National Treasury said that the investment by municipalities of their grant funding in VBS Mutual Bank represented a breach of regulations. VBS had actively flouted the law, and focused on municipal deposits which comprised almost 75% of all its deposits. National Treasury had sent an email in August 2017 advising municipalities that the MFMA did not allow for funds to be deposited with a mutual bank. Subsequent to the email communication, VBS had accepted approximately R1 billion in further deposits from municipalities. It was not immediately apparent if these were rolled over, or new deposits. Fifteen municipalities were impacted, mainly in Limpopo. Vhembe District Municipality had the largest exposure. It had R311m in deposits at VBS, which was approximately a third of its annual revenue. The municipalities that deposited funds with VBS tended to be more rural municipalities, drawn not only from Limpopo, but also North West and Gauteng.
The South African Local Government Association (SALGA) would engage with National Treasury on behalf of municipalities whose funding was now frozen while VBS was under curatorship, to deal equitably and practically on the matter. Political issues that could arise out of cash flow challenges and non-delivery of services, needed to be monitored. SALGA would lobby National Treasury and COGTA to enable it to obtain real-time data and reports from municipalities to enable better monitoring, advice and support. Municipalities were required to report on their financial performance monthly in terms of section 71 of the MFMA. There needed to be a review of the section 71 monitoring instrument – was it comprehensive and pertinent? SALGA could only lobby provincial COGTA and Treasuries to take measures when it picked up problematic financial practices such as budgets that were not cash funded. Council oversight structures must be strengthened to play an effective role. If municipalities violated legal requirements, National Treasury had enforcement mechanisms, including stopping grant transfers.
The Municipal Councillors Pension Fund (MCPF) had been placed under curatorship in December 2017 by the Financial Services Board. The MCPF curator, with input from the Financial Sector Conduct Authority (FSCA), spoke about the unlawful actions and mismanagement of the previous board and principal officer of the Pension Fund. Criminal and civil charges may be pursued against them.
National Treasury: VBS Mutual Bank’s impact on muncipalities
Mr TV Pillay, Chief Director: Municipal Finance Management Act (MFMA) Implementation Unit, NT, said there had been an engagement with the Standing Committee on Finance over VBS previously, where the South African Reserve Bank (SARB) had presented as well on the status of its intervention at VBS, and therefore NT would not be addressing that. It would, however, speak about VBS as a mutual bank and the differences in the licensing regime for mutual and commercial banks. It would report on the shareholding of the mutual bank as well for background. It would also report on the bank’s spike in growth.
The expansion of VBS had been rapid from mainly 2016 to mid-2017. The bank grew its assets substantially in 2016, growing by an average of 122%. This expansion was largely due to loan growth, peaking at 250% year on year in May 2016. An assessment had been produced by SARB and published in the public domain, and the issue with VBS had come to the fore where it impacted on municipalities because of the risky nature of the type of bank that VBS was. Since 2003, the MFMA had allowed for municipalities to bank with commercial banks and not non-commercial banks like a mutual bank, given the associated risks. The objectives had always been that municipal funds were safe and readily available for spending on municipal priorities. National and provincial departments generally banked with SARB, and only municipalities and state entities banked with private banks. Mutual banks were typically small and relatively lightly regulated by the SARB, and could not offer the immediate liquidity that one would expect if one deposited public funds into it.
VBS had actively flouted the law in how it focused on municipal deposits, which comprised of 75% of all VBS’s deposits. Despite the restrictions provided for in the MFMA, VBS had continued to receive new municipal deposits. In August 2016, it had been communicated that VBS was to cease accepting deposits, but it had continued nonetheless. NT had requested it to phase out the past municipal deposits to comply with the MFMA requirements. An initial assessment had indicated that VBS had accepted over R1 billion more in deposits after August 2016, when an e-mail had been sent by the MFMA team at NT to municipalities advising them that they were in breach of the law by depositing with VBS.
The modus operandi of VBS had been to make long term loans, knowing that its primary funding was short-term in nature -- the municipal deposits, surplus cash, grants and its own available resources which had been required over the short term. In the interim, what had occurred had been that because a few depositors made up the 75% in deposit funding, the business model that SARB had investigated had confirmed that the design and modality of VBS’s framework had not been effective. SARB had been engaging and working with VBS for some time to assist the bank with the gaps which had been identified at the time.
NT had become aware of the municipal investments by some municipalities through the section 71 reports that it received from municipalities. The reform had been introduced in the MFMA with a few years implementation mileage since inception. but the veracity of the information coming from municipalities had been also challenging in terms of accuracy, timeliness and the completeness. NT had advised and cautioned the municipalities which had been found to be investing with VBS, pointing them to the regulatory framework which applied again. In late 2017, VBS had tried to interdict NT from engaging municipalities, probably understanding that it would experience challenges. Having continued accepting municipal deposits, it had not been immediately apparent whether the deposits were new or rollovers, and therefore NT required more disclosure from the affected municipalities to understand better what was being dealt with.
There were 15 municipalities which had been impacted by VBS, mainly in Limpopo province, including the Vhembe district municipality, which had the largest exposure as it had R300 million in deposits with VBS, which was one-third of its revenue base. Municipalities that deposited with VBS tended to be rural, and were also from North West (NW) and Gauteng. The main investment exposure received from municipalities had also been compared with annual operating revenues, which would tell the Committee the exposure more accurately. In some instances, the exposure ranged from 52% down to about 1% to 2%.
There were widespread allegations, and it appeared to the curator that there had been some mismanagement of funds by VBS, but the ongoing investigation would show whether that was true or not. The status to date had been that there was more than R900 million which could not be located within the system of audits that had been undertaken at VBS. The ongoing audits would have to show what had transpired. Other challenges were related to loans to some directors and unrecoverable loans to other parties, internal inquiries at the KPMG auditing firm involving some of its directors, and allegations of VBS having paid commission to individuals who had been lobbying municipalities to deposit with VBS. NT had no real information on those allegations, and would await the forensic investigations by the proper authorities to confirm their veracity.
A reasonable expectation at present was that those affected could receive a return of 10c-40c to R1 from one’s deposit with VBS, which was quite low in respect of the amounts invested. The payout to municipalities was currently highly uncertain, and NT could not comment further on what was coming through the system, though it knew that over 13 000 people had ordinarily deposited with VBS with their life savings. In line with the mandate of protecting the most vulnerable, the restructuring of VBS would focus on those depositors, and at that stage the ordinary depositors would receive back almost all their deposits. That included the benefits and deposits of rural retailers, funeral insurance, stokvels and other vulnerable groups, which would possibly leave little for municipalities after disbursement of the investments to those groups.
The Committee was fully aware of NT’s principle of no bail out, which had been in the framework for a while from the White Paper on local government, the constitutional framework and the right to govern initiatives of municipalities. NT had spoken about local government’s accountability framework and the section 71 reports, but the Committee would know that it would not be an exact science that everything was reported on the section 71 reports.
When municipalities violated legal requirements, the NT had enforcement mechanisms, including the stopping of grants in the Division of Revenue Act (DORA) and section 216 of the SA constitution. The above mechanisms had been used at some point by NT, but had been stopped because of the consequences and engagements that had transpired.
Certain events had occurred in the affected municipalities over the last 12-18 months. Although section 171 of the MFMA had consequence management provisions, and these had been communicated to the municipalities by NT at a meeting in March 2018, it was unfortunate that NT to date had not picked up any action taken by any municipal councils. The process had to unfold so that consequence management was implemented.
Collectively over R1.5 billion had been invested by municipalities, and NT would look to the Committee for support on the type of engagements that were needed. It was urging the Committee to invite the mayors of the specific municipalities to come and account to it on the consequence management actions taken, if any had been undertaken to date, and whether their investigations had found that certain people had not been operating within the framework of the law.
Mr E Mthethwa (ANC) said he wanted the exact advice NT had given the affected municipalities upon finding out about the risks of investing municipal funds long term with VBS. Had NT followed up on the implementation of that advice? Did NT think there had been lack of understanding of the provisions of the MFMA regarding VBS investments, or had things been done deliberately flouting the law?
Was NT part of the team together with SARB which was investigating VBS and the municipalities which had invested with the mutual bank?
Mr K Mileham (DA) said the matter had been brought to NT’s attention in October 2016 through a Parliamentary question that he had submitted to the Minister of Finance, but the NT notification to municipalities had gone out only in August 2017, almost a year later. Why had there been a delay? What actions had been taken before August 2017? Had VBS been advised of the illegality of their actions?
Could NT outline the nature of the consequence management available to municipal councils? Would the investments be considered fruitless and wasteful expenditure? Was there any recourse which Parliament could follow with the municipal councils responsible for oversight over municipal expenditure by the responsible officials? Would action be taken against VBS officials?
Was what VBS had done a ponzi or permit scheme, in Mr Pillay’s opinion? Could criminal action be taken against VBS in that regard? Any deposit by a municipality that drew attention to payment of a commission struck him as a kickback, maladministration and corruption of the worst kind by both the bank and the municipality -- could action be taken against the lawyers that facilitated the deposits, either criminal or otherwise?
Ms B Maluleke (ANC) asked how often section 71 reports were submitted to the NT’s MFMA unit. Were the affected municipalities having adequately qualified personnel dealing with finances?
Hopefully after the investigations, those implicated would have to face to face the music.
Mr X Ngwezi (IFP) confirmed that Mr Mileham’s written question had indeed been televised in 2016 whilst he was still a municipal councillor. At that time, VBS had requested to come and make a presentation at King Cetshwayo District Municipality, where he was a councillor. He had advised King Cetshwayo against banking with VBS, based on that Parliamentary question, because as it was that district municipality would have been counted amongst the 15 affected municipalities. Had there been proactive interventions, the damage would not have been as extensive as it was being reported to the Committee. He also wanted to know why NT had delayed intervening.
If NT had been able to trace which municipalities had invested and how much money each had invested, could it not find out how R900 million had gone missing at VBS? Who were the individuals that had been paid commissions? Had they been the employees of VBS who had also been urging councils to invest with VBS? Although Mr Ngwezi understood the ‘no bail out’ principle from NT, he was concerned whether from the NTs perspective the municipal councils understood the difference between mutual and commercial banks. If indeed that principle would be applied, he was also concerned about the results, which would be no service delivery as the amounts lost were big.
Mr Mileham said that NTs report had spoken about its enforcement by stopping grant funding to delinquent municipalities in terms of section 216 of the Constitution. However; the affected municipalities were among the worst performing municipalities, the most financially distressed in SA, and had approved budget deficits. Therefore withholding grants from them would be the worst thing to be done to them. Government had to second people to those municipalities to sort out the ailing financial systems and to give the municipalities the capability to perform financial management and budgeting.
Mr A Masondo (ANC) asked NT to clarify the types of banks operating in SA, especially mutual banks. He was concerned with the assertion that SARB ‘lightly’ regulated mutual banks, and he wanted an explanation of what that meant. He asked NT to elaborate on the evolution of VBS Bank, because it was not coincidental that 15 municipalities had suddenly invested with VBS. What were the total losses to municipalities through investing with VBS? If the bank transactions had drown by 250% in a short space of time, why had intervention been delayed? Did the current problems spell the end of VBS especially in terms of the principle of ‘no bail out’? Had legal investigations already started, and what was the progress to date? If they had not been initiated, he wanted to know why. Were there any anticipated prosecutions and any key timelines for those processes to unfold? Had any of the other depositors and investors into VBS taken any action against the bank, and what could NT attribute non-action to? Where there any other implications to the unfolding events regarding VBS?
Mr D Matsepe (DA) asked whether there was any rule or provision that compelled municipalities to disclose their investment portfolios and their proposed investment institutions before actually investing.
Mr Pillay replied that he was mainly involved with municipalities within the NT and work on the VBS, while the broader supervision of all banks was under SARB. Because of that, his response would be limited to what he knew.
The questions to NT had spanned the regulatory framework that covered mutual banks and VBS operations in particular, whilst others dealt with municipalities and the regulatory framework that responded to municipalities. Most of the questions raised were either part of investigations, or further information was being sought.
NT had no insight into the municipal Information Technology (IT) and financial systems as it had with provincial and national departments, because municipalities managed those independently and individually. If it had that insight, then probably its early warning and monitoring systems would have picked things up. It received information from municipalities only through structured reporting, and it had been continuously improving the reporting, and the regulatory framework that supported municipalities had been premised on some of the principles he had mentioned earlier.
When NT came before Parliament reporting on municipalities and wished to regulate a particular municipality, the first thing that committees would say was that NT was over regulating. NT would retreat from doing that, as it was beholden to Parliament. A bigger part of the solution was the roles of the provincial legislatures and local governments which had not been addressed, and which needed attention.
The issues which were emerging through the bilateral engagements between the Department of Cooperative Governance and Traditional Affairs (COGTA) and NT would hopefully be taken forward in a constructive way, mindful of socio-economic and other implications. Some of the responses, however; had to be premised on some consequence management because without that, and without responsible provincial legislatures and municipal councils for consequence management, NT could do no more unless the law was amended to allow others to take responsibility for implementing certain actions, but certainly Parliament would not want that in a democratic dispensation.
The framework that NT had issued regarding long versus short term investments, compliance and the regulations thereof, had provided key principles of safety and preservation of public funds over returns. The higher the return, the bigger the risk, and the framework had been underpinned by the enabling provision in the MFMA which spoke about financial institutions, commercial banks and others. NT had presented on the mismatch, because one could not take short term borrowing of surplus funds as a bank on the one side -- which was what SARB had picked up -- and then lend long term. The issue was that one would never be able to get such money back as a municipality when it was needed. For example, if one were to take a bond on one’s home, there was a 20-30 years term on the bond repayment, and the point was that there had to be a cash flow match against such a bond. If a bank did bonds like that, it had to have a strong deposit framework and the regulatory framework which supported that was far more robust in the commercial bank environment. The deposit requirements for commercial banks was valued at over R250 million, while for a mutual bank deposits had to be about R10 million, which immediately told one that there was a higher threshold which the SARB applied. It was very stringent in that regard, to the extent that there were over 1 200 sets of compliance regulations with which commercial banks had to comply, but which were not there at the VBS. One could not invest in the short term expecting to accumulate returns in the short term with a bank that had a long term investment profile.
Mr Pillay said he hoped that COGTA would comment on the competencies at municipalities, because what the NT understood was that all the municipal managers (MMs) and chief fnancial officers (CFOs) were qualified. The NT regulations when carefully read specified that commercial, and not mutual banks, were to be used by municipalities. Therefore there was no grey area about those individuals not knowing the difference between a mutual and a commercial bank.
The framework on investment regulations had been issued in 2005, and it did not require a response in advance -- municipalities were not required to inquire with NT whether or not they could invest with particular institutions. That was also why there was a minimum competency requirement for municipal officials, as they were charged with advising their respective municipal councils in terms of their council’s policies. There had been over 192 circulars issued to clarify particular provisions of the MFMA, and NT would certainly clarify further any other provision and regulation if that was needed. However, that was in hindsight of what had already occurred. NT certainly was not under the impression that there were municipal officials without knowledge of what was required of them in terms of the MFMA.
Mr Pillay said he was not part of the investigative team appointed by SARB for VBS, as SARB had appointed a curator for that work. He would be unable to respond to any question regarding that work.
He said that Mr Mileham’s 2016 question had triggered the process of engaging more with municipalities. There had also been a request for clarification that had been submitted by VBS, and NT had responded to VBS on the regulations not allowing VBS to receive investments from municipalities.
Why had there been a delayed response until nine months later? NT had had to look through the system, because the section 71 reporting of investments was done post-investment, not pre-investment. An individual could invest short term today and withdraw the investment the next day on a seven day call account, for example, and NT would not be aware. Any system of reporting introduced would eventually have some gaps, and NT did not have a 24/seven hands-on monitoring system on municipal finance.
NT had looked and responded to the municipalities that the system had picked up, but the timing issue was important as it showed the start and end date of some of the investments discovered. Some of the investments had been made in 2015 and as they became due, they had been paid, therefore other municipalities not on the affected listed had already invested and had received their returns. NT only became aware of that post-investment through the reports review, and what had occurred was that NT had had to investigate the breadth of the investments across municipalities and had found at the time that they were not widespread. During the time between when Mr Mileham had asked the Parliamentary question and the time NT had then responded to municipalities afterwards, NT had used its MFMA helpdesk facility to alert municipal officials about the risks associated with investing with VBS at that time. Despite the warnings a spike in investments had occurred with VBS.
The consequence management framework on section 32 was largely about the municipal council taking action, but the start of the process could also be found elsewhere, where the MM or Executive Mayor (EM) had to act in a fiduciary manner and in a responsible way. There was also section 171 of the MFMA which spoke directly about consequence management procedurally and criminally, which again had to be council-originated actions, and was not NT’s or COGTA’s responsibility. The consequence management framework had already been strengthened, but NT preferred to have it more strengthened so that a particular process could unfold, because when NT issued the financial misconduct regulations many people had already been trained in municipalities.
Sometimes NT wondered why the regulation was not being implemented. The regulation covered both misconduct by municipal officials and even the council as well. The municipal councillor’s part would also rely on the municipal council’s code of conduct, as per the Municipal Systems Act, and for senior and other officials the process required internal engagements. There was provision that required a disciplinary board to be set up within a municipality or shared within a district municipality when there were capacity deficiencies, and that had occurred. Municipal public accounts committees had been established, and NT had trained a number of these committees and were continuing with others to ensure that the councillors understood the role they needed to play in investigations. Unfortunately, the consequence management framework was something NT felt could be improved with the help of the Committee, and provincial oversight.
The way descriptions and the definitions were crafted in terms of fruitless, wasteful and irregular expenditure could be fixed in the new term when the opportunity arose. There was potential to improve the MFMA in certain respects, and NT was working with COGTA in that regard.
NT would certainly support a thorough investigation, if it were to be undertaken.
Regarding financially distressed municipalities, NT had engaged COGTA, and the Minister of Finance had prioritised 55 municipalities on the distressed list to be assisted. If the 15 municipalities were not on that distressed list and there was a need for that to be done, certainly NT would do it. However; there had to be a commitment from the municipal council because if councils were not committed to doing restructuring and reprioritisation, the process would always fail.
The financial damage that had been caused remained to be seen, as the understanding had to be that there was the equitable share, conditional grants and surplus funds. Through NT’s research, all those had been part of the allocations invested, and some of the amounts could be manageable, but there were others where there had to be prioritisation and some of the interventions NT was undertaking together with some provinces.
NT was not responsible for looking at the VBS bank and tracing every municipality which had invested with VBS, as that was a responsibility of SARB. SARB was currently doing the audit to track the flow of funds which had gone into and had left VBS, and the Committee probably would have picked up in print and digital media that there had been a Namibian bank that had been affected by the problems at VBS. As the investigations unfolded, the Committee would probably be able to establish who was responsible for what at VBS, but to date NT had as much information as it had presented to the Committee.
It was critical that all involved, including NT and COGTA, applied their minds to the inevitability that the issues related to VBS would delay service delivery, although the hope was that the 15 municipalities would be put on the priority list in trying to figure out how best to restructure. With experience of financial recovery plans which the MFMA unit had had to assist with, there had often been pain and sweat that came with restructuring.
There currently were cooperative, commercial and mutual banks operating in SA.
NT’s MFMA unit had come to know that there had been a concerted effort to get municipalities to invest with VBS, but it did not know from where the pressure had originated. It also had been made aware by the Committee that there had been agents lobbying municipalities to invest with VBS. Certainly it was known that the affected 15 municipalities had continued investing with VBS even after NT had issued the warning in 2016. NT was still extracting all the available information and would submit it in writing as it was aware that the timing of the investments was between 2015-16 and early 2017 although the numbers still needed verification, which AGSA was still busy with.
The one amount was what municipalities had invested, which was just over R1.5 billion which could not be accessed and was in the VBS systems. The R900 million was what the curator had pointed out from the VBS side, which spoke to two separate numbers. Therefore 15 municipalities had invested R1.5 billion that still was locked into the VBS system.
Business rescue for VBS was related to SARB functions, and included the investigations but from Mr Pillay’s understanding, there were certain protection measures brought in for smaller, poor types of investor, including the funeral funds and others.
He was hopeful that consequence management would follow after the investigations were completed.
Other implications for stakeholders and other investors spoke to mitigation strategies where NT, COGTA and the South African Local Government Association (SALGA) would have to work together on finding a solution around the VBS matter. However; there would be pain either through service delivery, organisational restructuring, deferring of certain things and it was important that people were aware that if a restructuring were to occur, then a full restructuring would have to occur. That meant certain functions would have to be stopped, stalled or delayed, certain tariffs would possibly have to be increased to make good the resources along the way to operate effectively. Certain projects would not be implementable because of the cash difficulties and the most drastic measure -- which Members all knew since over 30-40% of municipal budgets were salaries -- would be no increases in the next round of negotiations. However; that would need support from Parliament, SALGA and others. All angles would have to be explored, depending on a case by case exposure.
Mr Olano Makhubela, Divisional Head, Financial Sector Conduct Regulator (FSCR), NT, said he would not be speaking on behalf of SARB but because he had 17 years experience at NTs financial sector policy unit, he would probably be able to shed some light on the types of banks operating in SA.
Essentially there was first tier and second tier banking. First tier banking referred to the known large commercial banks in the country, and in the second tier one could include cooperative banks, cooperative financial institutions( not yet banks) which would not be regulated as banks. Moving up the scale would be PostBank, which only accepted deposits and did not engage in lending, which was a key feature in banking, meaning whether a bank lent money, received deposits and to what extent that was done.
Based on that, a regulator would devise a regulatory framework which would speak to how much capital a bank or financial institution needed to retain to absorb a financial loss which could occur. A large bank for example, would then have to retain some amount of capital and that capital obviously would be larger compared to capital required for a second tier bank. When Mr Pillay had earlier alluded to light regulation of mutual banks: that had not been to say that mutual banks had been overlooked regarding compliance. The reference had been to say that a regulator would not require a mutual bank to retain the same amount of capital required from a first tier bank, since the risks associated with a mutual bank would not be the same as those of a large commercial bank. There was regulation of mutual banks by SARB, but mutual banks would not be required to comply necessarily with the same sets of regulations as those imposed on commercial banks. Probably that had been the reason why NT had been uncomfortable with municipalities investing in a mutual bank, as a mutual bank would not be subjected to the same compliance.
Mr Mpho Khunou, Chairperson: Finance Working Group, SALGA, said that SALGA agreed with Mr Masondo that there seemed to have been a flagrant disregard for the law from both the affected municipalities’ side and the VBS mutual bank. SALGA strongly advocated that the investigations be prioritised so that all responsible for the quagmire could be held to account and face the full might of the law.
SALGA would not support any proposal to withhold grants to the affected municipalities, as the residents had already paid a price because of the reckless actions of particular individuals in the municipalities and the bank, and therefore it would not be fair to further punish residents. Notably during the meeting there had been a list of MMs’ qualifications that had been distributed to the attendees of the meeting, but SALGA questioned whether the list contained the same people that had been part of the affected municipalities when the transactions had been entered into with VBS. SALGA certainly agreed with the spirit of consequence management in that those that were there during the transactions had to be punished, and not the residents.
Regarding how the actions of VBS and the affected municipalities had not been detected earlier and section 71 reporting; there were legal provisions that those reports had to be submitted to provincial treasuries and NT on a monthly basis. As part of strengthening of monitoring and oversight which all stakeholders had to perform, SALGA believed that possibly there had to be a wider distribution of those section 71 reports so that early warning systems could be strengthened, as COGTA was also not in the distribution loop for section 71 reports. There had to be a statutory requirement for COGTA to also be included in that distribution, as COGTA only intervened to date when a crisis had already occurred. Additionally SALGA could also be included to receive the reports quarterly to enable it to strengthen its municipal assistance mandate. Section 71 reports would also have been disclosed in annual financial statements and reports, which was also why SALGA was interested as to why the Auditor General of South Africa (AGSA) had not picked up the irregularities regarding the investments, as they dated back to 2015.
SALGA’s last proposal was for municipal internal audit functions to be strengthened to detect and indicate non-compliant transactions so that timely interventions could be implemented.
Mr Dan Mashitisho, Director-General (DG):COGTA, concurred with SALGA that indeed the list of MMs’ qualifications was not referring to people who had been with the affected municipalities at the time of the flawed transactions, as that would be revealed by the investigations. The list had simply been distributed to highlight the type of calibre of persons that municipalities normally would employ. It could also be seen there that the individuals were qualified persons, and therefore there would be no room to speculate that they would not understand the MFMA and the difference between a building society and a commercial bank.
COGTA also agreed with SALGA’s sentiments regarding grant stoppage, noting that first it had to be evaluated what the grants were used for. For example, some municipalities had invested with VBS their equitable share grant, which was generally used for salaries and infrastructure maintenance, and once a bank withheld such a grant that would create havoc within a municipality. Other grants, like the Municipal Infrastructure Grant (MIG), which were for targeted service delivery, would be construed as punishing the community if they were to be stopped as part of consequence management.
Mr Ngwezi said that from the distributed list of MMs and CFOs, he differed on whether they were qualified in local government matters. For example; the MM of Merafong City held an M Sc (microbiology) and that knowledge did not seem congruent with what was required in local government. The current MM of Ephraim Mogale local municipality held an honours degree, just like Mr Ngwez.i What had been COGTA’s response when the list of municipal officials servicing those municipalities had been submitted? Not all those individuals were highly qualified in local governance.
The Chairperson interjected that he believed the list had been distributed in response to the question as to whether the MMs and CFOs knew the difference between the types of banks municipalities were allowed to trade with, and not necessarily their qualification in local government. The point had been to emphasise that when they had deposited money with VBS mutual bank, they had been very aware of what they were doing.
Mr Mileham also agreed with Mr Ngwezi that not only were the people on the list qualified in different fields, but when one read what had been happening at Dr JS Moroka Municipality, both the MM and CFO positions had been missing. AGSA had repeatedly told Parliament that where there were high levels of vacancies, which was where dysfunction started. The question was who then had been signing off on depositing funds with VBS? Indeed, the list exhibited learned people who should have known the difference between a mutual and commercial bank, but they did not seem to have known that difference or had deliberately acted unlawfully. Either way, as ignorance was not a defence in SA law, the MMs or CFOs were responsible and had to be held to account, together with the respective mayors and council members. He proposed that all the affected municipalities’ mayors be called before the Committee to explain what consequence management would be followed, what financial recovery plans would be implemented and how the would municipalities meet their service delivery obligations having lost so much of their operating revenue. He was appalled by Greater Giyani local Municipality having deposited 54% of its operating revenue with VBS, which essentially meant that on top of only getting between 10c-40c to the rand back on their investment, no one was sure when that would be. That meant that the residents in Greater Giyani would continue suffering because of an incompetent official who had deliberately invested municipal funds with the VBS knowing full well that it was not legal. Therefore such persons had to come before the Committee to account.
Mr Mthethwa proposed that the Committee had to restrain itself from becoming law enforcement in terms of the VBS situation. What was indisputable was that money meant for the poor had been lost, and that NT had warned learned people who had taken decisions before the calamity, and those people had to account one way or another, through legal processes. The Committee understood that money meant for operations had been deposited in long-term investments. The poor could not be punished twice and the Committee was appealing to NT and those investigating to move with speed, to ensure that no money left the country
The Chairperson agreed that the investigation had to be allowed to take its course so that the Committee could be advised of the outcomes at the end.
Mr Masondo said he hoped that the law enforcement agencies were already doing something and were not waiting for SARB’s investigations to be completed.
Mr Mileham said the Committee had asked for the Municipal Councillors Pension Fund (MCPF) and its curator to come before the Committee and not SALGA, and therefore he wanted to know why SALGA was being given an opportunity to present on what was going on with the MCPF.
The Chairperson responded that seeing that SALGA were already were before the Committee, the Committee could certainly allow SALGA to present.
Mr Mileham pleaded to then hear from the curator at least on what was happening with the MCPF, or even the Registrar of Pension Funds.
The Chairperson insisted that SALGA would briefly present and assist the Committee with whatever information it had.
Municipal Councillors Pension Fund (MCPF): SALGA presentation
Mr Lance Joel, Executive Manager: SALGA, said indeed the invitation sent to SALGA was not to give its view on the MCPF and as such SALGA would only sketch the background. It would deal with the developments around the MCPF, and what had informed those developments. It had also extended the invitation to the curators of the Fund, who were present at the meeting.
The MCPF had been created to cater for the interests of municipal councillors. It was at the discretion of councillors to participate in the Fund, and there was no compulsion or obligation to do so. There were councillors participating in other pension funds.
Mr Joel said that there had been serious negative perceptions around the MCPF, so that nearly 600 of the 4 800 councillors had stopped contributing towards the Fund, although they could not withdraw from it. There were additional councillors who had communicated their intention to withdraw from the Fund as it was under curatorship, and SALGA had engaged the curators in order to notify them about the intention of councillors to withdraw, or to transfer their funds to other pension funds.
SALGA’s view had been that while the curators were busy investigating, it would not be in the best interest of the MCPF, once things had been fixed, to have a new board appointed in the same manner as it had been done in the past. SALGA believed that the crux of challenges experienced by the MCPF had been governance, and the board of trustees in its current shape and form had been at the centre of the difficulties. Therefore a different approach had to be taken regarding governance of the MCPF. SALGA had proposed exploring a merger of the MCPF with the Public Office Bearers Pension Fund (POBPF) so that there would be a single fund looking after all public office bearers interests across the three spheres of government. Related benefits to that would be a limitation of costs linked to having a single pension fund administered for all public office bearers.
Curators’ actions since their appointment
Mr Juanito Damons, Director: Rorich Wolmarans & Luderitz (RWL) Attorneys, an MCPF curator, apologised and said he would have prepared a full and separate presentation if he had been so advised, but would take the Committee through the section of the SALGA presentation related to their work as the curators.
The curators had managed to bring some calm regarding the MCPF, as it had found that historically the challenge with the Fund had been that there had been very little to no communication with councillors. The curators had also placed a short moratorium on the payment of benefits to councillors soon after they had been appointed, although they realised that payment of beneficiaries had been one of the most important issues the MCPF had had to deal with. The reason behind that had been the flawed verification processes at MCPF, and the curators had instituted their own process, starting from bank accounts to identity document verification, and proper tax assessments before payments were made to beneficiaries.
The moratorium had been in place for only two weeks, and during the period of provisional appointment up to the final order of appointment, the curators could not take major decisions. The final order for curatorship of the MCPF was issued on 19 March 2018, and two issues had come up on the roadshows the curators had undertaken to municipalities. Councillors had been moaning about benefit statements and the curators had advised the councillors that they could not rely on the benefit statements they had received previously, which had not come from the curators. The curators would be sending benefit statements for up to the end of April to councillors, and that would allow them to engage with the councillors on their benefits.
80% of MCPF’s service providers had returned to the Fund with revised rates after engaging with the curators on the rates that had been historically charged.
Apart from issues to do with MCPF not communicating with member councillors at municipalities, the Fund had not been performing well since 2016 to date. There had been properties purchased and never registered in the name of the MCPF at a purchase consideration of R137 million which, to the curators, were highly inflated prices. The curators were not expecting to get the properties back, because it made no sense to them that in a Fund that had a change of leadership and membership every five years, such an investment would have been made. The investment had been made three years ago, and the curators did not believe any development would take place in the following three years because of the issues around municipal approvals. One property invested in was situated in Midrand, Pretoria, where the curators’ head office was, and the curators saw some value in that property. The curators were busy with the whole investment policy of the MCPF, as it currently was non-compliant with regulation 28.
The curators wanted to be in a position to prosecute, after investigation, whether on a civil or criminal basis, with certain entities or individuals before the end of 2018, as they believed they had enough evidence to date to prosecute.
Mr Makhubela, NT, said the trigger for the curatorship of the MCPF had been the investment into immovable properties, and upon the request of the Financial Services Conduct Authority (FSCA). As the FSCA was assessing matters at the MCPF, there had emerged some breaches in terms of those investments. Fortunately, the FSCA had been alerted by a whistleblower as far back as 2015, and the FSCR wanted to indicate that curatorship was the last remedial action to be relied upon – it was never the default option, as it could be expensive and could take time. The FSCA had indicated to the curators the urgency of having the curatorship completed as soon as was humanly possible.
There was merit in considering consolidation of pension funds, as that could contribute to theefficiencies which SALGA had articulated in its presentation. To date, the FSCA was regulating around 44 municipal retirement funds, and the regulator was of the belief that the fewer the number of funds the better, because the economies of scale would allow the distribution of costs to a wider pool of members.
One of the issues which had emerged had been that, after the MCPF had decided to self-administer, there had been a surge in costs and ultimately those costs were borne by members. This was why it had been important for the FSCA to be involved, so that whatever costs would be incurred would be fair and minimal. It would engage with SALGA to see if the issue of consolidation could not be carried forward.
The performance of the MCPF went beyond municipal retirement funds. As part of the team formerly at NT dealing with reforms in the retirement schemes industry, Mr Makhubela commented that there had been issues in terms of how service providers billed retirement funds. As indicated by the curator, not all retirement funds communicated with their members, which was problematic, because members were supposed to receive regular benefit statements saying exactly how much they had accumulated in their funds, and a number of retirement funds seemed to struggle with that. The FSCA was busy developing standards which would enforce funds to communicate regularly with their members.
Mr Mthethwa was grateful that NT had participated in the meeting, because he was requesting that it had to increase the scope of the investigation into the VBS mutual bank, because the Committee had been informed that some municipalities in some provinces had used the bank after being instructed by the provincial leadership to do so. That raised the question of state-owned entities (SOEs) and provincial department’s involvement with the mutual bank as well
He wanted to know whether there were alternative retirement funds to which the 600 plus councillors were transferring, seeing that they had stopped contributing to the MCPF. The challenge in the long run with councillors not contributing to a retirement fund was that as they exited municipal councils, they would become a burden on government without retirement annuities.
Had retirement fund regulations not been followed deliberately so that the MCPF could do as it pleased and allow some members to draw from their retirement funds? If that was the case, the curator had to ensure that this was stopped forthwith.
He concurred with the consolidation recommendation of retirement funds before the end of the term of the current municipal councils.
The Committee would require the details of what had gone on in the MCPF if there had been immovable assets acquired, and then not registered under the Fund.
Mr Mileham wanted to know how liquid the current financial status of the MCPF was. What were its liabilities and assets to date? What return on investment was the MCPF receiving? What had been the impact of the 2016 negative return on investment on the MCPF? What was the status of the member’s database of the MCPF after the clean-up had been initiated by the previous board of trustees? How far was the curator with the verification of members’ contributions to the Fund? How often would members be receiving benefit statements going forward? What action was being taken regarding the identified maladministration by the MCPF? Did the curator have any information about how many municipalities were collecting dues from councillors but not paying them over to the MCPF? What did the curator think still needed to be done to stabilise the MCPF after curatorship was completed?
The Chairperson asked Mr Mileham if he had not been a member of the MCPF.
Mr Mileham replied that he had been a member of the Cape Joint Pension Fund (CJPF), and he had advised all councillors he engaged with to not invest in the MCPF precisely because of the maladministration that had been there for a number of years. If the fund stabilised and returned to a positive growth, he would advise his councillors differently.
Mr Ngwezi said that as he had recently left councillorship, he had advised a lot of councillors he engaged with to stop contributing to the MCPF, as he had suspected something amiss since reviewing his benefit statement, as he always found something amiss there. Even the staff of the MCPF, when contacted, would tell you three different things in the space of two weeks.
He asked if there had been any improvement since the curator started work, and if there had been councillors who had exited local government who would have received fewer benefits than they should have. Would the curators find those councillors and rectify that through compensation?
Mr Ngwezi said that the cessation of the payment of benefits, as alluded to by Mr Damons, had not been two weeks, as he had been a councillor at the time, and had resorted to threatening the MCPF with litigation in order for it to release his benefits.
He wanted the formula to calculate the benefits drawn by the MCPF as contributions towards members’ retirement.
Mr Makhubela replied that there was a challenge in one area of contributions, which was that if an employer deducted money from an employee that was meant to go towards a pension fund, and it did not end up in the pension fund, that was a criminal offence. If the question was what the FSCA had done about such issues, it became complicated as that needed the involvement of enforcement agencies and how to prosecute employers who were not paying over pension contributions they had already deducted from employees. The FSCA had been contemplating meeting with NT to impress upon it on the need to assist it in impressing upon employer municipalities the importance of paying over contributions to pension funds. The FSCA was addressing some of those issues, although it did not help matters when the pension funds themselves were having challenges.
Regarding pension funds’ performance, there were ‘defined contribution’ (DC) funds, where what contributors put in would be what would be returned, plus the return on the contributor’s savings, and there were ‘defined benefit’ (DB) funds, which were like the Government Employees’ Pension Fund (GEPF), for example. Funds like the GEPF worked with formulas, which would take into account the contributor’s last 12 months, or three years average salary, multiplied by a particular factor and the number of years the contributor had been employed: That would give the retirement benefit.
The FSCA was currently regulating ten defined benefit schemes in the municipal retirement funds industry, which meant formula-based retirement funds and 31 defined contribution schemes. It did not regulate how funds had to necessarily invest their savings, but instead set limits as to how much exposure funds could obtain from the various asset classes. That spoke to regulation 28, which said that a fund was allowed to invest only up to 75% in equities, which then set the maximum but no minimum. The minimum was left to the trustees of fund, and that was where investment policies came into play.
The Committee had noted that the MCPF had seemingly changed its investment policy rules to enable investment into immovable property. That had indeed been the case, as the MCPF had changed its investment policy to enable property investment which previously would not have been allowed within its rules.
The clean-up of databases did not affect just municipal pension funds, but involved the entire sector of pension funds, and the Committee would be aware, through current litigation, why the lack of data could become a problem. The lack of a proper database would render ineffective the calculation of a contributor’s pension benefits, and would also make it impossible to trace members and their benefits, which had led to unclaimed benefits remaining with administrators.
Mr Damons replied that while one remained a councillor, pension contributions would be deducted to be handed over to the MCPF. The curator had indicated and approached the municipalities with councillors who no longer contributed to the MCPF, and where some municipalities had indicated that they were contributing to other pension funds, which the curators believed to be illegal.
Regarding the consolidation of the MCPF, the transfer and streamlining of costs and possibly carrying on with self-administration, were issues which the curator would be discussing going forward.
The performance of the MCPF had, as already alluded to, shown a downward trend mainly relating to the purchase of vacant stands. It had R1.6 billion in assets in various asset classes, and a total number of outstanding member credits and beneficiary trusts of R1.61 billion. According to the numbers, there was supposed to be a R13 million surplus as of at December 2017, but what had not been factored in was what the cost would be if the curators decided to liquidate the fund.
The last benefit statements sent out had been for the period ending 20 June 2015. The curators had recently signed-off on the financials for 30 June 2016. The benefits statements for that period, together with the period from 30 June 2017 up until 31 December 2017, would all go out by the end of April 2018. That would allow up to date statements to interrogate with each councillor, which the MCPF would be engaging.
Regarding the maladministration and involvement of some legal firms in the purchase of the empty stands, and the involvement of the previous pension officer and what action the curators had taken to date, the curators were still investigating that, as there had been a complaint which had also been lodged with the law society against one of the attorney firms mentioned in various reports. There had also been an affidavit sent to the Hawks by one of the previous section 26 trustees, which the curators were following up with the Hawks. The curators had verified a lot of the allegations made in the past, and were proceeding with litigation against certain entities to recover funds or conducting criminal investigations against those implicated.
When the curators had come in, staff issues had been quite serious, such as communication with councillors and other internal problems which the curators had had to sort out between the unions and staff at the MCPF, and those matters had now been put to bed. Staff had since started to cooperate with the curators and there had been an increase in the communication levels with councillors.
When the curators had arrived at the MCPF offices on 19 December 2017, they had been required to authorise certain payments. The curators had refused to authorise the payments, as there still certain verification processes important to the curators which had not been in place at the time of the request to authorise. The moratorium the curators had instituted had been lifted after two weeks of their occupation of the MCPF offices, and after they had completed the verification processes they had required before distributing benefits.
Mr Mileham repeated his questions about how often benefit statements would be distributed going forward, how many municipalities were known to be collecting retirement annuities but were not paying them across, and what had been done to date regarding that. He wanted a sense from the registrar of the magnitude of the problem in the municipal pensions sector. Finally he asked how long the curator believed it would take to stabilise the MCPF.
Mr Makhubela commented on the under-payment of benefits to councillors, and said the law enabled what was called ‘surplus apportionment’ when there was money which came through after councillors had left a pension fund, depending on whether they were in a DC or DB fund.
The curator said that the next audit of the MCPF would be on 30 June 2018, and as per normal procedure the benefit statements would follow after the completion of that audit before the end of 2018, which would then make the MCPF up to date with benefit statements.
The number of non-contributing municipalities was currently unknown to the curator.
Mr Makhubela said he possibly could get the Committee that information in written form.
Mr Damons said once the MCPF financial statements were up to date -- and the curators had started with the 2018 paperwork -- he predicted that by the end of the year the curatorship would be completed, or the MCPF would have been stabilised.
The FSCA added that depending on what the curator did and how fast they worked, the plan from the registrar was not to liquidate the MCPF. The regulator wanted to see if the problem of the MCPF could not be fixed first, because if the lost assets could be recovered and the self administration issues could be attended to, then the MCPF could certainly be recovered from the brink.
Mr Ngwezi apologised for his comment that the moratorium period had been incorrect, and withdrew his statement.
Mr Joel said SALGA had certainly picked up a challenge at the local government level, where retirement annuity deductions had been made from councillors, but had not been paid over to retirement funds. There were also similar challenges with pay-as-you-earn (PAYE) and medical aid deductions which were not being paid over, so possibly SALGA, COGTA and NT should put their heads together to avoid a crisis similar to that at the MCPF.
Mr Pillay said NT had noted all the inputs, so that as soon as the next round of engagements started it would make the last input from SALGA a point to focus on. Indeed, the MFMA unit would need to get to the affected municipalities sooner, resources allowing, but certainly engagement at different levels would also be needed. Councillor oversight would probably require more focus, so the MFMA unit must train councillors to perform that oversight better. CFOs would also need to be reminded on how to apply the rules, as the MFMA had statutory requirements that needed to be complied with. Everything was there for application, but there seemed to be malicious non-compliance which had created the type of crisis that local government had found itself in.
Mr Masondo proposed that the MFMA unit had to indicate immediately to municipalities when it picked up non-compliance, and to dissuade affected municipalities from continuing with such activities.
Ms Wendy Fanoe, Chief Director (CD): Intergovernmental Policy, NT, said the only commitment that NT could make was the issuing of a circular notice when municipalities were non-compliant, because most of the municipalities that were involved in what SALGA had alluded to were indeed those severely financially and service delivery constrained.
Mr Mileham said one of the concerns that civil society, and Members of Parliament (MPs) as public representatives, had was the lack of access to data. He recalled that NT had started an open data system some years ago, and he would appreciate feedback on where that was.
Mr Pillay said NT had a committee on communications, including Statistics South Africa (StatsSA) but he was suggesting the Committee should visit the NT website every now and then, as the MFMA unit published all the information it had regularly. There was a link there as well to municipal websites in terms of section 75 of the MFMA, contracts, borrowing, annual financial statements (AFS), annual reports (AR), Infrastructure Development Plans (IDPs), and all other related information, including audit outcomes. There were a few portals available, and NT had also introduced ‘Municipal Money’ which was an NT website with municipal budgets and other related information. Certainly the MFMA unit could and would circulate to the Committee all the websites’ information, as that could help.
The meeting was adjourned.
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