Municipal Systems Amendment Bill: deliberations

Meeting report

PROVINCIAL AND LOCAL GOVERNMENT & FINANCE PORTFOLIO COMMITTEES: JOINT MEETING
21 August 2003
MUNICIPAL SYSTEMS AMENDMENT BILL: DELIBERATIONS

Chairperson: Mr Y Carrim [PC Provincial and Local Government]

Documents handed out
Municipal Systems Amendment Bill [B49-2003]
Draft Municipal Systems Amendment Bill - as certified by State Law Advisors
Submission by Costa Economou (Appendix 1)
R. Swanepoel & Associates Submission (Appendix 2)

SUMMARY
During the consideration of Clause 19 of the Bill the Department requested that the Proposed Section 86B that allows municipal entities to be established to provide non-municipal services be reconsidered. The South African Local Government Association contended that this is merely on of the issues introduced by the Bill that has not been properly thought through and which does create organisational problems. It also raised concern at the executive functions of municipalities are increasingly being limited by these provisions. A few consequential amendments and reshuffling were effected to the Proposed Section 86I in order to clarify the wording. Clarity was sought on the tax status of the service utility in the Proposed Section 86J.

MINUTES
Municipal Systems Amendment Bill
Clause 19 amending Section 86B
Mr Elroy Africa, Department DDG: Governance and Development, took Members through the contents of the proposed amendments to this clause. Its has consistently been the view of the Department that when it originally conceptualised "municipal entities" in Chapter 8, the primary focus was for the purpose of advancing the cause of municipal service delivery. There is thus clearly a bit of a departure in the sense that provision is now made for municipal entities to be established for any other local government function.

There has been some discussion between the Department and Treasury on this matter, and the Department requests that this Committee reconsider the clause which allows municipal entities to deal with any other local government function. It should be limited to municipal services alone. The Department would propose that a similar clause be inserted that allows existing municipal entities to deal with these other local government functions, thus offering some kind of an exemption. This would also pertain to the private company and the multi-jurisdictional service utility. This is the fundamental point to be made from the Department's viewpoint.

The Chair stated that, if this is the view of the Department, what is the reason for having a completely separate chapter dealing with services and functions. This seems to be a fundamental departure.

Mr Ismail Momoniat, Treasury DDG: Intergovernmental Relations, responded that this issue has been dealt with before. Exactly how non-municipal services are to be dealt with was discussed, and whether municipal entities can be established to perform some non-municipal services functions as well. Mr Africa is saying that this could either be disallowed, or it could be allowed for certain prescribed functions only.

The Chair asked why "functions" have now been included in this clause.

Adv G Grove, Treasury: Legal Drafter, explained that the Systems Act provides for municipal entities to be provided for municipal services. This has now been curtailed by the amendments tat have been permitted to the three forms. Apart from this the Promotion of Local Government Act provided for the establishment of municipal entities for any purpose. Thus the Bill does not change the existing law on this matter, as the provisions echo the current legal position. The only limitation imposed by the Bill is that it restricts it to the three forms stipulated.

The problem with "municipal services" is that this term is currently very broadly defined and thus includes various municipal functions. Aspects of a municipal service are also included, which are sometimes out-sourced by municipalities. Municipalities have already established companies for this purpose, and the Bill does not therefore deviate from the current legal position.

Mr Africa stated that, although the Promotion of Local Government Act would have allowed these municipal entities, it has to be noted that that Act pre-dates the new thinking manifested in the Bill. Mr Africa stated that, more explicitly, he is not sure whether enough is known about municipal entities that deal with the other functions. The municipal entity may not be needed to continue to perform this function, because there are other options. These include the normal procurement route which allows the municipality to enter into a relationship with any service provider for such functions, and provision has also been made for different kinds of partnerships.

It is entirely consistent with the Department's initial thinking in Chapter 8 of the Act, when the Department was specifically applying its mind to municipal services. The Department was not thinking through the complexities around municipal entities dealing with non-municipal services. Mr Africa stated that the result of this is that, in his opinion, this matter has not been properly thought through.

The Chair asked whether the current definition of "municipal service" legally incorporates aspects of a municipal function.

Adv Grove responded that his understanding is that the definition would exclude all aspects of a service, as "municipal service" only refers to the broad service.

Dr P Bouwer, DPLG Director: Legal Services, stated that matters such as debt collection, fleet management, meter reading etc. are all aspects of provisioning and administration. This has always been the Department's position. It will however depend on the circumstances of each case, and a general rule cannot be used here.

Mr Momoniat stated that he agrees with Mr Africa.

Mr T Mokwena, SALGA CEO, contended that this is really making SALGA's work more difficult than what it would have been had this matter been thought through much earlier on. It is very unfortunate that matters are always arising at the eleventh hour, and this is really creating an organisational problem. Sufficient evidence should be consulted which shows the merits and demerits of the issues involved. SALGA is not in a position to decide right now whether the alternatives proposed by Mr Africa are viable and practical. There are several matters in the Bill that do not have sufficient supporting evidence justifying its inclusion or removal from the legislation. SALGA's real concern here is that the municipality's executive functions are being increasingly limited here.

Ms Hogan stated that she is not adopting a hard-line on this issue, but she does believe there should be room to look at non-core functions to be performed. The range of municipal entities has already been restricted, which is in itself a limiting factor on the broad range of institutions that can be set up. She stated that she does not believe that, even if this matter would be deliberated upon for a further six months, that sufficient research results would be finalised that would allow Members to make any definitive statement on this matter. Ms Hogan contended that municipal functions be retained in the Bill. She stated that she does understand the Department's concerns, but cautioned against clipping the functions to such an extent that it does not allow certain creativity to emerge. It is clear that there has to be extensive research and monitoring on all these issues by the Department, Treasury and organised local government, to finally decide on a route to follow. This should be allowed to Committee out in the wash.

Although, the kind of fancy mechanisms highlighted in the correspondence from R Swanepoel & Associates (document attached) are shocking, and has to be guarded against. Ms Hogan stated that although she is saying that the functions should be opened up she is aware of the "deep and muddy waters" involved here, as illustrated in the R Swanepoel & Associates submission.

Mr P Smith (IFP) [PC Provincial] asked whether "other functions" being discussed here include services, however defined, plus everything else, or is clarity sought as to which "other functions" are possibly included or excluded.

Mr B Dorfling (SALGA) stated that it has not really been possible to set up a private company to perform certain municipal service, such as the refuse service. SALGA has instead commenced a process in many municipal council s that uses the ward committees on a community-participation basis. This vehicle is used to assist the community because it is not yet able to form a private company. This option has worked "so perfectly" because the community itself is performing the function, and a Public-private Partnership (PPP) will not yield the same result here.

The Chair requested the Department to offer a stronger argument for the exclusion of functions from this provision.

Mr Africa responded that this is unsettling and the Department has been applying its mind to the reason for the insertion. There are probably two powerful reasons for this provision. The first is that nothing currently prevents this from being done, and it is thus already allowed. The Department recognises this. The flipside of this is the recognition that these kinds of entities are currently very poorly regulated, and thus the aim here has been to strengthen the governance arrangements.

He contended that there is not sufficient empirical evidence to extend these powers even further, and for this reason the Department thus prefers that such entities not be allowed to carry out non-municipal services. The compromise here would be to allow those entities that currently exist and deal with non-municipal services to continue to exist. The Department is also of the view that, as stated earlier, there are other vehicles available to provide non-municipal services.

In conclusion, the current provision which allows for the establishment of these entities that deal with non-municipal services definitely goes beyond the current thinking of Chapter 8. The Department also doubts whether the full implications of such extension is fully understood.

Proposed Section 86I
The Chair asked whether Sub 2(a) should read "object" or "objects".

Adv Grove replied that it would be better to state "service or function", because the service utility is established for a particular function. This would bring the provision closer to the object of the Bill.

The Chair sought clarity on the reason to exclude "functions" from Sub 2(b).

Adv Grove responded that once the function is referred to at the top, the wording should stay the same.

The Chair proposed that Sub (c)(ii) be separated into those provisions dealing with the appointment of directors, and those dealing with the filling of vacancies and the replacement and recall of directors.

Adv Grove agreed with the Chair that the appointments first be dealt with, and then the filling of vacancies and replacement and recall of directors.

The Chair sought clarity on the route of the transference involved in Sub (c)(ix).

Dr Bouwer replied that this provision employs the same wording as Section 80(9)(i)(f) of the Act, which deals with the setting up of the district. This is then what is needed to transfer to that entity to have it up and running, and transfer thus takes place from the municipality that establishes the service utility. It is thus a one-way transfer from the municipality to the service utility. Dr Bouwer proposed that the transfer be dealt with in a separate provision, becoming the new (x).

The Chair agreed. He called for the current (x) to be broken up as well, to make the meaning of the "secondment" clear.

The Chair sought clarity on the term "scheduling arrangements" in Sub (d).

Mr Momoniat responded that he does not know why it has been phrased as "scheduling arrangements", because the intention here was to refer to payment schedules.

The Chair stated that "payment" has to be inserted before "scheduling arrangements".

Proposed Section 86J
Mr Smith sought clarity on the tax status of the service utility.

Mr Momoniat replied that he does not have the answer to this question, but suggested that the Receiver of Revenue has the power to determine its tax status. The tax status is not usually prescribed in any other legislation. In general a municipality is not taxed, but this does not mean that anything a municipality does is not taxed either. The Receiver of Revenue will look at the activities embarked upon by the municipality in question.

Dr Bouwer stated that the current legal position is that any person has to pay tax, and "person" by law includes a corporate entity in most instances. Thus SARS can, depending on the applicable provisions, regard the municipal entity as a legal persona which then has to pay tax.

Ms Hogan agreed that SARS would make a determination here. She proposed that Mr Martin Grote, Treasury Chief Director: Tax Policy, be consulted as soon as possible on this matter

Adv Kohlong, Department: Legal Services, stated that Section 1 of the Income Tax Act is very clear in stipulating that any legal person is subject to that Act. The Proposed Section 86J(1) clearly identified a service utility as a juristic person, and there is thus not way that requiring a service utility to pay taxes would fall outside the provision in the Income Tax Act. This matter does not therefore really need an investigation, as it is clear.

Dr Bouwer stated that a consequential amendment would have to be effected in Sub 2(a) by replacing "object" with "objects".

The Chair agreed.

Mr Smith noted that the wording of the Proposed Section 86J(2) differs from the corresponding provision dealing with private companies, the Proposed Section 86E(2). What is the reason for the difference in wording?

Adv Grove replied that there is only on municipality that can become involved in the establishment of the particular utility, and it is not the case that it can acquire another utility to be used for a certain purpose. A company of course need not be established by the municipality, it can acquire it by buying the shares in the company.

Mr Mokwena contended that the entire proposed section seems rather repetitive, and asked whether this was done intentionally.

Dr Bouwer responded that this is legally necessary to absolve the municipality from legal challenge on the grounds of estoppel and the Doctrine of Notice. This is what the court case in the Eastern Cape was all about. It might sound repetitive, but it has legal implications.

The Chair agreed that the current wording should be retained.

Proposed Section 86K
Mr Smith asked why Sub b(ii) refers to "benefit" only, whereas the corresponding Proposed Section 86F(1)(b)(ii) dealing with the private company refers to "economic benefit".

Dr Bouwer agreed with Mr Smith. This begs the question whether Sub b(ii) should be removed completely, or whether it should be qualified to read "the service utility would benefit the local community where it is to provide the municipal service".

[The remainder of this meeting was not covered by PMG].

Appendix 1 : Submission by Costa Economou

17 July 2003

The Director-General
Attention Adv S Kholong
Department of Provincial and Local Government
Private Bag X804
PRETORIA
0001

Public Comment: Notice 1839: Government Gazette 25149 dated 27 June 2003 LOCAL GOVERNMENT: MUNICIPAL SYSTEMS ~ENDMENT BILL, 2003

Thank you for the opportunity of submitting input, which is being given primarily in connection with the requirements that legislators are informed of the financial implications, including 'disclosing any possible financial liabilities or risks'.

I am giving this input in the context of employee benefits and, in particular, as regards liabilities arising in relation to pension and/or provident fund benefits, where employees are transferred from one organisation to another.

As a general comment, time may not always allow for the actuarial determination of liabilities under retirement funds. But a set of 'best-practice' guidelines will be needed to ensure the basis of an equitable transfer of persons in respect of

- contractual conditions of service
- compliance with Section 197 (0) of the Labour Relations Act where (unless otherwise agreed) the rights anti obligations of the old employer will continue with the new employer
- the extent to which pension obligations, accumulated leave, post-retirement medical expenses, termination benefits, etc are controlled or under-funded;
- and the Revised accounting Standard AC 116 to quantify the employer's obligation and expense;
- other employee benefits and/or expectations of transferees, including housing, medical scheme, funeral cover, participation in HIV/Aids programmes. And attendant communication and effecting of options

As specific comment to the draft bill, I submit the following for your consideration:

Page 6 : definition of 'municipal entity'
As regards the word 'fund', it is noted that 'ownership' of retirement and most medical schemes vests with the trustees and not with the employer.

Page 7--- the new Section 9(1) : '...by way of an Act of Parliament"
Whereas the financial impact might be reportable at the time of tabling an Act, should an intervention at a Draft Bill stage also be provided for.

This intervention would probably relate to principles & best practice agreements. To illustrate:-
-various provisions of The Electricity Distribution Industry Restructuring Bill {Gazette 24764 of 24 April 2003) provide that 'assets, liabilities, rights and obligations are transferred.
- indeed, Section 33 referred to all future actions or other proceedings being transferred.

Presumably, your Bill aims to avoid such situations between different Acts, particularly where they involve other Ministries

Page 34 : New Section 93K(2)(b)
This refers to a ... 'fund for the benefit of employees... terms of legislation regulating pensions or medical aid schemes'. Depending on the context, and because some benefits are insured rather than funded, should this be amended to 'a fund or scheme' anti broadened to read regulating pension or medical aid or other employee benefits'

We trust that this input will assist the Department. Should you now or later wish to discuss details, I should welcome the opportunity of assisting you.

Yours sincerely

Costa Economou BSc (Hons) FIA FASSA AFP
Business Development: Retirement Fund Division

Appendix 2 : Swanepoel and Associates

R SWANEPOEL & ASSOCIATES (PTY) LTD

THE CHAIRMAN - MR YUNUS CARRIM PORTFQLIO COMMITTEE ON PROVINCIAL AND LOCAL GOVT.

Cc: Mr Mannetjies Grobler - committee member Mr. T.V. Pillay - National Treasury

Dear Sirs,

"We have submitted a comprehensive business plan to National
Treasury (their reference (M 4/1/18 - 269/03) refers, i.r.o. Muniservice Trust's offer to provide:
a) Administrative;
b) Account collection and;
c) Resolving account queries, by using the existing infrastructure of the branches of selected financial institutions (commercial banks) to municipalities and service receivers (rates and service patrons), on a national basis, throughout the R.S.A. The offer is subiect to the participation and agreement of the financial institutions~ which we are presently awaiting.

We are of the opinion that if this arrangement materializes as envisaged, the proposed project will make a direct impact on your portfolio committee's investigation and recommendation to parliament on the Bill on new rate-able properties.

We enclose herewith an abbreviated Muniservice Trust business plan for your information. We will gladly forward the comprehensive business plan to yourselves upon request".

ABBREVIATED BUSINESS PLAN - MUNISERYICE TRUST
An unique plan has been devised by the beneficiaries of a Trust to be formed, to create mechanisms, utilizing existing infra-structure to oversee and control finances and quality of service delivery by Municipalities/Metro Councils and District Councils throughout the R.S.A.

The project also makes provision to collect municipal duties and fees at selected financial institutions' service points (tellers), thereby providing a ONE STOP service to patrons (service receivers and ratepayers) with extended business hours, including Saturdays. This includes the collection of rates on agricultural land -pending legislation.

By utilizing the efficient, well-trained personnel at commercial banks to deal with account and miscellaneous service delivery problems on behalf of patrons with senior municipal officials, it is envisaged that the provision of services by local government institutions will improve immensely.

When and where repetitive problems of service delivery arises Municipal Services Trust Company will at it's expense send municipal experts to investigate and advise the Local Council on how to solve these problems.

It is envisaged to appoint Charter Accountant firms to oversee the setting up of Local Council income and expenditure budgets on behalf of patrons and monitor financial matters and expenditure on an ongoing basis in the area of their operation. Complaints received by the Trustees about poor or no service delivery, corruption, etc. will be reported by Muniservice Trust to the responsible MEC's of the provinces, in the first instance and to the Minister for Provincial & Local government in the second instance.

At the cost of a single levy raised as a percentage of the rates and service charges, patrons will receive insurance cover that will pay their Rental or Mortgage Bondi water and electricity and rates in the event of: a) Retrenchment, b) Illness c) Death or with businesses d) In the event of a financial crisis, for a period of 316 months. This levy will also pay for the other administrative, overseeing and control functions of the Trust.

Patrons that choose to pay their municipal fees and duties at financial institutions' service points will furthermore qualify for negotiated discounts at certain participating consumer goods suppliers i.e. Checkers, Pick ~n Pay, Edgars, etc. A credit card type membership card will be issued to the patrons by the banks that will entitle then') to this discount when purchasing goods or services from those listed suppliers.

Muniservice Trust Company will apply to become member of the 'Proudly South African' association. This should enhance a proud to be South African attitude amongst patrons that will assist with nation building and break down the resistance and negative attitude by some patrons towards some local government institutions. The concerted effort by financial institutions to attract this new form of business to their institutions will further enhance the positive approach towards local government institutions.

The functions that the Trust will take over from them will enable senior municipal officials to apply their skills and professionalism to their main function namely:
overseeing and control.

The project furthermore makes provision for the formation of a partnership between the municipalities and the Trust, 'municipal entity" with the aim to collect arrears (amounting to R24 Milliard, which increases by R1,8 Milliard annually). The 'municipal entity". Municipal Debt Collecting Company (MDCC) will be based in and operate from Pretoria and will use reputable attorneys, financial institutions or credit bureaus to collect the arrears in the areas of jurisdiction of the various municipalities all at the expense of the default patron.

With the efficient collection system of the financial institutions, the collection of arrears by the MDCC and the banks, sufficient finance could be generated to either reduce service and rates fees in S.A. or the additional funds could be applied to capital expenditure which in turn will create job opportunities, reduce the unemployment rate and establish more self-sufficient, happy citizens. (PROUD TO
BE SOUTH AFRICAN CITIZENS)

Options to supplement the income of the Trust and therefore minimize the percentage levy to be raised are the following:

A) Sell pre-paid water and electricity cards at financial institutions' service points on a commission basis.
B) Offer administrative and account collection services to the second telephone landline operator (SNO) at financial institutions' service points on a commission basis.
C) Negotiate earning the maximum agents' commission from the successful insurance underwriter.
D) Interest earned on credit balance in Trusts' bank accounts invested on daily call.

The possibility to convert Muniservice Trust Company to a public Limited company, making a share offer available to all municipal/metro/district council service receivers/ratepayers (patrons) is an option to be investigated and if found viable be implemented within 12 (twelve) months of the formation of the Trust.