Local Government: Municipal Systems Amendment Bill: deliberations

Meeting report

LOCAL GOVERNMENT AND ADMINISTRATION SELECT COMMITTEE
7 October 2003
LOCAL GOVERNMENT: MUNICIPAL SYSTEMS AMENDMENT BILL: DELIBERATIONS

Chairperson: Mr B Mkhaliphi (ANC) [Mpumalanga]

Relevant documents
Municipal Systems Act of 2000
Local Government: Municipal Systems Amendment Bill [B49B-2003]

SUMMARY
The Department provided an overview of the amendments proposed in the Local Government:Municipal Systems Amendment Bill. During the discussion Members sought clarity on who exactly controlled the Board of the municipal entity, The Department was asked to explain the early warning signs it had put in place in the Bill which would alert the MEC's to problems in the municipality and the impact of the Crossing-of-the-Floor legislation on the political structure of the Multi-Jurisdictional Service Utilities. A protracted discussion ensued regarding whether the municipal representatives should be granted participatory rights at the Board meeting of the municipal entity, and the history of the provision and the political decision taken by the National Assembly was outlined. The Committee proposed that the municipal representatives either be granted full participatory rights, or they should not be allowed to attend the Board meetings at all.

MINUTES
Overview by Department of Provincial and Local Government
Ms Gabi Gumbi-Masilela, Department Chief Director: Infrastructure and Development Planning, stated that the Department explained during the last briefing to this Committee the Bill was a result of the consequential amendments that were effected by the Municipal Finance Management Bill. During the processing of the Municipal Finance Management Bill both the Finance and Provincial and Local Government Portfolio Committees decided that a separate Bill should be introduced which would include the amendments in the Municipal Finance Management Bill that impacted on municipal systems, instead of only including them in a schedule to the Municipal Finance Management Bill. She stated that the Bill was thus the result of that process.

She stated that the amendments proposed in the Bill did not present a major policy shift from the current Municipal Systems Act, but they actually strengthened and clarified some of the sections in the Act. This was especially so with regard to Section 8, which dealt with external mechanisms and municipal entities.

Ms Gumbi-Masilela stated that certain amendments have been effected to the definitions by inserting new definitions and amending existing definitions, and noted that the term "municipal entity" has been amended. The governance relationship in terms of the establishment, ownership and representation within municipal entities has also been changed. The current Sections 9 and 10 of the Act, which dealt with the assignments of powers and functions to municipalities, have been amended to ensure that unfunded mandates were curtailed as far as possible. She stated that these amendments also aimed to ensure that the municipalities had the necessary support, and review of the capacity to deliver the powers or functions.

She stated that further amendments dealt with the improvements made by municipalities with regard to the access to information, via amendments to Sections 21A and B of the Act. Amendments were also proposed to the annual performance reporting requirements of municipalities and the performance bonuses paid to municipal officials, via amendments to Sections 46 and 57 of the Act respectively.

A new chapter was inserted regarding municipal entities, and dealt with the external mechanisms which could be established by municipalities via Sections 76 and 77 of the Act. The conditions for entering into a service delivery agreement were also outlined, and municipalities were now required to first commission a feasibility study which outlined the benefits that the establishment of the external mechanism would have to the municipality.

Ms Gumbi-Masilela stated that the proposed Chapter 8A essentially stipulated the forms of municipal entities that would be allowed by the new definition, and focused primarily on the governance arrangement of the municipal entity. It also dealt with the transitional arrangements for those municipal entities which currently existed, in order to provide a transitional phase which would not interrupt the provision of service to the municipalities.

She stated that these were the key highlights of the amendments.

Discussion
Ms J Kgaoli (ANC) [Gauteng] stated that the question which arose time and again during her briefing to her province was the reason for this Bill being tagged as a Section 75 Bill, when it impacted significantly on provinces.

Dr P Bouwer, Department Director: Legal Services, responded that the heading of Section 76 of the Constitution was to some extent misleading, because the actual substance and meaning of Section 76 was contained in Sub clause 3 thereof. He stated that local government was no longer a general functional area listed under Schedule 4 which set out the competencies of the provinces. Sub clause 3 also listed specific sections, but none of those dealt specifically with local government either. As the Bill did not deal with any of those sections, the default position would be that it was a Section 75 Bill.

Kgoshi M Mokoena (ANC) [Limpopo] stated that his province expressed concern with who exactly controlled the board of the municipal entity, because it was an independent structure. The Bill also indicated that the municipal representatives would not be able to give direction to the Board at its meetings, and he sought clarity on that clause.

Dr Bouwer replied that Members should between the governance relationship, which dealt with the control exercised by the municipality over the municipal entity, and the service delivery agreement. He stated that the two were linked, to some extent, but they were two completely different relationships. Thus if a municipal entity failed to deliver on its agreement by not delivering municipal services, the service delivery agreement must be used to resolve that problem.

The Bill was clear on the governance relationship in the new proposed section 93A, which was further strengthened through the role of municipal representatives in the new proposed section 93D. The proposed section 93D(2)(b) empowers municipal representatives to even call certain meetings to require the Board of the municipal entity to account for its actions, which was a very forceful direct control mechanism for the governance relationship.

Ms Gumbi-Masilela added that the Board accounted to the municipality in terms of the service delivery agreement, and there were clear reporting and communication channels between the Chairperson of the Board and the municipal manager or mayor. The municipal council could then also call the Board to account for the failure to deliver the services it was supposed to provide.

She stated that municipal entities were established for the sole purpose of providing a specific function, and their targets were set in line with that function. The non-participatory rights granted to municipal representatives at the meetings of the Board ensured that they did not "add other things other than what they were established to do". Measured were thus put in place to ensure that the Board were in line with the intentions for which the municipal entities was created.

Kgoshi Mokoena asked whether there was no other terminology that could be used other than "parent municipality", because it was really an inappropriate term.

Dr Bouwer said that the term "parent municipality" was a well-known expression in corporate law, and it was thus included in the Bill. The term was also being used in the Municipal Finance Management Bill, for cross-referencing with this Bill.

Ms Kgaoli stated that she heard the reasons provided by Dr Bouwer, but asked whether there was no other word that could be used instead of "parent" municipality.

Ms Gumbi-Masilela replied that this concept was decided upon by the Department's Legal Services division, after they had considered the Companies Act as well as international precedents for this kind of arrangement. She stated that the legal division indicated that the term "parent municipality" was the most prominent, and it was adopted for this reason.

The Chair informed Members that this terminology was in line with the parent and subsidiary company concept in company law.

Kgoshi Mokoena sought clarity on the distinction between a private company and a municipal entity, because the definition of the municipal entity contained in the Bill appeared to converge these two concepts.

Dr Bouwer replied that the municipal entity was the collective term for all the possible permutations, and the Bill stipulated that these could take the following three forms: a private company, a service utility or a multi-jurisdictional service utility. He agreed with Kgoshi Mokoena that a municipal entity could thus be the same as a private company, but the term "municipal entity" was used generically to apply to all three forms. He stated that it was for this reason that the new chapter contained specific references each one of these forms separately. The more general provisions that apply to municipal entities generically only refer to "municipal entity".

Mr P Maloyi (ANC) [North-West] asked the Department to explain the difference between the new proposed Section 46 in Clause 6 of the Bill, and the current section in the Act.

Dr Bouwer replied that the current Section 46 of the Act dealt with annual reports in general, but the Municipal Finance Management Bill proposed that annual reports to a large extent related to financial reporting and they were comprehensively dealt with in the Municipal Finance Management Bill. One aspect of the annual reporting was reporting on performance, and it was for this reason that the existing Section 46 which dealt with annual reports was now replaced with a clause which only dealt with performance reports as one aspect of reporting. An additional reason for this decision was that the Act contained an entire chapter on performance management, and it was thus an area that was very peculiar and pertinent to local government legislation.

Mr Maloyi asked the Department to explain the measures put in place in the Bill to ensure that the early warning signs were established, so that the MEC's could be made aware of the problems in the municipality before they collapse.

Dr Bouwer replied that all the very forceful financial penalties and remedies that could be pursued for non-compliance were contained in the Municipal Finance Management Bill, and these were very strong sanctions. He reminded Members that Section 216 of the Constitution authorised government to withhold funds if Treasury's norms and prescripts were not complied with. The reporting requirement placed on municipalities was to a large extent strengthened by addressing the annual reporting aspect in the financial legislation, which was dealt with in the Municipal Finance Management Bill. The two pieces of legislation this have to be read together to get a full picture of the measures put in place.

Ms Gumbi-Masilela added that the Bill required municipalities to set very clear targets regarding what they want to achieve, as well as the outputs. The report has to articulate achievement or non-achievement of those targets. It was for this reason that the municipal council was now required, as part of its responsibility, to assess that performance and identify the achievements and shortcomings. The Municipal Finance Management Bill gave additional accountability responsibility to the municipal manager and municipal officers, and their performance would be linked to the performance of the municipality and the service delivery agents used. These quarterly performance reports would then highlight the early warning signs of problems with the municipality.

Ms Kgaoli proposed that the Department create a mechanism which provided early indicators to identify the problems with the municipality. This mechanism must be different to the financial mechanism outlined by Dr Bouwer, because there would be no point in imposing financial sanctions on a municipality that was already in financial trouble.

Ms Gumbi-Masilela stated that the Department had a number of internal initiatives in this area. One such programme was called Projects Viability which looked at the financial stability of municipalities, as well their ability to report and account in line with the Division of Revenue Act. This process allowed the Department to assist municipalities and was linked to the initiative aimed at enhancing the revenue of municipalities, to ensure that they were sustainable. She stated that the Department was thus considering linking that with the performance management systems developed within the Department. The Project Viability initiative would allow municipalities to put viable systems in place that would allow them to budget effectively, and also to monitor their expenditure patterns and to report in line with the Division of Revenue Act.

She stated that the new proposal in the Bill, which dealt with the assignment of powers and functions, was aimed at ensuring municipalities have the necessary capacity to perform the additional functions. It also ensured that those functions were adequately funded, so that they did not cause the bankruptcy of the municipality. Ms Gumbi-Masilela stated that the reason why municipalities were collapsing was because they had to deal with limited resources, and with additional unfunded mandates that were transferred to them as the result of the need in a particular area. The Bill also sought to ensure that the municipalities prioritise service delivery within those limited resources, and the performance of the municipal manager would be linked to their ability to reach those targets as well as reporting on those achievements and targets.

Mr C Ackermann (NNP) [Western Cape] stated that it was problematic that two or more municipalities could agree to establish a municipal entity, even though those municipalities might not be adjacent municipalities. He asked the Department to explain the impact of the Crossing-of-the-floor legislation on this arrangement, because the change in political structure could then result in the disbanding of that private company.

Ms Gumbi-Masilela replied that one of the purposes for creating a municipal entity was because it was realised that the municipality itself was not able to perform a specific function or delivery a particular service, because it did not have the necessary internal capacity to do so. The municipal entity would thus be established internally to provide this service, with the efficiency of the private sector. The entity was designed as a private sector structure so that it would be able to deliver the service as efficiently as an institution in that sector. She stated that the purpose for which these utilities were created has to be emphasised: they were created to assist and enhance service delivery.

Mr Ackermann asked whether a mechanism could not be built into the Bill which would prevent the dissolution of the municipal entity if it was functioning well.

Ms Gumbi-Masilela replied that the municipal entities would work according to a strict contract which would be based on the service delivery agreement concluded with the municipality. Thus the municipal entity could not be disestablished if it was performing its functions satisfactorily. It could be disestablished if the service which it was created to provide was no longer needed or came to an end, or if it was simply not performing according to the standards set out in the service delivery agreement. She stated that she was not sure exactly how the Crossing-of-the-Floor legislation would impact on this arrangements, because there would be legal implications to disestablishing the municipal entity and terminating the services of its staff and officials with contracts of employment. These implications would have to be considered before deciding to disestablish a municipal entity.

Dr Bouwer added that the Act dealt essentially with service delivery and the bias, which had not been changed in these proposed amendments, was still centered towards allowing a municipality to deliver municipal services through an internal mechanism. When a municipality decided to consider an external mechanism, more hoops have been built into the Bill which make it more difficult for a municipality to embark on this external mechanism which would deliver the municipal service on behalf of the municipality. This external mechanism could be a private company, and this arrangement would then be a Public Private Partnership (PPP). The service delivery agreement could also be entered into with another municipality, or even with a municipal entity. The municipal entity was thus external to the municipality and the intention was never for it to enhance the viability of the municipality, because its sole purpose was to deliver a service.

He stated that the proposed Section 78(3)(c) lists the additional requirements which the municipality would have to satisfy when considering the use of an external mechanism. This provision stipulated that if the feasibility study indicated that the municipal entity would not be able to deliver on the factors listed in that proposed section, the municipality would be precluded from establishing that particular mechanism. Dr Bouwer stated that the municipal entity was thus geared around service delivery, and the governance issue was something totally different and was addressed in the new Chapter 8A in the Bill.

Mr R Nyakane (ANC) [UDM] stated that he understood that the purpose of the municipal entities would be to boost the economic viability of the poorer municipalities who were unable to survive due to a lack of funds. Yet the municipal entities and the structure established by the Bill did not really appear to capacitate those municipalities so that they could generate funds and become self-sustainable.

Ms Gumbi-Masilela replied that the forms of municipal entities emphasised in the Bill were created to provide a service, and precisely what was meant by basic service delivery was defined in the Act. The Municipal Finance Management Bill would allow a municipal entity to be created for the purposes of tourism, for example, but the Act restricts the purposes for which such municipal entities were established to service delivery alone.

Kgoshi Mokoena stated that his concern with the proposed Section 93D in Clause 26 was that it directed the municipality to send "zombies" to the meetings of the Board of the municipal entity. They were not allowed to participate in the meeting but were merely observers. He questioned the use of those representatives at the Board meeting if they could not participate.

Ms Gumbi-Masilela stated that the proposed sections 93D(1)(a) dealt with the representatives of the council sent to the meeting to ensure that the Board did not stray from its mandate. These representatives were not given participatory rights because the municipality needed to protect itself by ensuring that, in that type of situation in which no member of the municipal council could be present on the Board, the representative would ensure that the Board was in fact performing according to its mandate. This did not necessarily mean that those representatives were "zombies", as they were actually monitoring the Board and reporting back to the municipal council.

She stated that, by not granting these municipal representatives the right to participate and thus to influence the decisions taken by the Board, the situation would be avoided in which the Board then states that in its defense a bad decision was entered into because of the pressure exerted by that municipal representative. The accountability arrangement would thus be strengthened in terms of the service delivery agreement.

Ms Kgaoli stated that it would make more sense if the municipal representatives were allowed to participate only to the extent that they inform the Board of practical solutions, or simply to advise it, but the Board alone would then be left to vote on the issue. She stated that it did not make sense to send the municipal representatives to Board meetings in the first place, if they could not participate.

Kgoshi Mokoena stated he saw no reason to send those municipal representatives to the meeting if they were not going to participate. He proposed that the provision be amended to grant the municipal representatives participatory observer status, and they would thus be able to participate but not vote. The municipal representatives must be allowed to contribute and verbally ensure that the Board abided by its mandate, as it would be foolish for the municipal representative to simply sit there in silence while the Board deviated from its mandate.

Dr Bouwer replied to these two questions by stating that it might assist if he provided some background to the operation of corporate bodies. Municipal representatives would vote, participate and debate at the shareholder meetings, because those meetings inform the municipal entity of the direction in which it must move. He stated that the other aspect would be the governance structure called the Board of Directors, and these concerns raised by Members were also extensively debated in the Portfolio Committees. The important principle here was that the decisions of the Board should not be influenced to reflect a bias in favour of the municipality, because the Companies Act stated very clearly that the fiduciary responsibilities of the Board were towards the municipal entity.

He stated that the problems raised by Kgoshi Mokoena appeared to relate to the service delivery agreement between the municipality and the municipal entity, and not to the governance arrangement of the municipal entity. It would thus not be possible to attempt to rectify a failure to abide by the service delivery agreement by seeking to influence the governance arrangement, by influencing the decisions taken by the Board of the municipal entity. The service delivery agreement would have to be amended for the municipal entity to perform a service not currently stipulated in the service delivery agreement.

The Chairperson and certain Members of the Finance Portfolio Committee actually discussed these governance issues with Mervyn King. It was stressed, and mentioned by the King Report as well, that the municipal council could not participate in the Board of the municipal entity because the fiduciary responsibility of the Board was to the municipal entity, not the municipality. Dr Bouwer stated that the proposed section 93D(1) allowed the municipal representatives to at least pick up on the nuances, and to report back to the municipal council on the activities of the municipal entity. The proposed section 93D(2)(b) in any event allowed the municipal manager or mayor to call a special shareholders meeting, so that the Board could report back to the municipality on actions taken by the Board.

Dr Bouwer stated that a possible cause of the concerns being raised could be with the activities at the municipal representatives at the Board meetings. He stated that the word "must" in the proposed section 93D(1) referred only to the fact that the parent municipality must have representatives, and it did not refer to what those municipal representatives had to do at the Board meetings or that they had to attend all its meetings. The parent municipality then had to decide in the proposed section 93D(1)(a) on the extent to which it wanted to use those municipal representatives.

The proposed section 93D(1)(b) placed a responsibility on the municipal representatives to properly exercise the municipality's shareholder rights in the municipal entity. This provision referred to a shareholder meeting, which was completely different in nature and purpose to the Board meeting in the proposed section 93D(1)(a), and here the municipal representatives would be much more active. The rights of a shareholder by definition included voting rights, and the municipal representatives in the shareholder must actively participate in the meeting. Dr Bouwer stated that this was strengthened in the proposed section 93D(3).

Mr Maloyi contended that the Department could not, in good conscience, expect the municipal representatives to sit all day in the Board meeting without saying a word. He stated that two options could be followed in the Bill: firstly, the municipal representative could be allowed to be a participating observer or, secondly, no municipal representatives should be allowed at all and the proposed section 93D(1)(a) would then be removed.

Ms Kgaoli agreed

Ms N Kondlo (ANC) [Eastern Cape] sought clarity on the mandate of the municipal representatives at the Board meeting in the proposed section 93D(1)(a), as stipulated in the proposed section 93D(3)(b).

Secondly, Ms Kondlo agreed with Mr Maloyi and stated that she did not see the need for the attendance of the municipal representatives at the Board meetings, if the proposed section 93H sufficiently spelt out the duties which the directors would have to comply with at that Board meeting. She stated that, even if the Board were to deviate from the mandate, the shareholder meeting would in any event have the overall authority to decide the direction to be taken by the municipal entity.

Mr L Lever (DA) [North-West] stated that Board meetings were usually closed affairs, but the net effect of the proposed section 93D was that it now guaranteed the municipal council access to that open meeting. He agreed with Mr Maloyi it might not be fair, but Parliament itself had the Parliamentary Monitoring Group which sat in on Parliamentary Committee meetings. It is not allowed to participate in the meetings but they monitor Parliament on behalf of the public of South Africa, and their situation was analogous to that of those municipal representatives. The proposed section 93D(1) thus guaranteed that the municipality had open access to the Board meeting by having a representative at that meeting, because the legislation prohibits municipal councilors from being members of the Board. He stated that it would at least alert the municipal council to any problems the municipal entity might have in effecting service delivery, so that the municipal manager or mayor could then call a shareholder meeting to sort out that problem.

Ms Kondlo disagreed with Mr Lever. She stated that they could not strictly be termed "representatives" if they did not actively participate in the Board meeting.

Mr Maloyi asked whether there would be any problems with deleting the proposed section 93D(1)(a), and using the proposed section 93D(2)(b) to then cover all these situations.

Dr Bouwer emphasised that it had to be made clear that this provision was not proposed by the Department, but was instead a political decision taken by both the Finance and Provincial and Local Government Portfolio Committees. The political question which had to be decided was whether councilors would be allowed to serve on Boards of directors, and it was decided that they would not be allowed to do so. The South African Local Government Association (SALGA) had a large role to play in this decision. The only alternative was then to grant municipal representatives at least the opportunity to attend the Board meetings to observe the proceedings, and it was for this reason that the notion of non-participating observers was decided upon.

He stated that the closest analogy to this situation would be that Parliament was open for everyone to attend, but Cabinet meetings were closed. The proposed section 93D(1) thus did not stipulate that municipal representatives had to attend all Board meetings but it merely granted the municipality the right to send a non-participating observer to the Board meeting, which would be analogous to the Cabinet meeting which was normally closed.

Dr Bouwer stated that shareholder meetings had to take place at regular intervals, but this municipal representation allowed the proposed section 93D(2)(b) to kick in, which allowed the municipal manager or mayor to call an extraordinary meeting. He stated that the municipality did not therefore have to wait for every scheduled Board meeting to take place before acting, but it could use this provision to call an extraordinary meeting for the Board to account to the municipality for its actions. Without the proposed section 93D(1)(a) there would be no other way for the municipality to know what actions were taken by the Board, because many of those decisions were not made public.

He stated that the Department was not defending the decisions taken by the Portfolio Committees, but he was merely relating the political decisions taken and the origin of the clause.

Ms Kgaoli stated that it was very important that the Department now disclosed the negotiated clauses to this Committee, and it was not ideal that Members had to "push the Department to come out of the bag with some of these issues". This Committee had no intention to sit in on the meetings that took place in the National Assembly, because it was a separate and independent House.The Department seemed to be protecting a provision for which they were not responsible. She stated that it was important for the Department to be open with the Committee, and to indicate the negotiated clauses.

Dr Bouwer replied that Department apologised for the impression created that the Department's intention was to mislead the Committee, as it merely attempted to respond to the questions posed by Members on a technical basis. It was only at a later stage that he realised that Members were grasping with the concept of municipal representatives' participation at the Board meeting of the municipal entity, and that the history of the provision should be clarified to Members.

Kgoshi Mokoena stated that the Committee has sought clear advice on this "zombie clause", and requested that this clause be flagged for later consideration.

The meeting was adjourned.