogan wanted more input as to whether Clause 90(4) provides national and provincial government an opportunity to opt out of their obligations.

Mr Mettler (SALGA) did not believe that the Clause provided national and provincial government with the opportunity to opt out of their obligations. It was only clarifying that local government cannot make excuses. The obligations on national and provincial government are clear in the Constitution. Further, if an act of Parliament places an obligation on local government it must comply.

Ms Hogan thought that clarity had been provided on Clause 90(4).

Ms Manche (DPLG) commented that Clause 90 should be crafted in a way that spells out the role provinces and national government must play.

Mr Hanekom (ANC) thought that Clause 94(4) was fine. On Clause 91(1)(a), which Ms Taljaard had a problem with, he said that it could be that the mayor is the problem and then the MEC would have to consult other persons. He had no problem with the Clause because the MEC could not side step the mayor.

The Member did have a problem with the drafting. In Clause 91(3) he noted that this is the first time that the term 'intervene' is used but it is not defined. The draft seems to intend that an intervention is equivalent to a financial recovery plan, but it does not say so. He said that after Clause 93 a recovery plan is mentioned but at this stage the draft does not spell out what type of interventions are possible.

Ms Hogan replied that an intervention could be anything in terms of section 139.

Ms Taljaard commented that there was still the question of what the final section 139 will look like. Currently there can only be an intervention if there is a crisis in the financial affairs of a municipality.

Ms Hogan did want to go into the merits at the moment but said that everyone accepts in principle that a stronger intervention is needed and in some cases a mandatory intervention.

Ms Taljaard replied that she did not necessarily accept that, because the wording of the draft opened the door to a wide discretionary power.

Mr Momoniat said that one view is that it is difficult to spell everything out in legislation because interventions are very difficult to predict. If a municipality feels that an intervention is not constitutional then a court can decide.

Ms Hogan asked what steps are in mind when it is said that a MEC must intervene in terms of section 139.

Mr Momoniat replied that it depends on the problem. One would hope that it is just a directive, but if the financial problem were serious then the MEC would have to go the route of the recovery plan.

Ms Hogan felt that the draft should therefore say that it applies to a financial emergency and the steps that need to be followed in relation to the recovery plan.

Mr Hanekom agreed that the draft intends this but does not say so.

MS Hogan asked for confirmation that the draft was just looking at a financial emergency.

Ms Taljaard commented that depending on how Chapter 11 is worded it could still be unconstitutional because of a possible broad interpretation.

Mr Momoniat said that Treasury saw gap in financial emergency situations and therefore there is a focus on the mandatory intervention. Because the constitutional amendment focuses on two types of problems the draft also covers the lesser serious problems.

Ms Hogan thought that it was simple in that Chapter 11 has to be based on section 139. For this reason she said that Chapter 11 must say that the intervention of the MEC is in terms of section 139 (1B).

Mr Powell (DPLG) said that the issue was the definition of 'financial crisis'. Once that is defined the mechanism can be looked at. The second issue he said was the failure that is being dealt with is a failure in financial management. He added that the softer issues under section 139 (i.e. the directives) are important ones and he felt that these issues need to be appropriately taken into account.

Ms Taljaard commented that Clause 90 on capacity building and support needs to be redrafted.

Ms Hogan summarised that the soft interventions need to be considered as well as the definition of a serious financial problem / financial crisis. The chair advised that she had spoken to Ms Manche and Mr Powell during the tea break and it was identified that there is a need to understand when a financial recovery plan kicks in or when there is a problem. Also a problem with financial management might not be a crisis but there needs to be clarity as to what an MEC can do. This would apply to the softer interventions. She asked Mr Momoniat to continue with Part 2.

Mr Momoniat said that he would quickly run through the rest of Chapter 11.

Part 2 deals with the financial recovery plan. Mr Momoniat said that there are four ways that a financial recovery plan can arise:
A financial recovery plan can be required by the MEC for Local Government when the MEC determines that is necessary in order to resolve serious financial problems in a municipality.
If the MEC does not take effective steps, the Minister for Provincial and Local Government can require a plan in terms of Section 100 of the Constitution, and section 91(3) of this MFM Bill.
A financial recovery plan can be prepared at any point at the request of a municipality.
The Minister of Finance must require a recovery plan where a court has determined that there has been a default by the municipality to an investor, or where the municipality seeks extraordinary relief from legal process pursuant to part 4 of this Chapter 11.
In any of the first 3 cases, the person requesting the plan can appoint any qualified person or entity to prepare the plan, including but not limited to the Municipal Financial Recovery Agency.
When the Minister of Finance acts following a court determination of default, he must request the Municipal Financial Recovery Agency to prepare or review the plan.

Clause 96 says who must prepare the recovery plan and the obligations on the person preparing the plan. The agency is obliged to prepare the plan if section 98 applies i.e. a court has determined that there is a serious financial problem. Clause 98 lists the conditions for when the agency must prepare the plan.
Clause 97 is important because it ensures the implementation of the plan that has been prepared. Mr Momoniat thought the Clause was important because it was no good having prepared the plans but it is not implemented.

Part 3 deals with the Emergency Recovery Plan.
As was said before Clause 98 says when an emergency plan is required. It is kicked off by an order of court.

Part 4 deals with the rights of creditors and the extraordinary relief available to the municipality.

Part 5 establishes the Municipal Financial Recovery Agency. Mr Momoniat said that he would not deal with this now.

Ms Taljaard said that conceptually she needed to think about the four ways that a recovery plan
can arise. Another conceptual issue was the separation of powers in that the executive takes over a legislative function, as the recovery plan was a legislative act.

Ms Hogan asked what suggestions Ms Taljaard had because surely she recognized that there is a problem when a budget is not passed.

Ms Taljaard believed that if there is a legislative failure, it must be resolved by elections.

Ms Hogan asked what would happen if the same problems are faced after the election. She said that the question is if the MEC has the power to mandate a financial recovery plan if the council does not adopt it.

Ms Taljaard questioned the legal standing of the agency to prepare a recovery plan.

Ms Hogan replied that the MEC delegating this power to an agency is envisaged in the new constitutional amendment.

Ms Taljaard felt that there is a question of political accountability if the MEC accepts the advice of the agency.

Ms Hogan said that the question of who can adopt the recovery plan would be discussed in the Justice Committee.

Mr Momoniat commented that it would not be a problem to dissolve the Council but submitted that the problems would not be resolved if the same persons were elected back to office. He added that during dissolution a budget would still be needed.

Ms Hogan reiterated that this issue needs to be discussed but would be done so in the Justice Committee.

Mr Dorfling commented that if the obligations on provinces to support municipalities were built into Clause 90 the MEC would have good information available. He further suggested that once the MEC has this information a decision needs to be made whether there is a systemic problem or a financial management problem. He continued and said that if the problem is systemic than the problem can only be solved in the Division of Revenue Act. He made a specific suggestion that such problems should be referred to the budget forum. If the problem is because of financial management, he said it must be divided into those that are serious and those that are not. If the problem is serious enough for a recovery plan then the Chapter should spell out what needs to be done in that situation. The suggestion was based on the need for the Chapter to be more flowing.

Ms Hogan asked what a systemic problem is.

Mr Dorfling replied that a new demarcation or a decline in the local economy could result in a loss of revenue to a municipality. These were examples of systemic problems.

Ms Hogan referred to Clause 96(4) that says that the drafter of the recovery plan must take into consideration those very factors.

Mr Dorfling replied that his point was that this consideration must come much earlier, not when the recovery plan is being drafted.

Mr Hanekom commented that it was not clear how one got from a financial recovery plan to an emergency recovery plan.

Mr Powell commented that section 139 was doing three things. The first it looks at when a financial recovery plan is needed. Secondly it provides the MEC with discretion to adopt a recovery plan in certain circumstances. Thirdly, there is a broader purpose of monitoring and support. He said that people are saying that all three of these are relevant and so the question that remains is what is the Chapter going to deal with. He asked the committee to keep in mind the public policy issues that are at stake. The first is how to attract capital investment in infrastructure. The second to protect and promote local government and the third is intergovernmental responsibility.

Ms Hogan said that it was not clear what was meant by financial crisis in section 139. The problem with section 139, could be the link with basic services, which is difficult to define. Further a failure to provide basic services is not always as a result of a financial crisis. It was the chairs opinion that section 139 was badly crafted because a test for a financial crisis would have been better than saying what it leads to. She added that if one accepts section 139 then a definition of a serious financial problem is needed. More specifically when does a problem become a crisis and when does the seriousness trigger section 139 (1B). The chair was clear that a municipality must adopt a recovery plan and if the municipality does not adopt it the MEC must do so. She asked what triggers the MEC to intervene.

Mr Glasser replied that the current draft of Chapter 11was heavily informed by the comments of the Chair of Justice. As a result when the MEC intervenes is deliberately not specified but rather Clause 92 provides factors that the MEC can consider when deciding if an intervention is necessary.

Ms Hogan commented that one basis for the MEC to intervene should be on request by the Municipality. The chair wanted this principle to be incorporated in the draft. She continued and said that what needs to be finalised is when the MEC intervenes with a financial recovery plan.

Mr Momoniat said that members seem to want to know when a problem is a serious financial problem for the purposes of section 139(1B). In trying to answer this he said that it was up to the court to decide. In the Chapter a political process has to take place to make the determination. The court could confirm or set aside the determination made by the political process.

Ms Taljaard commented that the current wording was vague. An example of this is that it is not clear what is envisaged under the softer interventions.

Mr Hanekom asked if it is desirable for the MEC to be obliged to impose a recovery plan.

Mr Glasser replied that we would want the MEC to impose the plan because the past has shown that there is a failure to act.

Mr Momoniat asked the committee if they preferred the Chapter to contain criteria or a process.

Ms Hogan replied that her personal choice was for the Chapter to contain the process. Due to time constraints the chair proposed that a small committee look at Chapter 11. All the issues should be considered and be brought back to the Committee. She did not want to instruct Treasury to draft something now because the Committee was unable to give a clear mandate.

It was decided that that the small technical group would meet on Wednesday 18 September 2002 after the Committee deals with the Finance Bill.

Ms Taljaard wanted confirmation when the composite bill would be ready.

Mr Momoniat replied that it would be ready on Friday without Chapters 9 and 11.

The meeting was adjourned.

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