Entities in Municipal Finance Management Bill: discussion

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Finance Standing Committee

19 November 2002
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Meeting report

FINANCE AND PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEES: WORKING GROUP
20 November 2002
MUNICIPAL FINANCE MANAGEMENT BILL: DELIBERATIONS

Chairperson: Ms B Hogan (ANC)

Relevant documents:
Working draft of Chapter 8A: Utilisation of External Mechanisms for Performance of Municipal functions
Municipal Finance Management Bill: Draft of 13 September
Municipal Systems Act
Treasury's presentation on Mechanisms, Entities, Districts and Authorities

SUMMARY
The Finance Committee Working Group met to discuss the establishment of municipal entities in terms of Chapter 8A of the Municipal Finance Management Bill. Municipal entities would be responsible to assist the Municipal Councils in the performing their functions. The Working Group had to devise mechanisms that would ensure that the entities remain in the control of the Councils in terms of political accountability although their autonomy should also be guaranteed. The National Treasury made a presentation regarding the framework that should be developed in creating these mechanisms.

MINUTES
National Treasury was represented by Mr I Momoniat, the Deputy Director-General in Intergovernmental Relations and Mr M Glasser, Intergovernmental Relations Consultant.

Mr Momoniat gave an input entitled Mechanisms, Entities, Districts and Authorities. Some points he made were the following:
Treasury did not have a position on the issue and would therefore remain open in the discussion. He noted that there seemed to be general agreement that there is a need to develop mechanisms that would regulate the relations between the municipalities and the entities. However, the point of departure is the means that should be used in achieving that, especially with regard to external mechanisms. This becomes apparent when the Council becomes a party in a Public Private Partnership or the Multi-jurisdictional Services Districts. Mr Momoniat said he could not find the logic in the Multi-jurisdictional Services Districts being a non-juristic person but which would be governed by a juristic person. There is a need to precisely define the meaning of concepts such as "political accountability" and "autonomy" and also to establish a balance between the two. He acknowledged that in terms of effective governance, the Council is required to remain accountable to its constituency. However its intervention in the entities should be minimal and only be effected when there is a threat to the municipality as the whole. He failed to find any justification that would allow the Councils to contract outside the Republic, whereas they are still struggling to deliver their core services inside the country. He noted that if Councils desire to enter into any Public Private Partnership or Multi-jurisdictional Service Districts then stringent test requirements should be put in place. He suggested that the Working Group should put fewer choices in place than there are presently, for any municipal council to exercise such choice.

Discussion
The Chair reminded the Committee that National Treasury has no position on this matter and it had merely compiled the framework at the request of the Committee. She noted that this is a conceptual discussion which is aimed at assisting the Committee in understanding the problems so that it can come up with the solution.

Ms R Taljaard (DP) asked whether there has been any audit made by the National Treasury to establish the kinds of companies available within the respective municipalities. She noted that this framework presents a legal rollback and thereafter requested whether an agreement had been reached between Treasury and the Department of Provincial and Local Government regarding the implication of this framework on the service delivery agreements.

Mr Momoniat noted that most entities do not have a proper Board of Directors in place and as such it is very difficult to find any information regarding those companies. Nevertheless, the Office of the Auditor -General has been a very useful institution in verifying the annual reports and financial statements of these entities, including their arrangements with the government. He noted that in the past there has been an agreement between National Treasury and the Department on this issue, although the DPLG has not been part of the later discussions.

Mr Y Carrim (ANC, Chair: Provincial and Local Government Portfolio Committee) noted that most of the issues raised in the framework are very technical and also relate to governance matters. He believed that Parliament lacks the necessary technical expertise to deal with some of the fundamental issues raised in the framework and as such would require the services of technical experts. Treasury and the Department should have met first and reached consensus on those issues before bringing this matter to Parliament. However, he acknowledged the fact that the municipalities are given too much latitude, but noted that the measures proposed in the framework are too restrictive and as such would not solve the problem. He felt that Parliament should have been give enough time to make its own research on this issue and to also consult were necessary. However he asked Treasury to unpack on the problems envisaged it and on how it arrived at such conclusions. Furthermore he asked which parts of the Bill the National Treasury felt they should be amended.

The Chair noted that the Committee had had a lengthy discussion on municipal entities and out of that discussion it was realised that there are certain problems with regard to the relationship between municipal entities and municipal councils, especially relating to governance. National Treasury had been requested to come up with a framework on how this could be resolved, especially with regard to autonomy versus an intervention relationship. Thus since this is still a conceptual discussion, the Committee will deal with the options presented to see which one would be suitable. Therefore it would not be fair, at this stage of the discussion, to require Treasury to identify the provisions which it feels could be effectively amended.

Mr Momoniat said that Treasury acknowledged that there is no simple way to resolve the problem - Treasury itself had been engaged with it for a period of two years. Thus whatever approach the Committee adopts, at the end of the day one way or another they would need to resolve this problem.

Mr J Mettler (SALGA) noted that at the heart of this debate lies the role of the municipality in its provision of service delivery. The Constitution is very clear that the object of the local government is to ensure the provision of services in a sustainable manner and such responsibility cannot be traded away. Therefore whichever framework the council chooses, it should be the one that would enable it to exercise its right to administer its affairs. This therefore means that the notion of restriction in this regard becomes unacceptable both in terms of the Constitution and the Municipal Systems Act.

Mr Momoniat stated that government does not need municipalities who have businesses in other municipalities. Since a municipality, which is business-minded, may subsequently suffer loss in the process and that resulting in the residents being compel mend municipal loses which do not relate to any service delivery. Therefore government should only strive for municipalities that are service-oriented and focusing on their core functions of delivering service to their communities.

Ms M Masilela (DPLG) stated that there is a need for Treasury and the Department to meet in order to reach consensus. It is important to find out which aspects can strengthen governance and ensure that there are no loopholes that could create problems for municipalities.

Mr Z Nofemela (DPLG) concurred with the National Treasury that stringent mechanisms should be put in place, taking into account the capacity of the majority of municipalities. He noted that the fundamental issue should be to minimize the infrastructure deficit. However, in doing that it should always be borne in minds that this Bill is not only being developed for this country alone, but would also be an instrumental law in governing our relations in the global sphere. Therefore instead of putting the credibility of our legislation at stake, by keep on changing it, the focus should be in developing structures which are workable.

Mr Momoniat noted that there is agreement amongst members that issues of governance need to be tightened in the local sphere of governance. However, the disagreement relates to the means of achieving that and whether such would not be in violation of the Municipal Systems Act. Therefore in line with the principles of good governance contained in the Act and the Constitution then the municipalities should always be required to provide good reasons when entering into any particular entity. Thus a need to review some of the Municipal Systems Act provisions then becomes clear, although the Act need not be wholly reviewed. Stated that it would, therefore, serve the Committee better if it were to accept the proposed mechanisms and give them a period of two to three year period in operation, while on other side it continues to scrutinise the audits available in the Auditor-General's Office. After the expire of period then the Committee may review the framework to see whether there are any problems relating to these mechanisms, that has been encountered. He said that this argument is propel by the fact that the Committee needs to set in place a framework that would guide the municipal council and the municipal entities, in the mean time.

Mr Dorfling (SALGA) noted that all the issues raised by the National Treasury framework revolve around the question of accountability and effective governance. This is the biggest concern and it should be addressed by developing guidelines with regard to finances in local government. Thus the municipal council while exercising its rights in the administration of its affairs will remain accountable for any services rendered and finances expended as per the Constitution and the Municipal Finance Management Bill of the Municipal Systems Act.

Mr Momoniat acknowledged that the private sector can play an important role in the deliverance of services. However the Committee must deliberate on the question of co-ownership. Noting that the municipal councils are not business-minded, then some limits should be placed on them especially when they are engaged in business dealings outside their municipal areas. This should be done, because a failure to do so, would mean residents would bear the failures and losses which he gauged would be 90% of cases of such business ventures.

The Chair noted that there is general agreement that issues of accountability and the governance relationship should be strengthened. The Committee needs to decide whether it would be the Council or the entity that is going to accountable. There is a view also that there should be not much restriction imposed on the municipalities as they have a constitutional right to development while providing services. The other view relates to the issue of capacity within the municipalities.

Dr G Woods (IFP) asked, except the Section 21 Companies which are clearly defined in the Companies Act, what are the range of other legal entities and what are their legal persona in so far as they are contracted by the municipalities.

Mr Carrim said that governance and accountability should not be unduly restricted. He agreed with Treasury that there is a problem with the Systems Act and that problem needed to be resolved now rather than later. He concurred with Dr Wood that clear and precise definitions should be provided so as to enhance good governance.

Mr Glasser responded that there are companies with share capital and those without share capital. Within companies with share capital there are those which are publicly traded and those which are not publicly traded. Therefore there would be a dozen possibilities of governance regimes since such companies may either be wholly owned or co-owned.

Mr Carrim said that the Committee need to know exactly what these entities meant so that it could know where they fit and what government principles apply to each.

The Chair said that it should be noted that the Finance Committee is not advocating for a restrictive route as proposed by the National Treasury. Therefore this is an open-ended discussion and the deliberations would determine which is the right route to be taken. However, she proposed that the Committee first deals with the general principles of governance and accountability.

Ms Taljaard accepted the proposal. She added that the Bill contains certain provisions that constitute a regulatory framework for governance and the Committee should work through these provisions as a starting point so as to fill the gaps that may exist within the proposed mechanism.

Mr P Smith (IFP) asked where the concept of limited liability would fit within the municipal system.

The Chair noted that these are some of the general principles that the Committee should try to discern as to whether the council, by making up a decision to set up a municipal entity, wants to shift its financial responsibility towards that entity or not.

Ms R Joemat (ANC) asked in the case where a company services different municipalities, then which municipality would take responsibility when there is a loss.

Mr B Mnguni (ANC) asked if the company should be liquidated, then who will take responsibility for such company's action. Would the municipality be responsible in such cases or not?

Mr Momoniat responded that if these principles are not covered in the Systems Act, which Treasury believe they should be, then a lot would depend on the kind of service to be provided and the terms of the service agreement between the parties.

The Chair stated that since the Committee cannot legislate for every contract which the municipality enters into, then it becomes clear that a special unit should be created which would be responsible to screen all contracts that the municipality enters into and that a Treasury approval should first be obtained for any public-private partnership contracts.

Mr Smith noted that this unit would only be an advisory body to the municipality and as such it would not have powers to compel the municipality to refer its contract to it. Therefore the issue of the municipal councils' right to contract should be clearly looked at since any intention to compel them to refer their contracts to this unit might have some constitutional implications.

Mr Carrim said that such referral would not per se be unconstitutional taking into account the fact that the municipalities do not have the necessary expertise, especially when they are dealing with multi-national companies. He proposed that the Committee should incorporate a provision making it compulsory for the municipal councils to refer their contracts to the unit - and that should be legislated.

The Chair suggested that it should be accepted that before a municipal council's budget be audited, it should first seek the opinion of the unit. Also municipalities should be answerable to their constituency - if the unit had given a negative opinion of the contract and, regardless of that, the municipality had gone ahead with the contract.

Ms Taljaard agreed with the proposal that the provision to have the municipality seeking the opinion of the unit should not be made a mandatory provision.

Ms Joemat noted that there needs to be strict requirements for municipal councils entering into contracts taking into account that contracts at municipal level often involve corruption. Therefore it would be no use in having a unit without any power to compel the municipal council to refer its contract to it.

Mr Dorfling noted that since there are four major services provided by the municipality then this means that there could be four different contracts entered into with four different entities. At the end of the day this may have negative effect on the principle of transparency since all of this entities would, as the matter of fact, be profit oriented.

Dr Woods noted that whatever entity is put in place, in law the principle is that it should be given some operational management autonomy so that it would be able to operate it functions. Notwithstanding this, but based on the princeple of democracy the entity would be required to account to the council. Therefore the entity would remain accountable to the council through reports submitted by it to the council. As far as intervention is concerned the council can only intervene where there is a risk to public assets and finances. The financial relationships and responsibilities between the council and the entity would much depend on the type of entity at issue. Therefore the intervention powers and the financial relationship would differ from entity to entity and would thus determine what can be done or not be done.

Mr Smith asked what is the relationship between the nominal fiduciary responsibility and the service agreement.

Mr Momoniat responded that this would be clearly outlined in the company's Articles of Association, which would contain provisions relating to liability. Nevertheless, one still needs to have an annual service delivery agreement, which would clearly specify the targets and how they be attained. Therefore both the fiduciary responsibility and service agreement are very powerful mechanisms, which would be very useful in this process.

The Chair noted that the Committee agrees with Dr Woods' analysis. Therefore a municipal council setting up a municipal entity would have to give such entity an operational autonomy , which autonomy would be subjected to the requirements of service delivery agreement. The Committee also agrees on the accountability arrangement, which includes the reporting and service delivery requirements of the entity to the council. This means that the municipality entity must account for what it is delivering and for its performance and financial reporting to the municipal council. Further the Committee agrees with term "oversight" which denotes the council accountability to the entity. Therefore the Committee acknowledge that the council has the duty to monitor the entity, but however it also acknowledge that the notion of accountability is two-folded..

Mr Komphela asked at what level would the intervention of the council be necessary and what would prompt such intervention.
Dr Woods responded that, on this issue, the Council would be guided by the provisions of the Systems Act, which contains Council's powers of interventions.

Ms Taljaard noted that at times there could be conflict of interest between the council and the entity, especially with regard to the principles of accountability and oversight. Therefore the Committee needs to determine whether interventions, by their very nature, can result in conflict of interest and if so then how can such be prevented.

Mr Smith noted that the provisions of Clause 45D(2)(c) and (3)(a), (b) and (c) of Chapter 8A of the Municipal Finance Management Bill which relates to service delivery agreement, are also intended to cure any conflict of interest that might arise between the council and the entity.

Mr Komphela stated that the Council should be allowed to intervene in the decisions of the entities especially where the circumstances and priorities have changed from the time of signing the contract and the intervention.

Mr Momoniat noted that the discussion had clearly given Treasury and the Department good guidance on how to formulate proper framework mechanisms.

The Chair suggested that both Treasury and Department should prepare a conceptual paper for the Committee on the issues discussed, especially with regard to the relationship of the council and the entity as far as accountability and autonomy is concerned.

Ms Taljaard noted that while she acknowledged the importance of the issues to be considered in the proposed paper, there would be not enough time to do that since the Bill is required to be finalised by 10 January 2003 and the members would also need to consult legal advice. Therefore, this means that members would not have ample opportunity to consider such a paper with their respective parties.

Mr Carrim concurred with Ms Taljaard's argument and thus proposed that, in order for the Committee to meet its deadline, a summary paper should be prepared instead of a conceptual paper.

Mr Momoniat stated that both Treasury and the Department would prepare a joint draft of the Bill and submit it to the Committee before 10 January, together with its summary. However a conceptual paper would also be included so that any of the issues raised in the discussion can be cleared.

Mr Carrim took the opportunity to thank the Chair for accommodating the Provincial and Local Government Portfolio Committee in the discussions. He acknowledged that the Chair at time had reason to be angry with his Committee but instead had showed understanding.

The Chair thanked all for their contribution throughout the discussion and also acknowledged that the Finance Committee had learnt a great deal about local government issues. She thanked the National Treasury for its patience throughout the discussions and also the Department of Provincial and Local Government and SALGA.

The meeting was adjourned.

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