Municipal Finance Management Bill:deliberations

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Finance Standing Committee

15 April 2003
Chairperson: Ms B Hogan (ANC)
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Meeting Summary

Municipal Systems Amendment Bill
The discussions on Clause 94O raised the following matters: "any relevant law" is too broad and has to refer to legislation dealing with the conduct of directors, "must take steps to consider the discharge" has to be inserted in Sub 3 to grant the discretion to the parent municipality and whether "performance of a director" should be included in Sub clause 3(a). The Committee considered whether the corporate governance issues of municipal entities should be included in the Bill at all, and whether Public Private Partnerships should not be used instead.

During the deliberations on Clause 94P the following matters arose: clarity was sought on the definition of Multi-Jurisdictional Service Districts (MJSDs), their role in the Bill and the discussion on this matter between National Treasury and the Department of Provincial and Local Government (DPLG). The passage of the Municipal Systems Amendment Bill and Municipal Finance Management Bills through Parliament was debated and, after heated discussion, the Chair ruled that the two Bills would be passed simultaneously.

The South African Local Government Association (SALGA) was pleased that councilors are now allowed to sit in on Board meetings under Clause 94Q, the transitional arrangements in Clause 94S would have to provide that current subsidiary arrangements have to be kept in place, the Committee considered whether the Code of Conduct in Clause 22 conflicts with the Companies Act, the existing rights under the current five year contracts in Clause 8 cannot be altered and whether MJSDs are included under "external mechanisms" in Clause 11.

Municipal Finance Management Bill
Members decided that Chapter 11 would apply equally to MJSDs as well. The powers of the Board of Directors of the municipal entity were discussed under Clause 91. The following matters arose in Clause 92: the time period within which a municipal entity has to submit a draft budget to the municipality, whether it should have to report on its financial situation on a quarterly or even a monthly basis, and the benefits of such reporting, and how Sub clause 3 would apply to MJSDs. The precise meaning of the term "interference" in Clause 107 was discussed.

The following matters arose under Clause 31: SALGA proposed that the contracts be capped at to years, whereas Treasury insisted on a three year period to align it with the MTEF framework, the validity and effect of pegging a fixed rate for municipal tariffs and the constitutionality of granting an exemption from the Sub clause 2(c)(i) contracts. Under Clause 40 the Committee questioned the sanctity of the contract that allows the municipality to impose unreasonable tariff increases on its service provider. The definition of "public private partnership" will be inserted in Clause 1. A heated disagreement ensued between SALGA and Treasury regarding the inclusion of a portion of Clause 20(b)(iv)(bb). The Chair outlined the outstanding issues in the Bill and the way forward.

Meeting report

Municipal Systems Amendment Bill
Clause 94O: Boards of directors

Sub clause 3(b)
The Chair stated that "any relevant law" in Clause 94O(3)(b)(ii) of the Amendments to the Municipal Systems Act (see document) is too strong because it goes beyond financial management violations alone. It should rather read "guilty of a criminal offence or code of conduct". It cannot include minor contraventions of the financial management provisions.

Mr Ben Dorfling, South African Local Government Association (SALGA) Councillor, stated that the word "if" at the beginning of Clause 94O(3) has to be removed. It creates the impression that the parent municipality would only be able to take steps to discharge the director on the grounds provided. The fact of the matter is that the parent municipality would have the power to discharge the director in any event. The phrase "following an annual performance review" in Sub clause 3(a) implies that steps can be taken to discharge the director only once a year. This is problematic.

The Chair agreed that these two matters have to be looked at.

Adv Gerrit Grove, Legal Drafter: Treasury, proposed that Sub clause 3(b)(ii) has to be more specific. It should only refer to legislation dealing with municipalities, and cannot just refer to "any law". It should instead state "failed to comply with any legislation regulating the conduct of directors or code of conduct". This would cover the Companies Act, the Municipal Finance Management Bill, the Local Government: Municipal Systems Act (Systems Act) etc.

The Chair suggested that it simply state "failed to comply with any relevant law or code of conduct". The phrase "must take steps for the discharge" at the beginning of Sub clause 3 is very harsh. It implies that the municipality must immediately take steps to discharge the director, even for a minor contravention under Sub clause 3(b)(ii). There is no discretion granted to the municipality not to discharge for minor contraventions.

Mr Dorfling stated that he has a problem with granting this discretion to the parent municipality.

Adv Grove contended that Sub clause 3 goes too far. The parent municipality could be merely a minority shareholder in the municipal entity, and minority shareholders do not have the power to discharge a director. Sub clause 3 should instead read "if the parent municipality has the power to discharge a director it must consider steps for the discharge of a director". This would grant more leeway to the parent municipality, and would resolve the Chair's concern by granting discretion to the parent municipality.

The Chair agreed. This formulation means the parent municipality must apply its mind as to whether the contravention is serious enough to constitute the basis for a discharge. This also means that the "if" at the beginning of Sub clause 3 has to be retained, because the parent municipality would not always have the power to discharge the director. It would only be able to do so if it is a majority shareholder in the municipal entity. This resolves Mr Dorfling's earlier concern.

Mr P Smith (IFP) [Provincial and Local Government Portfolio Committee] stated that "relevant law" in Sub clause 3(b)(ii) covers the fiduciary duties of directors of private companies. Which law regulates the fiduciary duties of directors of municipal entities?

Adv Grove replied that it would be regulated by the Municipal Finance Management Bill (the Bill), for example.

The Chair stated that those directors would be covered by the next Clause 94P.

Adv Grove stated that Sub clause 3(b)(iii) should be deleted because it is superfluous. Conflict of interest is already included in Items 5 and 7 of the Schedule 1 in the Code of Conduct in the Systems Act (see document).

Mr Smith contended that a time limit has to be placed on when the fraud in Sub clause 3(b)(i) was committed. Furthermore, having committed fraud in Sub clause 3(b)(i) should be a ground for disqualification from becoming a director in the first place.

The Chair agreed. She proposed to resolve this by inserting "whilst in office" at the end of Sub clause 3(b)(i).

Adv Grove proposed that a list of disqualifications be inserted.

The Chair agreed.

Ms R Joemat (ANC) [Finance Portfolio Committee] asked whether a municipality that is not a majority shareholder would have the same powers under Sub clause 3 as a municipality that is majority shareholder.

Mr Dorfling stated that the Code of Conduct for Councilors is now being made applicable to directors via Sub clause 3(b)(ii).

Mr Smith asked whether the Code of Councilors is necessarily applicable to directors.

The Chair stated that the two issues raised by Ms Joemat and Mr Dorfling and Mr Smith have to be held over.

Adv Grove proposed that Sub clause 3(b)(iv) be removed as well, for the same reason as Sub clause 3(b)(iii).

The Chair agreed.

Sub clause 3(a)
The Chair stated that she is not sure that "performance of the director" should be included in Sub clause 3(a). The only performance that should be relevant here is the performance of the municipal entity.

Mr Matthew Glasser, Treasury Consultant, stated that directors should not be replaced if they perform all their duties in accordance with the legislation to the best of their ability, but the municipal entity still does not perform well. Thus it is actually the performance of directors themselves that leads to the changing of directors.

The Chair disagreed. It is possible for directors to comply with the laws but "perform hopelessly incompetently" and not deliver on their mandate. Mr Glasser is referring to corporate governance issues, which is distinct from the performance issues in Sub clause 3(a).

The directors are not employees of the municipal entity. This is the root of all the concerns being raised around municipal entities. It is an independent private company and an external mechanism, with a Board of Directors which are not employed by the municipal council. The Board is instead regulated by the Companies Act. There is a weakness in the mechanisms of control, authority and oversight over a municipal entity. Thus the only real link between the municipal entity and the municipal council is a contractual relationship. It is clear that this Committee is getting out of its depth, because the corporate governance issues being delved into here are not really its field of competence.

Mr M Tarr (ANC) [Finance Portfolio Committee] suggested that these corporate governance provisions are in fact superfluous. They do not have to be included in the Bill because the Companies Act deals adequately with this matter. Or is it that case that these provisions are changing the Companies Act?

Mr Dorfling stated that the service utility and Multi-Jurisdictional Service District (MJSD) will not be covered by the Companies Act. There is thus a legislative vacuum for the corporate governance of these two structures.

The Chair stated that the Committee is encountering "a mind-field of problems" with the corporate governance of municipal entities. She would really like to take municipal entities "out of the whole game".

Dr Petra Bouwer, Director: Legal Services in Department of Provincial and Local Government, sought to clarify the permutations of using a private company and the relationships created. The main relationship in the provision of the service would be between the municipality and the municipal entity. Just how well that agreement is drafted will dictate how well the provision of the service is governed.

A "pincer-type of control mechanism" over municipal entities is in fact possible. The first would be via the direct service delivery agreement between the municipal entity and the municipality, which would regulate the relationship. The municipality would also be able to indirectly influence the running of the municipal entity as a company, because it has ownership control in it.

The ownership control aspect can manifest in two ways: firstly, the municipality can either be the majority shareholder in the municipal entity or, secondly, it can control the appointment of the Board of Directors of the municipal entity. This happens quite often in the corporate world. Members thus need not be overly concerned with the ownership control aspect if the proper service delivery agreement is in place.

Mayor Leeuw, SALGA, stated that Dr Bouwer seems to be confusing the issues here. It is important to separate the establishment of a private company by municipality and clearly spell out relationship between the two. Then one has to deal with the establishment of municipal entity, which is not necessarily a private company.

The Chair agreed. Members have to focus only on the private company, and not the service utility. It does not make sense to allow a municipality set up private company, in the form of the municipal entity, to deliver a service. The point made by Dr Bouwer that the service delivery agreement is pivotal in this relationship, and that the agreement can be cancelled when the municipal entity does not deliver. The problem is then what happens to the company owned by the municipality?

A complicating factor is that the municipality, as a shareholder, must have an interest both in the corporate governance and performance of the municipal entity that goes beyond simply the service delivery agreement. There are corporate governance issues at play here.

Dr Bouwer stated that the very benefit of having a company is that the municipality can prevent the municipal entity from diversifying its functions to such an extent that it cannot deliver on the service delivery agreement. The municipality would not be able to exercise this degree of influence into the running of the company if a Public Private Partnership (PPP) were used. This is why the corporate governance issues are important and have to be included.

Mr Tarr stated that the problem here is that a private company is being created that the municipality actually cannot fire if it fails to deliver. This Committee has to seriously consider whether municipal entity should be included in the Bill at all. Surely PPP's would be preferable.

Adv Grove stated that it would be within Parliament's power to do away with municipal entities altogether. How wise this decision would be, is another matter.

Dr Bouwer reminded Members of the "dovetailing" between the Municipal Systems Amendment Bill and the Municipal Finance Management Bill. The Municipal Systems Amendment Bill seeks to regulate some aspects of the corporate governance issues. Clause 113 of the Bill sets out the reasons for using a municipal entity. The municipality is granted more to influence the service delivery of the municipal entity than if a PPP were used. The two pieces of legislation thus have to be read together. This would begin to resolve the matter.

The Chair stated that she does not understand why a service delivery agreement is not used. If the service provider does not perform in terms of that contract, the contract is simply shut down.

Adv Grove stated that this might not be the best route to follow. The service delivery agreement only applies between the municipality and the service provider. The latter may or may not be a municipal entity. Sub clause 3(a) essentially goes slightly further than the corresponding provisions in the Companies Act. It allows the shareholder to make a value judgement and decide whether they have to get rid of director, because s/he is not performing properly.

The Chair stated that the Systems Act does not deal with the corporate governance of a municipal entity, when shareholders are not satisfied with the corporate governance of municipal entities.

The decisions taken so far on Sub clause 3 are as follows:
- insert a list of disqualifications;
- Sub clauses 3(b)(iii) and (iv) have been removed;
- Sub clause 3(b)(i) will read "committed fraud whilst in office"; and
- Sub clause 3(b)(ii) will read "failure to comply with any relevant law or code of conduct".

Dr Bouwer stated that Sub clause 3 merely creates an executive obligation on the municipality to at least consider steps to remove a director over and above what can be done in any event. The new Sub clause 3 will read as follows: "a parent municipality must consider steps for the discharge of the director".

The Chair agreed.

Mr B Mnguni (ANC) [Finance Portfolio Committee] sought clarity on Ms Joemat's earlier questions regarding the status of parent municipalities that are not the majority shareholder in the municipal entity.

The Chair stated that it is her understanding that those municipalities would have to enter into a series of relationships with other municipalities. In this case it would be governed by the various arrangements that specifies the relationship.

Mr Ismail Momoniat, Treasury Deputy Director-General: Intergovernmental Relations, agreed.

The Chair stated that Clause 113 in the Bill adequately covers the financial performance of the company per se, not Sub clause 3(a). The service delivery agreement covers the situation when the company is not delivering on its mandate. Provision is also made for the removal of the Board of Directors of the company when it does not delivery on its service delivery agreement. Nothing else needs to be added in this legislation.

Mr Momoniat stated that Mr Mervyn King indicated that Clause 94O(1)(b) should include that the Chairperson of the Board of the municipal entity must be non-executive director. The provision must also prescribe a minimum number of non-executive directors.

The Chair agreed. Mr Momoniat is requested to consult with Mr King on these amendments, as well as on the possible conflict with the Companies Act.

Mr Smith asked whether the Bill needs a provision dealing with the corporate governance issues of the service utility.

Adv Grove stated that this would largely be dealt with by municipal by-law. It would not be wrong to lay down certain norms and standards in the Bill with which those by-laws must comply.

The Chair agreed. She stated that there does not seem to be anything in Clause 94O that only applies to a private company. Its provisions could thus apply equally to a service utility that has a Board of Directors.

Mr Dorfling stated that a similar provision is needed for MJSD.

Adv Grove stated that a list of requirements for the agreements concluded by participating municipalities is contained in Section 89 of the Systems Act. A similar list is needed for service utilities.

The Chair agreed.

Mr Momoniat stated that National Treasury and the Department of Provincial and Local Government (DPLG) would even want to certify that those legal conditions have been met.

Adv Grove stated that this would raise constitutional problems. It amounts to national government approving a municipal by-law. This would go too far.

Mr Smith stated that "certification" is too strong a term. It implies that the by-law will not be in effect until it is certified. Perhaps another term should be used.

The Chair proposed that an information sharing consultative mechanism be built in with the two departments, for the two national departments to consult on the establishment of the structure.

Clause 94P: Duties of directors
Mr Dorfling asked whether the staff of municipal entities will be municipal employees.

Mr Momoniat replied that there is a discretion at the moment, so that one can almost assume that they are not municipal employees. But to the extent that they are not, they are still part of the public administration. National Treasury has discovered that it needs to regulate some of the salary packages as well. A whole discussion is needed on how to deal with the personnel issue.

The Chair sought clarity on the planned discussions on MJSDs.

Mr Momoniat responded that the discussions have not yet taken place. Both he and Ms Jackie Manche, DPLG Deputy Director-General: Institutional Reform and Support, agree that the MJSDs would have to follow the same process as the municipal entities. Although the legislation does allow for MJSDs, the reference is too indirect.

Ms Joemat asked whether the creation of municipal entities will not result in a higher percentage of unemployment. It does not appear that the staff of the municipality will automatically transfer to the municipal entity. Also their salaries are not the same as those of officials within the municipal council.

Mr Dorfling agreed. This is the problem with the "animal" created ie. the municipal entity.

Mr Momoniat proposed that the issue whether employees of municipal entities form part of normal municipal employees be held over for a separate discussion. It has been recognised that this must be addressed. The Department of Public Service and Administration (DPSA) and the DPLG are discussing this as part of the "One Public Service" initiative.

The Chair asked what commitment DPSA has given to address this issue.

Mr Momoniat replied that this matter is very high on its agenda.

The Chair asked when discussions on the MJSDs will take place. She is not at all clear on what exactly an MJSD is, and how it will operate in this legislation.

Mr Momoniat assured Members that he will discuss the matter with Ms Manche.

Passage of the two Bills
The Chair stated that the Municipal Systems Amendment Bill and the Municipal Finance Management Bill will be processed simultaneously. This was the undertaking given to her by the Provincial and Local Government Portfolio Committee. She stated that the Municipal Finance Management Bill cannot be passed today, as was originally planned. It will still be sent for legal advice, and then returned to this Committee for further deliberations.

Ms Manche stated that when the passage of the two Bills was discussed at an official level, it was found that the Municipal Systems Amendment Bill is currently only being processed by the DPLG. From these logistics it was recognised that that Bill will only be capable of being introduced by DPLG to Parliament in June 2003. The DPLG had envisaged that by that time the Finance Portfolio Committee would have completed its deliberations on the Municipal Finance Management Bill. The understanding was that the Municipal Finance Management Bill would then be parked till the Municipal Systems Amendment Bill is approved by Cabinet.

The Chair disagreed. This does not accord with the assurance given to her that the two Bills will be processed simultaneously. She informed Ms Manche that the Speaker of the National Assembly does not allow Bills to be "parked". The Chair stated that every week she has to explain to the Speaker why this Committee has not yet passed the Municipal Finance Management Bill. She would not be allowed to "park" the Municipal Finance Management Bill.

Ms Manche stated that all she is saying is that logistically the Municipal Systems Amendment Bill is not currently before Parliament. This will only be possible when DPLG has formal Cabinet approval to introduce it to Parliament. She agreed with the Chair that the two Bills have to passed simultaneously. For this to happen the Municipal Finance Management Bill has to be "parked", for lack of a better word. This is the position at a purely logistical level.

The Chair stated that this is an unusual process. Problems will be created if provisions of the Municipal Systems Amendment Bill then contradict the Municipal Finance Management Bill. A Schedule would then have to be included in the Municipal Systems Amendment Bill to amend the Municipal Finance Management Bill. Parliament would then go backwards and forwards as it tries to reconcile the Bill while it tracks its way through the process.

Mr Smith agreed with Ms Manche that the Municipal Finance Management Bill has to be parked. The reason for this is that it makes no sense to pass the Municipal Finance Management Bill if its provisions could be undone by the Municipal Systems Amendment Bill three months down the line.

The Chair, visibly frustrated, replied that Mr Smith's statement makes her even more worried. This Committee has been negotiating this matter with the Provincial and Local Government Portfolio Committee all along in good faith. She stated that the current state of affairs has caused her to now rule that the two Bills will be processed simultaneously. This will mean that the Bills will be finalised in August/September 2003, and they would miss the NCOP cycle. This in turn means that the whole process will have to be redone by the new Parliament in the new year. The Chair stated that she has to meet with the two Departments and the Chairperson of the Provincial and Local Government Portfolio Committee to sort out this issue. The Municipal Finance Management Bill has to be passed as soon as possible, because the local government sphere needs it.

Clause 94P(e)
The Chair asked whether the "municipal representatives" in Clause 94P(e) are the mayor and municipal manager.

Mr Momoniat stated that the reference is incorrect. The directors are accountable to the shareholders, not the parent municipality. He proposed that Clause 94P(e) be deleted.

The Chair agreed. It is understood that the directors are accountable to their shareholders, and they cannot be "accountable through the municipal representatives" as stipulated in the provision. It is implicit in the whole relationship that the directors would be accountable.

She stated that the shareholder would be the municipality. The municipality would also bear the loss suffered by the municipal entity, and would have to institute a financial recovery plan under Clause 113.

Ms Joemat asked whether there are any municipal entities currently in existence. Furthermore, what is the urgency for the municipal entity to make the company work, as it is not liable for the loss?

Mr Momoniat responded that there is much bad practice amongst Section 21 companies at the moment. They are all very opaque, and their financial reports are hardly seen. The provisions in the Municipal Systems Amendment Bill will bring all these irregularities out of the woodwork. These companies are then efficient only in the sense that the inefficiencies have been shifted someplace else, usually to the municipality. The result being that they have not actually dealt with those inefficiencies. What is clear is that they have not been well thought through.

Clauses 94Q: Meetings of boards of directors
Mr Momoniat stated that the municipal representatives here should not be the same as those specified in Clause 94N, as Clause 94N deals with shareholder meeting representatives. Clause 94Q should deal only with the "accounting officer or officers". In this clause the municipality is not appearing in its capacity as shareholder but rather in more of a working relationship, to deal with the implementation of the service.

The Chair disagreed. The municipal representatives have to be included at the Board meeting so that they can report back to the municipal council. They are only observers and cannot intervene in substantive Board proceedings. This will allow them to know what is going on at the meetings, and their observer status prevents them from abusing any corporate governance rules.

Mr Dorfling stated that he appreciates the fact that councilors are now allowed to attend Board meetings.

Clause 94R
The Chair noted that no objections were raised with this clause.

Part 5: General
Clause 94S: Establishment of, and acquisition of interests in, companies and other corporate bodies disallowed
Mr Dorfling stated that this will be a huge problem, because some municipal entities already have subsidiaries.

The Chair contended that this would have to be dealt with via a transitional mechanism. It would probably have to allow those companies, trusts etc that have already been established by municipal entities to remain in place. Surely these arrangements cannot now be reversed retrospectively?

Mr Momoniat stated that these municipal entities must then motivate for an exemption from the provisions of this clause.

The Chair proposed that Clause 94S(3) cannot refer to a municipal entity. Instead, companies that currently have such municipal entities must apply for permission to continue in its present form. A new transitional mechanism is needed under Clause 94S(3).

Clauses 20 and 21
The Chair noted that no objections were raised with these clauses.

Clause 22
Schedule 3
The Chair asked whether this Code of Conduct for councilors conflicts with any code in the Companies Act? She noted the point made earlier by Mr Dorfling that this Code of Conduct is being modified in Schedule 3 to be equally applicable both to directors and staff of a municipal entity.

Mr Dorfling stated that there is a contradiction between Clause 21 and Clause 94O(3). Clause 94O(3) states that the parent municipality must consider steps for the discharge of a director, whereas the Code of Conduct in Schedule 3 provides that the Board of Directors has this power. The Companies Act also provides that this power lies with the Board of Directors. These two provisions have to be properly aligned.

The Chair contended that Clause 94O(3) operates over and above the Code of Conduct in Schedule 3. The Board of Directors would enforce the Code of Conduct via Clause 21. Once a director has been found guilty of an offence via a disciplinary hearing, the parent municipality would then exercise its prerogative, via Clause 94O(3), to consider whether that director should be discharged.

Mr Dorfling proposed that a paragraph be inserted to state that the duty of the Board of Directors is to ensure that the Code of Conduct is enforced, and any fraudulent activity etc. has to be referred to the parent municipality to consider any further steps to be taken. This will clearly establish that link between the two, because it is currently very loose.

The Chair agreed with Mr Dorfling. She requested Adv Grove to align the two provisions. The Committee will then look at the principles employed in the new aligned provisions.

Clauses 1- 4
The Chair noted that no concerns were raised with these clauses.

Clause 5
Adv Grove stated that this is not a new clause. It is merely a condensed version of what was included in the Municipal Finance Management Bill.

The Chair noted that no concerns were raised with this clause.

Clause 6
The Chair noted that this was discussed when this clause resided in the Municipal Finance Management Bill. She noted that no concerns were raised with this clause.

Clause 7
The Chair noted that no concerns were raised with this clause.

Clause 8
Mr Dorfling stated that he has a problem with Sub 4B. It provides that bonuses based on performances can now only be paid after the official's performance has been measured against the audit report on the financial statements. In most of the cases the performance of those officials will be evaluated within a year's time following their date of appointment, as per the performance agreement, and their bonuses would be paid promptly by that time. The time of appointment no longer has any significance in the proposed Clause 8.

Mr Momoniat disagreed. He stated that the current formulation makes absolute sense. The performance will be judged during the financial year. The performance bonus of the top managers can only be paid after the audit reports on the financial statements. It is also an incentive for the managers to complete the performance and audit reports as quickly as possible.

Mr Dorfling stated that this would alter the contents of the current performance agreement contracts.

Adv Grove stated that there is a rule of statutory interpretation which provides that any legislation affecting people's rights only applies to future rights. It cannot therefore alter existing rights. The sanctity of the contract has to be respected.

The Chair stated that the sanctity of these five year contracts would then have to be respected. The future contracts would have to be concluded on the requirements set out in Clause 8.

Mayor Leeuw stated that a performance bonus in Sub 4B is not only made in cash. These could include granting additional leave, for example. He proposed that "paid" be expanded to include "or granted" as well.

The Chair agreed.

Dr P Rabie (DA) [Finance Portfolio Committee] contended that this formulation could open the mechanism up to abuse.

Mayor Leeuw stated that this would not be the case. Everything that is paid or granted to the manager or municipal manager is spelt out in the performance agreement.

Clauses 9 and 10
The Chair noted that the Committee had agreed to these clauses on a previous occasion.

Clause 11
The Chair stated that Sub clause (c) was previously contained in the Municipal Finance Management Bill. It lists the additional "hoops" applicants would have to go through before being allowed to explore the option of an "external mechanism".

Mr Dorfling asked whether an "external mechanism" includes MJSDs, or whether it is limited to municipal entities.

Adv Grove stated that this clause refers to the existing Section 78 of the Systems Act. It applies to all external mechanisms, but does not apply to MJSDs. This is something that this Committee has to look at.

The Chair asked for the definition of "external mechanism".

Ms Manche replied that there is no definition of this term. It could however be included under "another municipality" in Section 76(b)(ii) of the Systems Act.

The Chair asked whether the definition in Section 76 includes MJSDs.

Adv Grove stated that the problem is that it is not included in Section 76. Perhaps MJSDs could simply be added to the list already contained in Section 76(b).

The Chair agreed that it be added to the list.

Mayor Leeuw proposed that the phrase "or provincial" be inserted after "national" in Clause 11(b).

The Chair agreed.

Clause 12
Adv Grove stated that this provision is substantially the same as it appeared in the Municipal Finance Management Bill. Only technical amendments have been effected.

Mr Dorfling stated that the proposed Section 80(1)(aA) says that Part 3 has to be excluded. This negates the amendments the Committee has just effected to Section 76.

Adv Grove stated that these municipalities would not go through the bidding process in Part 3. Clause 12 deals with the situation where the municipality negotiates with other municipalities. It would not have to go through a competitive bidding process, and thus Part 3 would not apply.

The Chair requested Adv Grove to effect all the consequential amendments to this clause. She noted that Members agreed with this clause.

Clauses 13-15
The Chair noted that Members had agreed to these clauses on a previous occasion.

Clause 16
Mr Dorfling stated that Section 82 of the Systems Act merely dealt with the formation of entities. This is currently dealt with by Clause 94 of the Municipal Systems Amendment Bill.

The Chair noted that no concerns were raised with this clause.

Clause 17
The Chair stated that this is a new provision.

Adv Grove stated that it applies to the new chapter on supply chain management.

The Chair noted that no concerns were raised with this clause.

Clause 18
Adv Grove stated that this clause provides that a MJSD will be treated as a municipal entity only for the purposes of the Municipal Finance Management Bill. It is not treated as a municipal entity for the purposes of the Systems Act, because this Act has different provisions dealing with MJSDs and municipal entities.

Mr Momoniat stated that the corporate governance issues will be dealt with in the Municipal Systems Amendment Bill.

The Chair noted that this concludes the discussion on the Municipal Systems Amendment Bill.

Municipal Finance Management Bill
Chapter 11: Municipal entities
Mr Momoniat informed Members that Clause 3(1)(c) states that this chapter applies to MJSDs as well.

The Chair noted that Members agreed.

Chapter 11: Municipal Entities
Part 1: Financial governance
Mr Momoniat pointed out that aside from Clauses 92, 93 and 112 every thing that had been discussed in the previous meetings had not been changed "to the extent that that there were slight changes".

Mr Dorfling pointed out that the dates in Clause 92 had not been discussed, yet the principle was still the same.

Mr Momoniat stated that the removal of the words "on request" from Clause 98(1)(c) would be one of the recent changes made to Chapter 11. Parts 3 and 4 of Chapter 11 were standard. A new addition to Clause 112 is that municipalities had to borrow on behalf of the entity, as well as the issue of guarantees.

Clause 90: Bank Accounts
The Chair said that there is no need to effect any changes here, because it is a standard clause.

Clause 91: Bank account details
Mr Smith asked if the Board of Governors and the governing board of the Board of Directors would be one and a same thing.

The Chair said that the Board of Directors was understood to be the governing body. Clause 1 defines the "board of directors" as a "municipal service district appointed in terms of an agreement referred to in section 89 of the Municipal Systems Act". The definition might be confusing, because it blurs the distinction between the geographical area and the actual institution itself. The definition should instead read "a Board of Directors in relation to a multi-jurisdictional municipal service district means the governing body".

Adv Grove stated that if this is the case why is it that the Systems Act does not allow the Board of Directors of a company and councilors of a service utility to sit on the board of a MJSD, whereas the councilors of the governing board could sit on its board.

The Chair said that the Committee has to revisit the Systems Act to sort out this matter. There is no need to effect changes to Clause 91 as it is a standard clause.

Clause 92: Budgets
Mr Momomiat pointed out three issues in respect of budgets of municipal entities: firstly, there is a whole process for establishing municipal entities. Secondly, there was a service delivery agreement which had to be signed as soon as the municipal entity was established. It could only be changed when both sides agreed to the change. Thirdly, there is the budget of the municipal entity.

It had been agreed by the Committee that the municipality would not be allowed to approve the budget of the municipal entity. Instead, this would be done by the directors of the municipal entity.
Much of the business plans and matters connected thereto in Clause 93 had to form part of the budget of the municipal entity, and would constitute one process. This means that Clause 93 has to be scrapped and some of its components have to be imported into Clause 92.

Sub clause 1
The phrase "when requested by the municipality" should be added after "parent municipality" in Sub clause 1.

Mr Smith asked whether it should read "municipality" or "municipalities".

Mr Momoniat replied that the request refers to all the municipalities out of the parent municipality. Unless the context indicates otherwise, this refers to Part b of the "parent municipality" definition in Clause 1 of the Bill. Hence the request had to be furnished to each municipality. In case of a MJSD, a request has to be furnished by each participating municipality.

Mayor Leeuw stated that Sub clause 1 now provides that the Board of Directors of the municipal entity has to submit the draft budget without waiting for the request from the municipality.

Mr Momoniat was of the view that the municipal entity has to submit the draft budget within 150 days when requested to do so. Yet in most instances 150 days would be quite late, as it would only be 50 days before the municipal entity tables it budget. Hence the Bill had to allow for a municipality to request the draft budget from the municipal entity.

Ms Joemat asked whether Sub clause 1 means that municipal entities are always obliged to submit a draft budget. If so, why is it necessary to insert the phrase "when requested by the municipality"?

Mr Momoniat responded that there would usually be some negotiations between the municipal entity and the municipality when the municipal entity is about to submit a draft budget. The first draft of the budget would submitted quite earlier. The new phrase in Sub clause 1 is only requesting the last draft budget submitted by the municipal entity after there had been some discussions.

The Chair was concerned that the phrase would make it difficult for the municipal entity to know when it had to finalize its budget.

Mr Momoniat pointed out that the phrase was not referring to the approval of the budget, it is merely requesting a draft budget. It is only the Board of Directors that can formally approve the final budget of the municipal entity, in terms Sub clause 5.

The Chair questioned just how ready the municipal entities would be if they were asked to submit the draft budget within 150 days.

Mr Smith stated that the phrase "on request" would make things difficult for the municipal entity. It would thus be better to change the phrase from "when requested" to "within a month of being requested to do so". This will allow the municipal entity enough time from the date of the request.

The Chair was of the view that it is not necessary to specify that the draft budget has to be earlier than 150 days, as this would place the municipal entity in a very difficult position. It would be better to state that the municipal entity should submit a draft budget "when requested as per agreement".

Mr Momoniat concurred with the Chair's proposition.

Dr Bouwer asked as to why it is perceived that the municipality would require the draft budget before the 150 days expires.

Mr Momoniat briefly outlined the process of submitting the draft budget as follows: firstly, the Mayor would table the budget 90 days before the start of the financial year, and this would be followed by the hearings on the budget. The municipal entity's budget also forms part of the hearings, and the municipality may suggest recommendations where necessary. Then, 30 days before the financial year starts, the Board would have to finalise "up to the hearings the budget of the municipal entity".

Mr Momoniat asked whether the remaining 60 days was sufficient for the municipality. Should it be enough, the 150 day period currently contained in Sub clause 1 has to remain. It is however possible for some municipalities to start their engagements at an earlier date, and the draft budgets would normally be supplemented with interactions and engagements between the municipal entity and the municipality.

Some municipalities have proposed the inclusion of a provision like Sub clause 1, because some municipal entities regard themselves as being so independent that they refuse to furnish the municipality with their budget.

The Chair asked the Members to agree that the Board of Directors of a municipal entity would submit its draft budget to its parent municipality not later than 150 days before the start of its financial year, when requested as per agreement.

Sub clause 2
Mr Smith conceded that "mid- year" in this sub clause refers to a 180 day period "and could be earlier". Due to the amendments effected in Sub clause 1, Sub clause 2(b) could no longer be applicable.

Mr Momoniat replied that Sub clause 2(b) could only applicable for 150 days, and could not apply before that period. If the financial statements were not ready for whatever reason, it should not mean that the municipal entity could not provide a draft budget. Therefore if the municipality requires a draft before 150 days, it would not be possible for a municipal entity to provide for a mid year performance review.

The Chair suggested that the phrase ", should there be one available, if requested upon earlier" be inserted in Sub clause 2(b).

Mr Momoniat concurred with the Chair save that, for Sub clause 2 to be specific, it has to state that "a draft budget submitted within the 150 day period must contain both the financial statements for the previous financial year and the mid-year performance review of the municipal entity during the first half of the current financial year, if available, if requested upon earlier".

Mr Smith asked whether the performance review assessment was something that has to be done automatically as a standard practice, or whether it only has to be done in respect of Sub clause 2(b). If it is a standard practice, it has to be worded to the effect that "a draft submitted within the period of 150 days must be accompanied by a mid-year performance review assessment only if it is available".

Mr Momoniat proposed the insertion of a separate clause, for the purposes of certainty, which would provide that when the municipal entity requested an early draft budget it must also submit a mid-year performance review together with that draft budget.

Mr Dorfling asked whether it is possible to subject the municipal entities to a quarterly review instead of a mid-year review.

The Chair held that this is a new clause which the Committee has not yet considered.

Mr Dorfling raised concern with the reporting requirement process for local government in Sub clause 2(b). It requires a municipality to submit a report only to the offices of the Mayor and Treasury. Councilors who have been involved in the drafting process expressed strongly that they would like to report through the MEC or Local Government. They recommended that the assessment and monitoring be done by that MEC as well.

Mr Momoniat replied that Treasury is prepared to include the MEC for Local Government. Treasury would however still remain part of the assessment and monitoring process, because there are councilors who would still like to report directly to Treasury.

Mr Dorfling stated that municipal entities should also report on a quarterly basis. It is not necessary to specify "quarterly" and "mid-year" reporting, because throughout the year reports would normally be continuously submitted on a month-to-month basis. They would contain what was foreseeable for the rest of the financial year.

Mr Momoniat said that there are quite a number of reasons why mid-year and quarterly reports are needed. Sub clause 2 contained not only the financial report but also reports on issues of performance in the current year and monthly reports, as the municipal entity finalises its budget. A municipal entity therefore has to produce a fairly high quality report on the projected output for the current year, which is more than a financial report. Such a comprehensive report is needed for delivering a credible budget. If that report is submitted quickly enough, it might as well form part of the projections for the National Budget. It could help the department to estimate the actual spending taking place in municipalities.

Mr Smith that the monthly report does not focusing purely on financials, and the quarterly report does not focus on assessment alone. The content of both of these reports overlap substantially.

Mr Momoniat replied that it was envisaged that these report would provide a fairly high quality mid year review. Most of the information contained in the monthly reports was mostly internal, and was therefore not for public consumption. On the other hand, the half-year reports ware mainly aimed for the public.

The Chair asked why it was necessary to make the half year reports public, when an annual report is made public in any event.

Mr Momoniat responded that it was important to make both the mid-year report and the annual report a matter of public record and to publish a quarterly report of the actual spending of the municipal entity, so that this can be measured against the budget.

The Chair pointed out that the mid-year performance review assessment report requires municipal entities to go into greater detail in their report, and have to include issues of service delivery performance. It would thus not be necessary to require municipal entities to submit half-year reports as well.

Mr Momoniat conceded that the major reason for that kind of reporting is that the half year reports are critical for the municipal entity's own budget process. It also provides very updated information on the current financial position of that municipal entity. A Code of Practice is emerging that requires half-year reports. The Australian legislation goes further and requires the mid year reports to be audited as well.

Mr Pillay added that the mid-year review provides an appropriate time to look at any corrective action that can be taken in the amended budget. Thus the notion of mid-year reporting fits into the whole cycle of corrections. The public has the right to know the performance of the municipal entity against the targets set by the municipalities.

The Chair was of the view that it is not necessary to make the mid-year reports available for public consumption. The normal standard is that the public would normally be provided with performance reports at the end of each financial via the annual report.

Mr Smith concurred with the Chair. He pointed out that there is no substantial difference between the monthly reports and the mid-year reports. Instead the mid-year reports are just a consolidation of the monthly reports.

The Chair proposed that the mid-year reports be submitted by the municipal entities, but they would remain internal documents. Public documents would be provided once a year. The mid- year reports are not a consolidation of the monthly reports, because they deal with revenue, actual expenditures "and other immaterial variances". They also focus on the actual performance delivery, which is useful for the purposes of preparing for the budget. It is also useful for identifying what exactly the municipal entity is delivering on.

Sub clause 3
Mr Smith asked how this sub clause would apply to MJSDs.

The Chair replied that the parent municipality would make the recommendations, and would send those recommendations to the Board of Directors of the municipal entity.

Mr Smith asked what would happen in the case of three multi-jurisdictional municipalities "and one of them has a problem sends it through and what would the board do in respect of that municipality probably with majority of shareholding". He was of the view that when a municipal entity has to submit the draft budget to each of those municipalities and then through to the review process, each of those municipalities would surely come up with a different set of recommendations.

The Chair asked which municipal council was responsible for the budget, in the case of a MJSD.

Mr Momoniat replied that all of them had to submit the draft budget. But they could not amend the budget of a MJSD.

Mr Smith sought clarity on the responsibilities of the governing body over the MJSD and its budget. The standard approach is for the relationship with the municipal entity to be achieved through the board, and the budget process would also be submitted through that board. Would the same process be followed when dealing with MJSDs, because they have some sort of partnership arrangement. Does this meant that each partner has the right to approve the budget?

Mr Momoniat replied that he is not opposed to the proposition that each municipality be allowed to approve the budget.

The Chair stated that the concept of a MJSD has not been sorted out at all in the Systems Act. She requested DPLG to "tease" the concept of a MJSD and identify, for example, what the institution looks like, what its governing principles and how it is governed. This would help in understanding the governance and financial arrangements of these structures.

Adv Grove pointed out it has to be remembered that the MJSD is run in accordance with the agreement between the participatory municipalities. Section 89 of the Systems Act allows those municipalities, to a certain extent, to determine their budgetary funding and scheduling arrangement for the implementation of the agreement in the agreement itself. The municipalities could therefore amongst themselves decide many of the issues that are perhaps not dealt with in the MFM Bill.

The Chair asked DPLG to clarify the concept of MJSDs so that the Committee can have a better understanding of what it is dealing with, the connotations of the agreements between the participatory municipalities, and the issues of financial accountability and corporate governance arrangements of these institutions. These matters have to be considered by the DPLG, because it is not the job of this Committee to unpack such concepts. Instead, this Committee only has to look at issues of financial arrangements of the municipal entities that have developed from the Municipal Systems Amendment Bill. MJSDs will therefore be put on hold until DPLG comes with a precise description of the concept.

Ms Manche responded that DPLG will contact the Municipal Infrastructure Investment Unit (MIIU) and Treasury to try to unpack that concept. It will thereafter report back to this Committee on the recommendations arising from that meeting.

The Chair supported this proposition fully. Most of the Committee's discussions had been held back by that imprecise notion of a MJSD.

Sub clauses 4-7
The Chair noted that no concerns were raised with these sub clauses.

Sub clause 8
Mr Smith stated that he does not understand why a municipal entity has to provide for an adjusted projected budget income. This seems to mean that it was adjusting its budget on the assumption that some funds would not be received.

Mr Momoniat pointed that these adjustments were provided to cover for extra allocations.

Dr Bouwer asked whether it is envisaged that there would be transfers to municipal entities over and above what should be done in terms of the delivery agreement.

Mr Momoniat proposed that the word "income" be changed to "grant". The phrase "is consistent with any service delivery agreement" has to be inserted to deal with the business plan. Sub clauses 93(b), (d) and (e) have to remain.

Sub clause 9
The Chair noted that no concerns were raised with this clause.

Sub clause 10
The Chair asked when exactly the municipality knows what grant it is going to receive from a municipality.

Mr Momoniat responded that it would know when the budget is tabled.

The Chair asked whether it is possible for a municipality to conceivably influence the budget of the municipal entity by expanding or restricting its budget allocation.

Clause 94: Disposal of capital assets by municipal entities
The Chair stated that this clause reflects the standard formulation as required by the Municipal Finance Management Bill.

Sub clauses 1-5
The Chair noted that no concerns were raised with these clauses.

Sub clause 6
Mr Smith was concerned that the phrasing of this provision allowed for the transfer of the capital asset by a municipality to another entity within its own municipal jurisdiction. This is not prohibited by this provision.

Clauses 95 and 96
The Chair noted that no concerns were raised with these clauses.

Part 2: Accounting officers
Clauses 97-104
The Chair noted that no concerns were raised with these clauses.

Part 3: Reports and reportable matters
The Chair pointed out that Part 3 contained standard clauses as required by the Municipal Finance Management Bill.

Clauses 105 and 106
The Chair noted that no concerns were raised with these clauses.

Clause 107: Interference by councilors
Mayor Leeuw sought clarity as to the use of the word "interference".

The Chair stated that the interpretation of that term had to be restricted to interference by councillors outside their assigned responsibilities. This is clearly dealt with in Item 11 of Schedule 1 of the Municipal Systems Act. An "interference" could not be construed as interference if it had been done by that councillor while exercising his/her oversight function. It can only be "interference" when it is done outside the assigned responsibilities.

Mayor Leeuw asked whether it is possible to change the title of the clause to "prohibition on councillors" instead.

The Chair suggested it be changed to "improper interference by councillors".

Dr Bouwer stated that the content of the clause refers to reporting incidences of inappropriate interference by councillors. He thus proposed that it be named "inappropriate interference by councillors", as this in itself would create an objective test.

Mr Smith pointed out that it has to be made clear that the clause only prohibits interference, not improper behaviour.

Members agreed that the title has to be changed to "the reporting of the improper intervention".

Clause 108: General reporting obligations
The Chair noted that no concerns were raised with this clause.

Part 4:
Clauses 109 to 111
The Chair noted that no concerns were raised with these clauses.

Part 5 : General
Clause 112: Borrowing of money
The Chair noted that no concerns were raised with this clause.

Clause 113: Financial problems in municipal entities
The Chair said that this clause provides that the municipal entity would approve the budget.

Clause 31: Contracts having budgetary implications
Mr Momoniat stated that a long-term contract extending beyond the three-year budget period is submitted to the relevant Minister and Departments. If it is a contract for the provision of water, for example,. the Minister then comments. If you've been through that process, there will be no need for the Minister to cap rates later, because the Minister has already made the comments up front.

Just how strong or weak this provision can be is a constitutional issue. The current version is fairly weak, so that the views of all interested parties can be taken into account..

A few small things have to be added. This includes inserting the "Department of Provincial and Local Government" in addition to the National Treasury as the responsible government department in this clause.

Mr Dorfling stated that the Committee had a long discussion on this matter in a previous session. It was agreed that contracts with a lifespan of 48 months will be included in this process, which has now added a second financial year. The agreement reached on 48 month contracts must be adhered to.

Mr Momoniat stated that a period of four years had been discussed. The decision was taken to change this to a three-year period to align it with the MTEF period of three years. Surely this made sense? Any contracts beyond three years also had to be covered. The four-year period referred to contracts for office equipment, etc. It was also covered by the contracts for categories of goods. It was felt that this would better align the provision with the MTEF budget process.

The Chair contended that the municipal manager rather than the mayor would sign the contract, once the municipal council had approved the contract. The implementation was left to the accounting officer. It was important for Mr Y Carrim (ANC), Chair of the Provincial and Local Government Portfolio Committee, to be present when this matter would be discussed.

Mr Dorfling proposed that the phrase "in the normal administration of business" replace "as may be prescribed" in Sub clause 2(c)(i), because there many small issues that are contained in contracts. These include cell phones, fax machines, etc. This amendment will save the municipality from going through the very lengthy contract process when contracting for such minor items.

Mr Smith asked whether it was possible for a municipality to enter into a contract with a particular company which allowed the municipality to increase its tariffs at a particular rate, or at a level commensurate with the inflation rate. Would they be allowed to peg a fixed rate that would be binding on the municipality for the duration of the contract? This is done with or without reference to capping measures that may or may not be taken by Treasury.

Mr Momoniat stated that this was the biggest issue to be dealt with. Many private investors who want to engage in PPP's have big problems with provisions in both the Water Act and the Systems Act. On the other hand, many municipalities do enter into long-term contracts. There are good reasons for some of those capping mechanisms, and they will be retained for one-year contracts. The capping provision will in a sense not apply to long-term contracts, because the Department of Water Affairs and Forestry (DWAF) will agree to a reasonable approach on the tariffs that would apply.

Mr Smith stated the text does not appear to establish any link between a capping mechanism and the tariff on the contractual price.

Mr Dorfling noted that "subsection (2)" had now been excluded from Sub clause 3. He made the point that any contract really imposes a financial obligation, however small. Normal business contracts should, however, be excluded.

Mr Tarr stated that he interpreted "as may be prescribed" in Sub clause 2(c)(ii) to mean that a prescribed schedule of goods would be published at some stage. This would leave out all the minor items that appeared to be causing concern.

Mr Dorfling felt that this might cause further problems. Ascertaining a fair average could be difficult. An amount of R10 000 is a huge amount to a small municipal council, whereas to a metro like Johannesburg, the same amount is miniscule in relation to its budget percentage. Stipulating prescribed values would not make sense.

Categories of goods
Mr Momoniat suggested that the words "or share" be inserted at the end of Sub clause 3(c)(ii). Long-term contracts are not desirable for certain services. One example would be a cell phone contract. If the service provider does not perform sufficiently in terms of the service agreement, the contract can be terminated. There should generally be a significant capital investment in the case of long-term contracts.

He agreed that categories of goods should include office equipment, and asked Mr Dorfling to provide a list of those categories.

Dr Bouwer stated that it is Ms Manche's position that there should be some mechanism to request exemption from the contract, over and above the other avenues available. However, that the feasibility and constitutionality of an exemption is not yet understood.

Mr Momoniat said the provisions in the Bills may not be unconstitutional. However, they have a negative impact, because investors will not come forward. Instead they will wait for the Constitutional Court to rule against the provisions.

Treasury is concerned with helping certain municipalities who are crippling themselves by agreeing to certain tariff structures that have resulted in the improper calculation of their Consumer Price Index (CPI) projections. This has in turn resulted in lower outputs. The problem is that once the contract has been signed, they cannot exercise their power to cap the tariffs. It could be possible to cap this by granting an exemption, if the Constitution will allow it. There would however be many exemptions government would have to consider, and these could imply a significant liability.

The Chair stated that she has to refer this matter to Mr Carrim.

Clause 40: Decision to increase cost of bulk services or to cap increase in municipal revenue
The Chair stated that if there is a contract in existence, it will prevail.

Sub clause 1 essentially provides that the Bill will not be binding on the municipality in the following situation: where the national or provincial government has determined municipal tariff, rates etc. which prevent the municipality from honouring its financial agreement with its service provider.

Mr Smith asked how the upper limit of revenue "from any other source" in Sub clause 1 would be determined.

Mr Dorfling suggested that the fact that the provision confirms that contract is binding and cannot be cancelled could become problematic. Consider the following example. A municipality has a service delivery agreement with a particular service provider, but imposes unreasonable tariff increases in excess of those projected in the contract. This provision states that despite this the contract would have to be honoured. It is clear that the provision could lead to misuse.

Dr Bouwer disagreed. He stated that it is precisely these high returns that make PPP's so attractive to investors.

Mr Momoniat stated that this provision should apply to the private sector in particular. It could also apply to the public sector entities, but these could be dealt with through the shareholder contractual agreement. Those municipal entities that are fully owned by the municipality do not have to comply with these provisions.

Mr Dorfling reasserted that it would be problematic in the following situation: an agreement has been reached between the municipality and a service provider, but the tariff increases have been set at an unreasonable level in the favour of the service provider, and are not in line with the anticipated increase on a yearly basis.

Mr Momoniat stated that the problem with Mr Dorfling's example is that any long-term contract has risks. The danger lies in the degree of risk that is negotiated. This provision seeks to minimise the risk. He stated that any contract must be honoured. However, this should not apply to a service delivery agreement between a municipality and a wholly-owned entity, because the parent municipality could evade the tariff-capping powers by entering into contracts with its own municipal entities.

Mr Dorfling said that there is provision for a tariff to be capped. If the cap for that year is 6% but the municipality has entered into contracts that will set the increase at 15%, the municipality is now actually being protected. What happens is that the municipality will then outgrow the upper limits of the tariff increase because the contract will have to be honoured, even though the increase might not have been properly thought through.

The Chair confirmed the Committee's decision to introduce an exemption for wholly-owned municipal entities. She noted Mr Momoniat's request that the Committee consider an exemption for jointly-owned entities as well.

Mr Smith asked whether the phrase "organ of state may increase the cost for municipalities" in Sub clause 2 would refer to consumers as well, or would it always refer to the costs for municipalities. ESKOM, for example, deals directly with consumers without going through the municipality. "The capping mechanism would not apply, as a contract exists between the municipality and the service provider". How does the capping mechanism apply to other circumstances?

Furthermore, would it still be considered a prescribed service if the municipality itself provides a service "in-house"?

Mr Momoniat replied that if the Johannesburg City Municipality is providing a service to itself, then this provision does not apply. It will go to the public when it increases, and it will have to justify that. A capping mechanism could operate in any event, because it is not a multiple-year contract. Perhaps the more appropriate word would be "price", not "cost". This has become a big issue since ESKOM released its Annual Report.

Dr Bouwer stated that the purpose of Clause 40 is to send out a message to potential investors. It might be very artificial to draw distinctions between municipal entities, or those entities that operate completely outside the municipality. He asked whether this would not be covered by a guarantee?

Mr Momoniat informed the Committee that Members had decided during a previous meeting not to allow a municipal entity powers to guarantee or borrow. Since the Constitution enables a municipality to provide guarantees, all the Committee could do was to regulate it. He felt that they should definitely look at allowing guarantees for income streams.

Clause 1: Definitions
"unauthorised expenditure"
Mr Momoniat suggested that the definition of "irregular expenditure" be inserted in the Public Finance Management Act (PFMA).

The Chair stated that she did not want to deal with that matter until the Committee had had an opportunity to consult with Parliament's Standing Committee on Public Accounts (SCOPA). That Committee deals with the issue of unauthorised expenditure on a regular basis.

Mr Momoniat wanted to amend the definition of "unauthorised expenditure" to include expenditure that is not in accordance with the Division of Revenue Act.

Public private partnerships
The Chair noted that the definition of "public private partnerships" has been removed from this version of the Bill.

Mr Smith mentioned that in 2002 discussions centred around a range of internal/ external mechanisms, particularly the extent to which government's issues around PPPs and the like need to be regulated. The MFM Bill deals with municipal finance management, but is silent on financial arrangements relating to PPP's.

Mr Momoniat stated that in PPP's the financial arrangements are with the private party, and it is all about contract management.

The Chair stated that the contractual agreement of PPP's would be centred around guaranteed revenue streams or tariffs. Is this sort of agreement was covered in the financial management arrangements?

Mr Smith suggested that if the council was engaging with Community Based Organisation (CBO's), Non-Governmental Organisations (NGO's) and emerging contractors in particular, the contractual arrangements might be different. The nature of the contractual arrangement concluded with them could be looser and more flexible, because of a differentiated approach towards municipal entities.

Mr Momoniat stated that all PPP's have to go through the Bill's Chapter 4 process. Treasury is however open to alternative provisions.

Mr Pillay (Treasury) brought it to the Committee's attention that it had previously agreed to retain the prevailing provisions for a framework for PPP's, and decided not to explore other alternatives.

The Chair asked whether PPP's are defined in the Bill.

Ms Manche replied that it is reflected in Clause 162(1)(d) of the Bill.

The Chair stated that this reference is inadequate. A specific clause has to be inserted into the Bill to deal specifically with PPP's

Mr Momoniat stated that Treasury would insert a clause into the Bill that spells out the areas it wants to regulate.

The Chair agreed. She advised Mr Momoniat that he would have to determine how exactly PPP's fit into the Bill.

Clause 8: Primary bank accounts
Mr Dorfling proposed that Sub clause 2(b) should be removed, as it granted the municipal council too much discretion. The investment of funds is capital and operationally related. Since investments can take different routes, they will not necessarily be combined. Thus the capital funds will have their separate banking account, and the operational funds would have their own account. The primary account is not necessarily the capital account. He contended that tnterest from the capital account should go into the capital account, not the primary account.

Clause 20: Matters to be prescribed
Mr Dorfling was happy with the phrase "the rate of growth of operating expenditure" in Sub clause b(iv)(bb), but felt the remainder of the provision should be removed. If the current formulation were retained it would mean that the capping of salary portions, general portions etc. would be regulated.

Mr Smith stated that the current provision could be useful in regulating the salaries of municipal workers, especially in the rural areas. In those areas people collect salaries for doing nothing.

Mr Dorfling stated that, with due respect, this does not happen in municipalities.

Mr Momoniat stated that he has a real problem with the fact that Mr Dorfling is raising clauses that have already received "a lot of discussion".

Mr Dorfling disagreed. He stated that many clauses have been altered by Treasury.

Mr Momoniat disagreed.

Mr Dorfling stated that Sub clause b(iv)(bb) was altered after the 10 January 2003 draft. He stated that he will consistently maintain that it was not provided in the current form. He asked Mr Momoniat to not "make [him] a liar". The current form appeared in the January draft, and Mr Dorfling complained to Treasury about it in a letter. He is complaining today again, because it is not feasible. This provision was moved in after the discussions. He is not a liar.

Mr Momoniat stated that this was one of the issues that were included even in the first drafts of this legislation, and it received extensive discussion.

Mr Dorfling stated that the decision to change the provision did not arise out of discussions in this Committee.

The Chair stated that this is not a major provision.

Mr Momoniat stated that he has personally "not been a fan" of some of these provisions. He is merely saying that many of these issues have already been discussed in detail by this Committee.

The Chair stated that she had allowed Mr Dorfling to raise unresolved matters. The Committee has to decide whether this matter needs to be re-opened.

She suggested that the provision be retained. The regulations on the Bill would have to be gazzetted for public comment in any event. The particular provision in question would then receive public scrutiny, and thereafter an appropriate response could be attained. She noted that the Committee agreed with its retention.

Clause 50: Budget process and related matters
Mr Dorfling pointed out that Sub clause 3 provides no indication of the number of days within which the performance contract must be made public.

Clause 134: Criteria for determining serious or persistent material breach of financial commitments
Mr Dorfling stated that two options are given, and one must be chosen.

Mr Momoniat pointed out that the options related to a constitutional amendment. The differences between the two options were minor, and Treasury had decided to seek legal opinions on the constitutionality of both options. Treasury prefers Option 2, and if that option was found to be unconstitutional they would then insert Option 1.

Outstanding matters
The Chair stated that the legal advisors were expecting to receive the Bill during the Parliamentary recess. However, a number of issues are still outstanding:
- the nature and role of MJSDs;
- the definition and role of PPP's;
- consultation with Mr Carrim on Clauses 31 and 40 of the Bill; and
- status of the Gauteng Rationalisation of Local Government Affairs Act raised by Mr Dorfling
during the previous meeting.

The Chair thought it unlikely that the MJSD issue would be sorted out within the next week. She asked if it was going to be unfeasible to ask the lawyers for an opinion on the constitutionality of the Bill.

Mr Momoniat assured the Committee that Treasury could resolve the PPP issue within the next week.

The Chair stated that MIIU and Treasury's PPP Unit have to consider the issue of PPP's. She asked Mr Momoniat to explain what the terms of reference would be the terms of reference of the constitutional opinion.

Mr Momoniat replied that there were three specific issues:
- Chapter 13: whether it is in line with the amendment to Section 139 of the Constitution;
- Treasury's power to regulate, as raised by Ms R. Taljaard [DA] (Finance Portfolio Committee) in the previous meeting; and
- Clauses 31 and 40, which includes the issue of capping.

He added that the lawyers should also be asked to do a general check on the constitutionality of the remainder of the Bill.

The Chair invited the DPLG and SALGA to submit any issues they may have with the constitutionality of the Bill to the Committee.

Clause 20
Mr Dorfling again drew attention to his disappointment with the inclusion of the provision in Clause 20, despite an agreement reached by the Committee in a previous meeting to scrap it from the Bill. The reason given for the failure to scrap the provision is unacceptable. He assured the Chair that he would forward the details of this agreement to her, and that he would raise his objection about Mr Momoniat's comments about him.

The Chair stated that Treasury seemed to be of the opinion that, according to their records, this agreement had never been reached. Perhaps the audio tapes of that meeting need to be consulted to determine whether the agreement had actually been reached. She asked DPLG and Treasury to consider whether they actually wanted to hold on to that provision in Clause 20, as going through the tapes might prove somewhat exhaustive. She assured Mr Momoniat that Mr Dorfling was usually quite vigilant on noting decisions taken at meetings, and reminded Mr Momoniat that he might not have been present in the meeting at the time the agreement had been reached.

Mr Dorfling assured the Chair that he would refer to the SALGA reports, and even obtain the Parliamentary Monitoring Group's report on the proceedings to prove his statement. He reiterated his objection to being called a liar.

The Chair asked Mr Momoniat to withdraw the implication, if he had implied that Mr Dorfling was a liar.

Mr Momoniat responded that he had simply pointed out that the 31 August version of the Bill already contained the provision which Mr Dorfling objected to. It had not been removed, as Mr Dorfling had stated, but had always been there.

The Chair stated that a misunderstanding seems to have arisen between Mr Momoniat and Mr Dorfling. Mr Dorfling had raised the point that a decision at Committee level had been taken to remove the provision in Clause 20, which had not been carried through. It had then been incorrectly understood that Mr Dorfling was saying that Treasury had inserted the provision at a later date. Treasury insisted that it had not done so, but that the provision had been in the Bill all along. There has been a "confusion of understandings", and that no-one had accused Mr Dorfling of lying.

The Chair again asked Treasury consider whether they wanted to hold on to the provision, as it was a minor one. It would not be pleasant to have one sub clause causing a major division.

The way forward
The Chair stated that the Committee had made a commitment to pass the Bill in the first week after recess. It is however unlikely that the Committee would be able to fulfill this commitment, as it has other issues to deal with in that week.

Mr Smith suggested giving Treasury and DPLG more time to deliberate the issues.

The Chair stated that she was eager to receive the constitutional opinion on the Bill before passing it. The Committee had promised that the Bill that would be sent to the constitutional lawyers would be the final draft. Yet as it stood, the Bill was not in its final stage. She asked whether Members are satisfied that the current version of the Bill was sufficiently finalised to send to the lawyers. She noted that all members agreed that it should be sent to the laywers.

The Committee might have to meet again on the Wednesday 14 May to look at the constitutional opinion on the Bill.

The meeting was adjourned.

Appendix: Revised Clauses 31 and 40 of the Municipal Finance Management Bill

Contracts having budgetary implications
31. (1) A municipality may enter into a contract which will impose financial obligations on the municipality beyond a budget year, but if the contract will impose financial obligations on the municipality beyond the end of the second financial year following the budget year it may do so only if -

(a) the municipality has at least 60 days before the meeting at which the contract is to be
approved by the municipal council -
(i) made public the draft contract and an information statement summarizing the municipality's
projected financial obligations in terms of the proposed contract;
(ii) invited the local community to submit written comments or representations on the proposed
contract; in accordance with section 21A of the Municipal Systems Act; and
(iii) solicited views and recommendations on the proposed contract from the National Treasury
and from the responsible national department, if the contract involves the provision
of water, sanitation, electricity or other services as may be prescribed; and

(b) the municipal council has taken into account -
(i) the municipality's projected financial obligations in terms of the proposed contract for each
financial year that is covered by the contract;
(ii) the impact of those projected financial obligations on future tariffs and revenue; and
(iii) any input on the proposed contract received from the local community, the National
Treasury and the responsible national department; and

(c) The municipal council has adopted a resolution in which -
(i) it determines that the municipality will secure a significant capital investment or will derive a
significant economic or financial benefit from the contract;
(ii) it approves the entire contract exactly as it is to be executed, and authorises the Municipal
Manager to sign the contract on behalf of the municipality.

(2) The process set out in subsection (1) does not apply to -
(a) contracts for long-term debt regulated in terms of section 43 (3);
(b) employment contracts; or
(c) contracts -
(i) for categories of goods as may be prescribed; or
(ii) in terms of which the financial obligation on the municipality is below a prescribed value.

(3) All contracts referred to in subsection (1) and all other contracts that impose a financial obligation on a municipality must be made available in their entirety to the municipal council, and may not be withheld from public scrutiny except as provided for in terms of the Disclosure of Information Act, ……..

Decisions to increase cost of bulk services or to cap increases in municipal revenue
40.
(1) A power conferred by national or provincial legislation on a national or provincial organ of state to determine the upper limit of a municipal tariff, rate or tax, or of revenue from any other source, will despite such legislation, not apply to a municipality to the extent that it would impair a municipality's ability to meet its financial obligations in terms of a contract which has been approved by the municipality in accordance with the process set forth in section 31 for contracts having budgetary implications or the process set forth in section 43(3) for long term debt.

(2) A national or provincial organ of state may increase the cost for municipalities of water, electricity or other bulk service as may be prescribed only after the Minister and organised local government have been consulted.

(3) Unless approved otherwise by the Minister, a decision referred to in subsection (1) or (2) which is made known -
(a) on or before 28 February in any year, does not take effect for municipalities before 1 July in
that year; or
(b) after 28 February in any year, does not take effect for municipalities before 1 July the next
year.

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