Municipal Finance Management Bill: Chapter 8

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Finance Standing Committee

14 April 2003
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Meeting report

FINANCE; PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEES; FINANCE SELECT COMMITTEE: JOINT MEETING
15 April 2003
MUNICIPAL FINANCE MANAGEMENT BILL: CHAPTER 8

Chairperson: Ms B Hogan (ANC) [Finance Portfolio Committee]

National Treasury Delegation: Mr I Momoniat, Deputy Director-General: Intergovernmental Relations; Adv G Grove, Legal Drafter and Mr M Glasser, Consultant
Department of Provincial and Local Government Delegation: Dr P Bouwer, Legal Drafter
SALGA Delegation: Mr Leeuw, Mayor; Mr M Dorfling, Councilor and Ms S Makotoko, Finance Manager
Delegation from Auditor-General Office: Mr C Botes, Parliamentary Liaison Officer and Mr A Kamedien, Legal Advisor

Documents handed out:
Summary of Criminal Sanctions agreed to by Technical Committee
Letter from the Auditor-General on the Municipal Finance Management Bill (Appendix 1)
Draft Municipal Finance Management Bill - 31 March 2003
Proposed Amendments to Municipal Systems Act

SUMMARY
The Committee considered the criminal sanctions that were agreed to by the technical committees of the National Treasury and DPLG. It therefore dealt with the issues raised in the previous submission of the Auditor-General concerning the effect of the Municipal Finance Management Bill in the operation of the Auditor-General's office. The Committee agreed that Clause 125(1)(c) and (d) of the Municipal Finance Management Bill should be deleted since the auditing requirements of the Auditor-General Office should be contained in the Auditor-General Act since it is the Act that has established that office.

With regard to Chapter 8A the Committee discussed what constitutes a municipal entity and when can it be established. It was decided that it is either a private company or service utility that can be established by the municipality whenever a function can be more sufficiently done by a separate structure from the council. However before an entity could be established it should first be determined whether such service would be of real benefit to the community. Since the entity is a company it was agreed that is should have the Board of Directors but a clause disqualifying councilors to serve in the Board should be inserted. The Committee agreed that all those municipalities who had already established Section 21 Companies should now change those companies to one of the acceptable municipal entity options since a public company does not qualify to be a municipal entity.

MINUTES
Summary of Criminal Sanctions agreed to by Technical Committee

The Chair noted that the technical committee of the National Treasury has prepared a written submission on the matters that would require criminal sanctions. She thereafter went through the Clauses that the National Treasury and the DPLG had agreed on (see document). She advised the members to look through the document on their spare time so that they could be able to deliberate on it when the Committee gets to finalise the Bill, after it has received legal opinion from the State Legal Advisors. She thanked the National Treasury on compiling a complete record of the Committees' previous deliberations.

Letter from the Auditor-General on the Municipal Finance Management Bill
The Chair noted that the Committee has received a letter from the Auditor-General requesting an opportunity to address the Committees on certain issues he felt remained outstanding, which would have an impact on the operations of his office.

Mr C Botes noted that the letter from the Auditor-General refers to two previous issues, which were left outstanding by the Committee in previous submissions. He noted that the Auditor-General Act, which is in the process of being amended by the Public Audit Bill, provides adequately specific requirements for reporting by the Auditor-General. The Act also gives the Auditor-General certain discretion to use his/her professional judgment in matters or decide on them, if he believes that such would be to the benefit of the council (Please see letter attached).

The Chair commented that the request made by the Auditor-General Office is a very reasonable one and since no one would want the Auditor-General to act as the referee as that could put his office in a very difficult position. She then proposed that Clause 125(1)(d) be deleted as the Auditor-General does report annually on its progress. She said that the concept "may" may be prove to be problematic, as it does not place limits and above all she does not think that falls within the Auditor-General 's office but something falling squarely within the scope of the public accounts committees of the various legislatures and municipalities.

Mr M Tarr (ANC) noted that the same should be said with regard to Clause 125(1)(c).

The Chair agreed with the preposition and thus noted that the above argument also applies to provisions of Clause 125(1)(d) of the Bill.

Mr M Dorfling (SALGA) questioned this argument and noted it would make things difficult for those sitting in SCOPA meetings on the provincial legislature. This would result in those people only auditing the report compiled by SCOPA, as they do not have another report coming from the Auditor-General. Therefore this would be difficult for local governments as there might be loss ends coming in with the report resulting in the Auditor-General only reacting to certain modes. He said that this is what Clause 125 is trying to prevent thus giving the local governments a chance to peruse the report whilst still in SCOPA so they could see what the Auditor-General actually wants. By removing these provisions is the Committee not taking away this process?

Mr Botes said that the Auditor-General should be given an assurance that throughout the process of oversight there would be constant advice exchanged and briefings taking place. This therefore means that should subsequent or new responses or submissions be received in relation to SCOPA's concerns or findings, during the process of oversight, the Auditor-General would be able to issue a view on them. However he acknowledged that these things cannot necessarily be prescribed in the Act but are issues of accountability.

The Chair noted that if the Committee feels that the Auditor-General Office should perform the functions contained in Clause 125 then the Auditor-General Act/Public Audit Act should prescribe them as auditing requirements for the Auditor-General. These cannot be spread around in various Acts and don not form part of the Municipal Finance Management Bill.

Proposed Amendments to the Municipal Systems Act
Chapter 8A: Municipal Entities
The Chair noted that the requirements for Municipal Entities are at present contained in the Municipal Finance Management Bill, which is still a draft Bill. Notwithstanding the fact that the Committee does not have the authority to amend a Bill until it has been put before it, the Portfolio Committee has proposed that the provisions relating to Municipal Entities should be incorporated into the Municipal Systems Bill. So based on that the Committees are within their rights to debate this matter. However, in order to get a clear picture on this matter it would be proper for the Committees to go through the provisions of the Municipal Systems draft Bill so as to establish the provisions that the DPLG and the National Treasury have already agreed on.

Mr I Momoniat (National Treasury) noted that the last version of the Municipal Finance Management Bill dealt with both the establishment and ownership issues of the Entities and the Financial Governance of those municipal entities. However in the current version of 31 March 2003 both the DPLG and National Treasury had agreed to take those issues. He then suggested that national legislation has to be enacted in order to allow Section 21 Companies to be able to transfer their assets, when they are disestablished, back to the municipalities. He said that the changes made to the Municipal System Act with regard to the definition of a municipal entity are important since it is vitally to determine what is a municipal entity. He noted that there would be non-interference and active monitoring when it comes to the Board of the entity since the independence of the directors, who would act in the interest of the company, should always be upheld. He proposed that the Committees should first look at the provisions of the Municipal Systems Act before going through with Chapter 11 of the Municipal Finance Management Bill.

The Chair noted that after the Committees have dealt with the Bill it would go to the State Legal Advisors for their opinion and will therefore be passed when Parliament returns from recess. She reminded Members that they have approved the amendments contained in the original amending Bill, but for the benefit of other Members the Committees would start from scratch with this new draft amending Bill. This would assist the Committees in dealing directly with Municipal Entities, as they would be illuminating what is new and what is not from the Bill.

Clause 1: Amendment of Section 1 of Act 32 of 2000, as amended by Section 35 of Act 51 of 2002
Adv G Grove (National Treasury) noted that it is important for the Committees to remember that Clause 3(1)(c) of the Municipal Finance Management Bill stipulates that the Municipal Finance Management Bill would apply to the governing bodies of multi-jurisdictional municipal services districts as if those governing bodies were municipal entities under the shared control of the parent municipalities. Although the governing body of the multi-jurisdictional municipal services districts is not a municipal entity in terms of the Municipal Systems Act, but is in terms of the Municipal Finance Management Bill.

Mr Dorfling asked how would the multi-jurisdictional service utilities be recorded in the books of the councils.

Mr Momoniat noted that he has also concerns when it comes to multi-jurisdictional services utilities, especially when they occur outside the government, since they refuse to become private companies. It should be noted that Department is not trying to change the Systems Act but nonetheless this amendment seems to provide a mechanism through which multi-jurisdictional service utilities could be treated as municipal entities for the purpose of financial government since they are some kind of quasi - municipalities.

The Chair asked the Department to simplify the meaning of the term 'multi-jurisdictional municipal service district'.

Mr Dorfling responded that in terms of his knowledge 'multi-jurisdictional municipal service district' would occur whenever local councils within a district council pull together their resources. This may be either for economic reasons or whatever reasons, to form a service utility, which would thus give service to all those local councils concerned in that particular service.

Mr P Smith (IFP) said that according to his understanding this applies to all designated areas and not necessarily an entity. Therefore it is not restricted to local municipalities but may also apply with equal footing as between the district municipalities and an example would be the multi-jurisdictional service districts established in KwaZulu-Natal.

The Chair noted that the term 'multi-jurisdictional' should therefore be understood to cover a wide jurisdiction, either within a district council or beyond such district council.

Adv Grove noted that although multi-jurisdictional refers to a district or an area the entity, itself, would be the governing body. Therefore the difference between 'multi-jurisdictional service districts' and 'service utility' is that the one is multi-municipal while the other is solely owned by a single municipality.

Mr M Glasser (National Treasury) noted that there are many ways that can be used to create a multi-jurisdictional service utility. One of them is to have a district municipality providing services to local municipalities, or a quasi-municipality, which is a multi-jurisdictional service district that is having a legal structure, or a cooperative agreement. This simply states that the municipalities would only collaborate to provide those particular services and thus no new entity has been formed or a co-owned municipal entity, that is a private company which its ownership is shared by several municipalities and is in terms of the Companies Act.

Mr Momoniat noted that there is a general concern on the part of the Department with regard to co-ownership since they may be simply set up by agreements and there are no external mechanisms in place. Since there is a high possibility that this process might lead to a number of difficulties then a need for hoops to be created within the legislation becomes imperative. This is induced by the fact that the municipalities opting for this procedure do not necessarily consult their community even though their powers are being given over.

Mr Smith noted that multi-jurisdictional services are necessary since there is a need for certain services to be made multi-jurisdictional such as water. He further noted that the principle should be around government arrangements and not concern the relevancy of the multi-jurisdictional services.

Mr Momoniat noted that there is confusion and explained that there are other service utilities, which falls squarely under the national government and water is one of them. However the problem is that when there is a shift between government's spheres there is very little discussion on the actual financial implications involved, such as the risks that are being taken by municipalities. These problems could be dealt with if the whole process can be done through legislation since there would be transparency in the process.

The Chair noted that the argument raised by Mr Momoniat is not within the Committees powers. It could be better dealt with by the Portfolio Committee on Local Government. They have obviously taken note of the concerns and would thereafter see how would governments' arrangements be tightened, with regard to multi-jurisdictional service districts. She then asked what would happen to those municipalities who have already established Section 21 Companies since now all the companies are required to be private companies.

Mr Momoniat replied that there are transitional mechanisms in place to deal with that.

Mr Tarr noted that a service utility would be owned only by a single municipality. What could influence a municipality to choose between a service utility and private company?

Mr Momoniat responded that Clause 94I stipulated when a service utility can be established and therefore some discretion is given to the municipality in this regard so as to come up with its own innovations. This is an internal issue but in order for the municipality to be able to set up an entity, which could provide the required service some external mechanisms has to be established. That is why a set of minimum requirements for the establishment of a service utility has been laid in Clause 94G(2).

The Chair noted that in terms of the Bill the municipality could set up a service utility that can perform one of the functions of the municipality, but not its services. She then asked what is the difference between a municipal function and the service.

Adv Grove responded that before the Systems Act come into force the municipalities were not allowed to establish statutory bodies, as is the case with Parliament. In order evade this they then resorted to Section 21 Companies. This created many problems for the municipalities since these companies, once established, assume a life of their own and the assets do not revert back to the establisher when the company is dissolved. In terms of the law when a Section 21 Company is disestablished, for whatever reason, its assets should be transferred to another Section 21 Company to further another public purpose. As a result of this the notion of service utility notion was then created in the System Act so as to replace these Section 21 Company. Thus, if Members have a problem with the use of name then they may come up with an alternative one but notion is very proper.

Mr Smith noted that there is a conceptual difficulty involved here, which the Committees should not engage themselves in, because this debate is not new as there was once a huge debate on the meaning of a municipal service. Therefore it would be proper for the Committee to accept that a reference to function means function in a broader sense, which service is a part of.

The Chair said that this therefore means a service utility could be established if a function may be perform more efficiently by a separate structure. However such a function should be of real benefit to the local community and above all it is required to have a board of directors, like any company. She then asked what about shareholders, thus would there be shareholders as is the case with other companies. What mechanism would be in place between shareholding and equity holding?

Mr Momoniat responded that since the municipality would be sole owners of the venture the issue of shareholders is irrelevant and the mechanism that would be used is the one of equity holding.

Dr P Bouwer (DPLG) noted that there are two ways through which a separate legal persona of the company can be established either through Companies Act or common law principles. In terms of common law a legal entity may be created by mere agreement, the so-called company constitutions. In the discussions leading to this it was agreed that a legal persona of the municipal entity is be created through a by-law. As a result of that a notion of the municipal entity was created and it has been retained in the Bill and the only thing now that is being proposed is to prescribed in the Bill that the by-law would be the constitutional vehicle of establishing an entity. With regard to the service utility the municipality would be the sole owner as it is the sole member controlling the equity. Based on that it would not be necessarily to have a shareholder, but to adopt a common law concept for the creation of separate legal persona where one is the only interested party in the venture.

Mr Dorfling asked whether this means that the Section 21 Companies that were overall set up in the municipalities will now eventually be changed into municipal services entities.

Mr Momoniat responded that there are several things that the Department has done with regard to the transitional mechanisms as it accepted the fact that this is a new thing and should be approached with caution. The municipalities have been given a three-year transitional period to adjust into the process and are thus required to do so as far as possible using the acceptable options, namely the private company or service utility. However, there would be continual discussions between all spheres of government assessing the process and should it found to be an inappropriate one the Parliament would be approach so that it can revisit it.

Mr Dorfling asked whether councillors would also form part of the Board of Directors of the utility.

The Chair noted that what Mr Dorfling wants is the composition of the Board of Directors and whether there is a disqualification clause for councillors to serve in the Board.

Mr Momoniat replied that councillors would not form part of the Board and thus there would be a disqualification clause against them. He said the Board would be structured in a very similar way to those of other companies but, unlike with those ones, this one would have fewer obligations.

Mr Tarr noted that although he accepts the reasoning behind the establishment of the multi-jurisdictional private companies but he fails appreciate the reasons that could lead a municipality into forming service utility owned by it alone. He said that he does not believe that these utilities could do a better job than the councils, which are organs of the state. He also noted that the utilities have the effect of changing the chains of accountability since they would remain accountable to the councils, who in turn would no longer be directly accountability to the general public.

The Chair noted the concerns raised by Mr Tarr. She said that everyone is concerned with the establishment of independent institution.

Mr Momoniat responded that members should note that it is difficult in the public service to create a new entity. However this problem could be addressed in one of the sets of options available, namely either by bending the existing rules but to what extent that could be done remains a moot point, as there are constitutional implications involved. The other option, which is more favourable although it would depend in its constitutionality, is that the municipalities should be given a room for their own innovations, especially on those things that they could better do. So it is not the intention of the Department to stifle the municipalities but to rather come up with regulations, which would introduce hoops that should first be passed by any municipality alleging the beneficiary nature of the innovation. But, for this process to be successful governments Departments would be required to cooperate and that is one of the requirements in Systems Act.

The Chair noted that the Committees concurred that the transitional mechanisms should specifically state it that all Section 21 Companies should now be transformed to become either service utilities or private companies.

Dr Bouwer pointed out that legally there are only two ways to deal with this issue. Thus a municipal entity may be set up to deal with same subject matter that the Section 21 Company dealt with before and then such be transferred to the new entity. Since it is doubtful whether a Section 21 Company may be transformed into one of the new entities, it could be provided that when a Section 21 Company, which was owned by the municipality, is being disestablished by law, all its assets must be transferred either to the municipal council, itself or the municipal entity set up by that municipal council. These are there only ways in which a legal vehicle can be created to dispose those assets to their rightful owners.

The Chair noted that the Committees accepts the mechanisms as outlined by Dr Bouwer as the principle is that all Section 21 Companies should shift to the kind to ones acceptable in the Bill.

Clause 94B: Establishment and acquisition of private companies
Mr Mshudulu noted that there is a great deal in the pipeline as well as a commitment in terms of the capacity of companies to go to rural areas where government does not have capacity to.

Mr Momoniat explained that this is an external mechanism. The entity is not the only way to establish a public private partnership. Most PPPs are in terms of a service level agreement. So that is certainly allowed and something that to be encouraged. It is just with the entity being dealt with.

Ms Hogan asked Mr Mshudulu about the amendment to the Municipal Systems Act, where there are more provisions around service delivery agreements which would involve the MIIU. In terms of Clause 12, there are improvements on those service delivery agreements. The Committee will return to that later.

Clause 94C: Legal status of private companies established by municipalities or in which municipalities hold interests
Ms Hogan declared that they were finished with Clause 94B. In terms of Clause 94C if any municipalities have interests and if one or more municipalities or provincial or national organs of state have interest in the companies then such organs of state do not have ownership control.

Mr Smith said that this must be there for a particular reason. Why should Clause 94(b)(2) be repeated?

Adv Grove said he needed to make it clear that there is a distinction between a municipal entity and a public entity. When is an entity a municipal and when a public entity? The entire Clause 94(c)(1)(a) and (b) needs to be read. Of course an entity could be jointly owned by a municipality and a national organ of state.

Ms Hogan asked whether a distinction was being made between a public and a private entity.

Mr Mshudulu said that if the private companies are now gaining a new definition here, he was not sure what the purpose was, but obviously you establish a private company according to the Companies Act, why now define it? He also had difficulty with Clause 94(B)(2). What about any other private company? Unless this is explained in a later clause?

Mr Momoniat said that a decision was taken at some point that private companies would not be allowed to have a share because in practice no private company will want to come and hold a minority share. They usually want a controlling share. That gets in the way of the municipality investing and so on. The better mechanism for the private sector, it was felt, was the PPP. This allows for a service level agreement; there is no co-ownership of assets. Most PPPs are, in effect, concessions. This recognises that, realistically, no private sector is really going to invest and pay to be a municipal entity because it would have to have a minority share.

Mr Mshudulu said that since reference is made to the Companies Act, which governs the private company after they do business, all other principles are being regulated through the Companies Act. He suggested inserting a reference to the Companies Act instead of creating a new definition and putting aside the governance of the Companies Act. Immediately when you are a private company, you take that route.

Adv Grove said that this is exactly what Clause 94B(3) says, that if a municipality establishes, requires or holds an interest in a private company it must comply with the Companies Act. But if there is an inconsistency between the Companies Act and this Act, the position of this Act will prevail. He did not know of any such conflicts.

A Member noted that Clause 94B(3) says does not necessarily address the point raised. If the participation of municipalities is linked to private companies that are either owned by other municipalities or provincial or national government they are prohibited from participating in companies other than those. This therefore says that if they choose to engage in any relationship with any other company other than a company that is owned by government, meaning any of the three spheres, then that would be illegal. Why is this necessary with those companies that are owned by government only, why not open it to other companies that are not owned by government? That is the gist of the issue.

Ms Hogan said this was because a decision was taken in this Committee that this is the preferable. Those were the instructions given to National Treasury because of the complications that can arise when you have a private outside company with a share ownership because you lose further any mechanism of control over that company. Already the share ownership mechanism of control is very remote. If you add in additional shareholders from the outside you are in a much more difficult position to exercise control over that company. It dilutes it completely. That was the decision taken in the Committee itself.

The Member said the decision was not being contested but it leads to the same question raised by Mr Mshudulu on the issue of the MIIU and its role.

Ms Hogan explained that a municipaltity can establish a contractual relationship with anyone in the private sector, that is not excluded. What you are excluding is a municipality setting up a company which is not wholly owned by that municipality or by an organ of state. Then your control mechanism is too weak. She noted that Treasury also consulted with Mervyn King, author of the report on corporate governance arrangements and a report back was received that he agreed with the Committee on these issues. Ms Hogan asked that further discussion on this issue be postponed and asked that some of the decisions taken in the Committee be respected. The discussion can be returned to if people felt that it is overriding a major principle. These Clauses have been agreed to by the Department of Provincial and Local Government, who signed off on them. The Committee is not undermining Provincial and Local Government at all. There was a whole process around these clauses which went on before this.

The Member agreed with the Chairperson but pointed out that as parliamentarians they had the right to disagree with the Department. If Members did not share the understanding they could land up changing provisions which have good intentions.

Mr Momoniat reiterated his earlier point that PPPs are allowed. The current external mechanisms provide for that; that has not been changed in these amendments at all. It is just the vehicle of the private company which is something that you own, not being co-owned with the private sector.

Clause 94E: Conditions precedent for establishing or acquiring an interest in a private company.
Mr Smith had a problem with 94E(c): if a company would be of real economic benefit to a community. The first thing is that this is creating an objective test to determine whether this mechanism is appropriate or not. He did not think that the Systems Act required an objective test of this sort. It required that the council applies its mind to the mechanism and is convinced that one is better than the other. The sentiment should be reflected rather than creating a test. He was also not sure whether real economic benefit should be of primary concern, it could be financial benefit or non-economic. Any benefit would be fine, he was not sure if it is necessary to establish the nature of the benefit. The key issue is whether the council believes that the utilisation of this mechanism is of benefit.

Ms Hogan asked Mr Smith to suggest an amendment.

Mr Smith suggested changes to the wording.

A Member said that it would be beneficial if the term "real" was defined because it is not the first time it is being used and it is a very subjective term.

Ms Hogan shared his concerns about the term "real".

Mr Smith reiterated that the principle of the process to be followed is that when the council applies its mind about whether or not to use the internal or external mechanism essentially it is asking whether it can do it internally or externally. All it needs to do is give expression to that sentiment.

Ms Hogan asked if (c) is then not needed.

Mr Smith said he would not have thought so. The phraseology could be amended.

Mr Momoniat suggested it read "if the company would be of benefit to the local community".

Mr Smith asked what would happen if someone came afterwards and argued that they could not create this company because it is not a benefit, but the council believed it would be.

Ms Hogan agreed because then a whole process has been followed and this is almost duplicating a process; you have gone through the Systems Act process and you don't need this to duplicate the process again. Would (c) then be deleted?

Mr Dorfling added that this is a slap in the face of local government to say that there is a real need to perform the function along the lines of real business principles because if we are local government, we don't do that. It's a principle that you must drive local government as a business. He suggested that (c) not be deleted but rather the reference to economic benefit should be removed.

Mr Smith said that when he was criticising (c) he noted that (b) is the same thing from a different point of view. You have to first, in assessing the internal or external route, have gone through this exercise.

Ms Hogan asked if (a) and (d) would be retained as well as (b) and (c)

Mr Smith agreed to this.

Mr Momoniat noted that in one of the discussions with Mervyn King he outlined that often these public entities are not carefully thought through. There seem to be many abuses.

Ms Hogan noted that this is catered for in the Municipal Systems Act.

Mr Momoniat said that these are the System's Act provisions so tests are being introduced that they have to meet to create these entities.

Ms Hogan said that in terms of the processes within the Systems Act itself, it is covered.

Clause 94D: Conditions precedent for co-owning of private companies
Mr Momoniat said that this is a very important hoop and he would want it to be strengthened where the two national Departments come in. This is saying that if you want to go beyond the municipal entity, given the complexities of co-ownership, you really need to do much more work. He was of the view that these hoops were insufficient.

Mr Brown, a Department representative said that some work has been done on the text already in this regard and there has also been a discussion with Mr Glasser. What is presently proposed is to change the wording to "consider clear business objective for shared control".

Ms Hogan agreed with this proposal.

Mr Brown said that there has also been more technical refinement.

Ms Hogan thought this made it much clearer.

Mr Glasser said that as a legal matter he was sympathetic to what Mr Smith pointed out. There is a difference in structure between 94D and 94E; 94D is an objective test. As he pointed out, if you were not to comply and there was no real need, someone could subsequently come and invalidate the establishment of the company right from the beginning and it causes all kinds of problems. Whereas 94E required that the council consider these matters so that it applies its mind but it may reach whatever conclusion it desires and it does not challenge the initial incorporation. This is important.

The other thing is that there is a difference between the Systems Act procedure which goes to choosing a mechanism to provide service, which is one question and what the council is being asked to apply its mind to here, which is should we establish a separate personality? Do we need to own a separate being to do this? It is just a different question and it might be that different factors should be considered about how best to provide a service.

Ms Hogan asked if the Committee could go through the tests in the Municipal Systems Act.

Mr Glasser said that those tests relate to whether you can best provide that thing internally or externally and it does not really address the fundamental question which was raised a long time ago, which is why do you really want a separate entity, a separate legal being? That is the question council must apply its mind to here.

Ms Hogan asked it was possible to echo some of the language of the tests in the Municipal Systems Act rather than use this language?

Mr Glasser said he was sure they could come up with better language.

Ms Hogan said that the language in the amendments was a slap in the face for local government. She asked Treasury to improve on the language.

Mr Momoniat asked that they should include a requirement of approval from the Ministers for Local Government and National Treasury or some criteria against that if the approval route is not required. That is important.

Ms Hogan said that they would come up with better language along the lines of the Municipal Systems Act for Clause 94E(b), (c) and (d).

Clause 94F: Disposal of companies and equity interests in companies
A Member asked whether Clause 94F, together with other clauses, would not conflict with the procedures for establishing a private company according to the Companies Act.

Ms Hogan said that this question was also asked in discussions with Mervyn King.

Mr Momoniat explained that Mr King did not appear to have really looked at those sorts of issues. He agreed with them broadly that there was a need to take some of the public interest provisions. He did not comment on potential conflicts.

The speaker said that this Clause means that a municipality simply cannot transfer its share to a private sector entity but only to an organ of state or another municipality.

Mr Brown said that this question keeps coming up in a different form. The legislation does not undermine the principles set out in the Companies Act but adds to it and gives direction to internal governance issues. One very uncomplicated example would be: in terms of the Companies Act you can apply your own auditor but this Bill now stipulates that this has to be the Auditor General. This would already inform what has to be go into the articles of association and memorandum of understanding of your company. The Companies Act says that if you want to establish a company you must have the following instruments. There is no limit to what you can put in that. You can put agreements in, agreements on transfers of shares, preferential options when shares are transferred. This Clause stipulates that when you use the animal created by the Companies Act within the public sphere the following additional requirements apply. This means that some of these things will have to be incorporated into the articles of association. What the legislation attempts to do is to limit what municipalities can put into the instruments creating those particular entities. This is over and above. If you set up an ordinary private company you can even agree to the auditors which you want to use. The government is prescribing the arrangement; it must be the Auditor General.

A Member said that soft options should not be accepted. He would accept the provisions since they were in line with the Companies Act.

Part 3, Clause 94K: The duties and responsibilities of parent municipalities
A Member sought clarity on 94K(b). What is its intention?

Ms Hogan explained that they had requested its insertion. There was a debate over what the relationship was between the board of directors, the chief executive officer and the shareholders of the municipal entity. The ownership control clause referred to earlier, states that the shareholders have the right to cast all the majority of votes at meetings of the board of directors. It was noted that this completely contradicts and is in conflict with the Companies Act. Shareholders simply cannot instruct the board of directors to take decisions. A discussion then emerged about what the relationship between the board of directors and shareholders, the company and the separateness. The board of directors must perform their fiduciary and government responsibilities in terms of the Companies Act. That was her understanding of the purpose of the provision.

Mr Dorfling explained that in terms of the Companies Act there is a certain way that a company must draft its financial statements and it might be different to what was anticipated. The dovetailing of the statement of the municipal entity and as a company would have to be redrafted in some way in order to consolidate it into the municipality's. He agreed that it might be a hoop but in terms of the Companies Act you have to draft your statement in a certain way.

Ms Hogan was not sure how to deal with this.

Mr Dorfling said that they would simply have to draw up their statements twice. Once to comply with the Companies Act and then to dovetail it with the municipality's statement.

Mr Momoniat said that they did not think it conflicted with the Companies Act.

Mr Momoniat said that it has not proved a problem with national public entities because the accounting standards board was set up in terms of the PFMA, who set the accounting standards and that is the only provision that public entities are expected to comply with. They would heck that it does not lead to two sets of statements.

Ms Hogan asked whether it was not possible it could be sorted out through regulations.

Mr Momoniat thought that it could.

A delegate said that sometimes he did not understand what this provision meant. Does it mean that where a municipal entity would fail to comply with some provision or other that the municipality must step in to replace the board? Perhaps the whole clause should be reconsidered.

Mr Dorfling said that they would simply have to draw up their statements twice. Once to comply with the Companies Act and then to dovetail it with the municipality's statement.

Mr Momoniat said that they did not think it conflicted with the Companies Act.

Mr Momoniat said that it has not proved a problem with national public entities because the accounting standards board was set up in terms of the PFMA, who set the accounting standards and that is the only provision that public entities are expected to comply with. They would heck that it does not lead to two sets of statements.

Ms Hogan asked whether it was not possible it could be sorted out through regulations.

Mr Momoniat thought that it could.

A delegate said that sometimes he did not understand what this provision meant. Does it mean that where a municipal entity would fail to comply with some provision or other that the municipality must step in to replace the board? Perhaps the whole clause should be reconsidered.

Ms Hogan thought the clause was specifying the shareholders' responsibilities to ensure that it complies with the law and is managed transparently.

Adv Grove said that shareholder responsibility and powers are determined in terms of the Companies Act and its limited. Shareholders can only exercise their powers in a general meeting, for instance. This provision could be returned to at a later stage.

Ms Hogan suggested that the drafters look at how compatible those clauses are with the Companies Act. We are also talking about shareholder activism, which is a new sphere of activism within the boards of companies, which is what prompted these clauses.

Dr Bouwer said that this provision would make sense. Even it is limited it rests the responsibility on the parent company as a shareholder to see to it that the company is properly run. It would create an executive obligation on the municipality. All interventions can be done in terms of the Constitution. In other words, it might be limited but it creates an executive obligation. If the municipality creates an entity and does not even exercise even the bare rights it would have as a shareholder in terms of the Companies Act, then the MEC can step in and do it on their behalf. He did not think that this would necessarily give content to those rights. Whatever that content is, it does create executive obligations for that municipality.

Ms Hogan said that certainly the municipality will be required to ensure that the entity meets its contractual obligations and service delivery obligations. That is clear. It must be managed transparently and responsibly.

Dr Bouwer agreed that it creates an obligation for the municipality but he questioned what this obligation required the municipality to do.

Ms Hogan suggested that it was to exercise its powers as shareholders. If a company is not being run transparently and responsibly and is not meeting its contractual obligations then the shareholders must intervene to get rid of the board of directors.

Dr Bouwer thought this would mean the municipality as the shareholder would replace the board of directors. Should this not be stipulated?

Ms Hogan was not convinced that this was the only power that a shareholder has. When you consider shareholder activism and you consider AGMs, shareholders are tending to take resolutions that go beyond just the appointment of directors. This option should therefore be left flexible to see what powers shareholders can start exercising if they want to flex their muscles.

Mr Smith pointed to Clause 94L, dealing with parent municipalities having sole control. He noted that Clause 94K was drafted to almost suggest that it also means sole control, although it is obviously generic to cover multiple ownership as well. With respect to multiple ownership, she was unsure what the effect would be of some of the clauses. For instance 94K (c): each of the parent municipalities must establish and maintain clear channels of communication between the municipality and the entity. What should be required are clear lines of communication en masse, on an aggregate level. He was not sure how this would work in practice. What should be required are clear channels of communication between the shareholders and the entity. But here the obligation is on each of the parent municipalities to create this channel. There is no co-ordination between them.

Ms Hogan pointed out that Clause 94K is a parent municipality in relation to a municipal entity, then there is sole control and shared control.

Mr Smith wondered if it was covered under Clause 94M(a)(1), so that there must be an agreement regulating their relationship. If it is covered there, then the problem falls away.

Ms Hogan thought that covered it.

Mr Dorfling said the clause does not stipulate the recourse if the shareholder is not happy. It should also be stated if a municipality is not doing what it should be doing there can be a Section 139 intervention. Leaving it out will leave room for discrepancies.

Ms Hogan said it was not necessary to specify Section 139 because once you place a municipality under an executive obligation it falls under the general conditions of Section 139. Ms Hogan said she did not want to specify the courses of action open to shareholders at this stage because they are being developed. Before a shareholder was simply a passive passenger now there are shareholders who are actually challenging directors around certain matters. She preferred to leave the options open.

Dr Bouwer said that a municipal official is a strange animal; if he does not read what he is supposed to do, it becomes difficult. It would be better if you state that so you could know the recourses.

Ms Hogan asked if it could be stated that reasonable steps should be taken but not specify those steps.

Dr Bouwer pointed out that municipal entity is not only a private company so generically the whole gambit of municipal entities is catered for. In some instances, for a private company, you can do less, than what you can do for a municipal entity, which you set up by way of a by law. This is therefore correct. It may not be as appropriate when applied in respect of a private company, it might be very limited. But so be it.

Ms Hogan said that it applies to a whole range of institutions and not just a company. It seems perfectly clear that where there is an executive obligation they must exercise that obligation.

Mr Glasser outlined the conceptual framework. When drafting the clause they realised that the municipalities having shared control was the most complicated situation as it was hardest to say what they must do to assure that it is managed transparently and responsibly, in the public interest and so on. In Clause 94N the approach of requiring them to have an agreement stipulating what they should do was taken. With regard to municipalities having sole control it be more explicit and this is why Clause 94L says they should do specific things. Clause 94K was intended to be the overarching thing which would apply in broad principles where there is both shared and sole control. This is why it is so broad.

Dr Bouwer said that the provisions on a municipal entity that is a private company is completely in line with the Companies Act. Clause 94K says, overall, what the responsibilities are. It also makes reference to the Companies Act; therefore if it is limited, it is limited. But it does create executive obligations for the municipality. Clause 94M does nothing more than give guidance, to what we call in company law a "shareholders agreement". Despite anything that has been set out in the articles of association of a company shareholders can reach agreement on how they are going to vote. They can bind themselves against each other than a vote in a meeting. This is what Clause 94M does.

Mr Smith thought that Clause 94K(a)(I) was very clear that you must exercise any shareholder and any other rights and powers that you have. If it is limited to the one issue, that is fine. It is not necessary to spell out what those powers are as it is covered in existing law.

Clause 94M: Parent municipalities having shared control
Mr Momoniat commented that this was an important clause because it regulates co-owned entities that needs to be more sharply regulated. It is also, in a sense, about a shareholder compact, although he was unsure about exactly that came in.

Mr Smith and Ms Hogan agreed that some requirement to set this up needs to be inserted into the clause.

Dr Bouwer proposed new wording "municipalities that have or may acquire shared control of municipal entities must enter…"

Ms Hogan asked if "or must acquire" should be added.

Dr Bouwer said that you must first establish joint control and following that you must enter into an agreement.

Clause 94N: Municipal Representatives
Mr Momoniat explained that this clause deals with who must represent the municipality. The way the clause regulates it, he was of the view that the municipal manager should be a representative and then there could be councillors in addition. You also only have councillors.

Ms Hogan pointed out that a municipal manager must be receiving communications, whatever that means.

Mr Momoniat said that councillors would be allowed to be shareholder representatives. But it should be obligatory that the municipal manager and his/her delegate should be part of the representatives just so that there is continuity.

Dr Bouwer said that in his experience with companies shows that this proposal might be exclusive because it will come down to proxy writing, in any event. The municipality holds 50% of the shares exercised by one person personally or by three persons. They may exercise 50% of the voting rights.

There are two things lumped together here, which may be distinguished. Firstly, receiving a communications. Perhaps that should be to the municipal manager. As soon as it comes to the voting and the representing at shareholders meetings, it is first sorted out in caucus and then voting takes place in the meeting in certain manner.

Adv Grove said that, with regard to governance, if one considers the MFMB and the duties of the municipal manager as well as of the mayor and councillors, there must be this linkage here.

Ms Hogan said that even if there is proxy voting, having more than one representative there is important and the municipal manager should be there to hear the reports of the directors to the shareholders and to be able to ask questions. Municipal managers would therefore be incorporated into Clause 94N as mandatory.

Ms Hogan noted that municipal entities were the biggest issue facing the Committee as well as the financial recovery plan. It is very complex.

The Committee left off their deliberations on the amendments to the Municipal Systems Act and turned to Clause 84 of the Municipal Finance Management Bill.

Mr Momoniat explained that the reference in the clause to municipal chain management should read supply chain management. The word "policy" has also been taken out. Otherwise the clause stood as it was.

Adv Grove asked, with regard to Clause 84(1)(n), whether it would be possible later, when organised local government is part of a better legislative process, that it will also mean organs of state, if you think about centralised procurement.

Mr Momoniat said that you could have that.

Ms Taljaard said she was pleased with 84(j)(iii). She referred to 84(1)(f) and asked what the words "in public" indicated.

Mr Momoniate said they had heard horrendous stories of tampering. He would have wished to stipulate in the clause "no changes", but he thought it was covered by "to bids" after "record". This was one area where criminal sanctions should apply, in his opinion.

A delegate said that ever since that happened in one particular area, the pages are numbered and the tender clerk who opens the bid must sign each page and put a date stamp on each page of that tender. He concurred with Mr Momoniat that this is where most of the irregularities find its way in municipalities. There should actually a contract tender register in place in a municipality and it must recorded in there and signed by each individual before the opening of the tender so that they agree with what is stated in there.

Ms Hogan asked if he was proposing an amendment to make the clause more specific.

He thought the clause was specific.

Adv Grove explained that the framework should not be prescribed here in this particular clause. It provides for a framework to be prescribed by regulations. All the details are in the regulations. He noted a story reported by the media of one particular council which bought a computer worth R700 000 for R1,7 million.

Dr Bouwer proposed including, at the beginning of paragraph (f), the word "transparent" because you still have to prescribe it but that is your guideline and must be provided for.

Ms Hogan asked if the word "public" could be retained.

Mr Momoniat said the paragraph does not mean open to the public or whoever wants to watch them open it.

Ms Hogan said that this is exactly what is needed.

Dr Bouwer said that what happens is that if the due time is 10am on a specific day, all the tenderers are there to watch the process. This process must take place in public.

Ms Taljaard said that for many reasons she would be the biggest zealot in this area. But she was concerned about the meaning of "in public". Legally, does it mean you have to have four community representatives in the hall, because that is "in public" or 10 000 people in a hall?

Dr Bouwer suggested that "transparent' should not be inserted but it should read "procedures to open, register and record bids in a place accessible to the public." It does not matter how many people are present.

Ms Taljaard asked if this did not exacerbate the problem. If there was such free access to the bidding venue anyone could come and walk away with documents. What balance needs to be struck and how can it be put into law?

Ms Hogan ruled that "transparent" will be inserted into the clause and the meaning in precise terms would be set out in the regulations.

Adv Grove said that it should say that it must be open to the tenderers who bought the tender documents. That is usually what happens. The time and date for opening the documents is usually specified in the documents. "In the presence of the tenderers" would therefore be added into the clause, replacing "in public". The drafters would also insert after "tenderers" "interested parties/stakeholders" and the Committee would consider whether it is too unwieldy.

Ms Taljaard referred to 84(1)(l), saying that it was a good provision but she had one reservation. In respect of both (l)(i) and (ii) that will be the subject of an ongoing procedure, for example if there is a transgression by a councillor, it may be the subject of a rules committee investigation or some committee. But procedurally, she was not sure that there was a timeline sensitivity in the provision. At the conclusion of the investigation, once the person has been found guilty of contravening the code, what is missing is the guilty conviction on both counts and the procedure for then invalidating recommendations or decision based on the guilty conviction.

Ms Hogan asked if she was suggesting invalidation prior to the entering of a contract. What happens if it only emerges later that there was improper interference?

Mr Momoniat reminded Members that there would still be regulations to work out the detail. The drafters tried to avoid that kind of detail.

Ms Taljaard said she did not favour delegated legislation; this is an important area for certainty.

Ms Hogan said that you cannot say definitively when invalidation should take place because it is particular to each circumstance. Invalidation would occur when you come across the offence.

The Committee the considered Clause 85 of the MFMB.

Ms Hogan asked for clarity on the heading "Approval of tenders not recommended".

Mr Momoniat explained that there would be a tender committee who will make a recommendation. If the council decides to go for any other bid it will then have a higher hoop through which to pass.

Mr Dorfling said this issue had been discussed at length. Clause 88 even bars councillors totally from the tender committee. He had been requested to allow one councillor even to sit on the tender committee to give guidance. If people outside local government sit on the committee they might need guidance. They could even sit as an observer.

Mr Momoniat said that this area is very clear; political representatives should not sit on tender committees. The responsibility is, in effect, with the accounting officer, to set up a tender committee. The committee could be wholly internal or with external persons. The accounting officer remains responsible for this. The council grapple with the recommendations in a council meeting and they climb certain hoops if they want to make changes.

Ms Taljaard referred to Clause 88, which is linked to Clause 85. Her concern was disallowing people to attend meetings even as observers, which was potentially complicated. She supported the concerns about councillors on the tender committee but not allowing them to attend the meetings is harsh. If they were to try and intimidate the tender committee they trigger all the penalties set out in the code of conduct.

Mr Momoniat said that councillors are anticipating the MFMB being in place because they are not able to stop interfering colleagues.

Ms Hogan also noted the enormous pressures put on councillors from outside. They may face repercussions if tenders are not awarded to certain people.

Mr Mshudulu said that it is safer that way. There have been problems between members of the mayoral committees and the ordinary councillors, with some councillors feeling more superior. This provision is to save councillors from this pressure.

Ms Hogan said a reason for their inclusion would be that they are the custodians of local affairs but the bid has to be approved by them anyway; they may turn down the bid.

Mr Lekgoro agreed with the provisions but the underlying assumption was that officials themselves are not corrupt. More needs to be done on the clause to ensure that there are safeguards.

Mr Fankomo stressed that there was no need for councillors to be part of the tender procedure.

Mr Dorfling explained that in some councils it is currently the position that the tender committee has delegated powers. A councillor committee will not have any decision making powers with regard to conflicts. In his council a tender committee can resolve contracts up to R5 million. In that case you would not be able to delegate at all because it will not be legal representatives in the sense that there are councillors who can take ultimate decisions there. It will all be recommendations coming through to the mayoral or executive committee or eventually the council which will make decision making a little longer. The tender committee sits each week but it does not mean that it will go through the mayoral committee in the same week. He suggested that the tender committee could only recommend, being an outside committee. It would not have decision making powers.

Mr Momoniat said he was sympathetic to Mr Dorfling's point. The tender committee makes a recommendation and the council or accounting officer then approves it. The accounting officer, up to a certain amount, can make the decision, although it depends on the council delegating that power. Clause 85 needs to be more nuanced so that if the council considers the recommendation for approval or comes to a different decision it will have to do certain things. The accounting officer could make the decision by default with the council making the decision if it wants to or it could be retained as delegations.

Adv Grove suggested that it be kept as delegations. But there cannot be delegations to the tender committee because they have no powers.

Mr Momoniat said that the delegation is to the accounting officer then to the mayoral or executive committee from the council. The power to approve the tender can be delegated only to the accounting officer. There should not be a further delegation.

Ms Taljaard could see merit in the argument for both sides. There is a real danger around the concept of information asymmetry. The tender committee will not necessarily share all the requisite information with council. The council would want to satisfy themselves that the information they are supplied with is appropriate. There is a very material issue in terms of information asymmetry. She noted the distrust of councillors.

Ms Hogan pointed out that it was also about the protection of councillors.

A Member asked if it was not an offence to withhold certain information to the main decision making body such as council.

Ms Hogan said this fell under reporting requirements.

Ms Manche (DPLG) said that earlier the word "policy" was deleted. You would want municipalities to come up with their own policies within a national framework around how they conduct these procedures and set up tender committees. You also want to remove councillors from that process to avoid undue influence. The compilation of the committee is fair in terms of internal and external persons, removing persons with interests. These safeguards maintain the integrity of the system. It is important to have a provision allowing municipalities to come up with these systems.

Ms Taljaard said she was merely concerned with information asymmetry, not just with the argument about including councillors as observers. She did not think that the generic reporting requirement criminal liability deals specifically with this issue with the way it should be. She wanted reassurance that in this process councillors had an adequate flow of information from the tender committee.

Mr Momoniat suggested that on a quarterly basis the accounting officer could be required to report on all the procurement and other sort of information. These issues are difficult because anyone who loses a contract will complain to a few councillors that the process was unfair. There should not be complete paralysis because everything gets challenged all the time. This area requires practical training in tender procedures. Problems can not be dealt with only in legislation.

Ms Hogan acknowledged Ms Taljaard's concerns but said that sometimes one had to rely on the systems in place.

Ms Taljaard said that on a national level questions have been raised about officials involved in the tendering procedures. Officials do not inevitably make the correct decision.

Ms Hogan said that officials were subject to a whole series of prescriptions. It was a simple question of whether councillors sit on those committees or not.

The Committee then considered Clause 86, Clause 87, Clause 88 and Clause 89. There were no comments.

The Chair then nthe remaining issues to be finalised in the following meeting. The Gauteng problem was still to be resolved as well as the delegation of decision making to the accounting authority. There was also Clause 84's wording and MsManche's suggestion of a policy framework.

Adv Grove suggested that it might be better to speak of a policy instead of system because there is the rates policy, the tariffs policy and so on.

The other issue concerned the presence of councillors on tender committees.

Dr Bouwer noted, on a practical point, that there was often a power play in municipalities. The councillor sitting on a tender committee could start making comments intended to influence but none of the official would throw the councillor out of the room.

Mr Momoniat said this could be looked at. Perhaps in regulations mechanisms could be put in place where observers, other than councillors, could be present. Outsiders should not chair the committee but neutral observers could be present.

Ms Hogan said these could be officially delegated observers appointed by council.

Mr Dorfling said these should not be officials because there would be too much pressure.

Mr Lekgoro asked what the ultimate role of those observers would be.

Mr Momoniat said the observer might be able to say that the process was neutral and was followed.

The meeting was adjourned.

Appendix 1:

Dear Chairperson


Municipal Finance Management Bill

I refer to our submission dated 10 January 2003, which commented on the January version of the MFMB, and the latest version of the MFMB dated 31 March 2003.

Kindly note that we have reviewed the latest version of the Bill with regard to our abovementioned submissions and would like to draw your attention to the following issues:


We note with appreciation the fact that the latest draft now omits the requirement relating to the keeping of lists of bank accounts by the Office of the Auditor-General, and that the provision relating to the stopping of equitable share allocations to municipalities have been amended. However, we have not been able to obtain comment from National Treasury to our enquiries about the remaining matters, which are the following:

1. SUBMISSIONS TO PROVINCIAL LEGISLATURES [Clause 125]

 

The Office is concerned that its previous comments were not accommodated. The Office should not be compelled to provide assessments of the responses but have discretion to report on such issues. This also infringes on the discretion of the Auditor-General and goes beyond the constitutional mandate of the Auditor-General.

 

The Public Audit Bill (previously Auditor-General Bill) drafted with the express purpose of consolidating audit matters and specifically audit reporting matters in one Act, will be presented to Parliament by the end of the month. This reporting obligation in clause 125 should thus be deleted and left for the Public Audit Bill as it may cause an unintended legal conflict.

 

Recommendation:

That the requirement to provide a report on the adequacy of responses by the auditee be deleted and incorporated in the Public Audit Bill.

 

Alternatively that the draft clause should simply read: "The Auditor-General may report on any response by the municipality to issues raised in an audit report."

 

2. AUDIT FEES [Clause 62(2)(f)]

 

Please note that the MFMB still does not address the audit fees issue satisfactorily.

It is an acknowledged fact that non-payment of audit fees is a critical issue at local government level. Unlike other service providers, the Office is obligated to audit non-paying municipalities. It is thus imperative that non-payment of audit fees is explicitly made a statutory obligation. This will enable the constitutional amendments of Constitution of the Republic of South Africa Amendment Bill B33B-2002 to be activated if a material amount of audit fees is outstanding or a consistent non-payment of fees occurs once the Bill enacted.

 

It will then also be in alignment with PFMA section 38(1)(e). The Constitutional amendment on its own may not automatically result in intervention when non-payment of audit fees occurs. The term "audit" will emphasise the importance to accounting officers of meeting their audit fee obligations.

 

Recommendation:

 

The term "audit" is inserted as per our previous submission.

 

62(2)(f) comply with tax, levy, duty, pension, audit and other commitments of the municipality as required by legislation;

 

In addition we emphasise that this will align the MFMB with the PFMA and that the term "audit" will emphasise the importance to accounting officers of meeting their audit fee obligations.


Please feel free to contact Mr Cobus Botes from my Parliamentary unit at any time on the following number: 082 4606432.

 

S A FAKIE

AUDITOR-GENERAL

 

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