Municipal Fiscal Powers and Functions Amendment Bill: National Treasury Briefing

Meeting report

Opening Remarks by the Chairperson

The Chairperson opened the meeting and welcomed the delegation of National Treasury to the meeting. He said that a letter of congratulations had been sent to Dr Duncan Pieterse, who was appointed as the new Director-General of National Treasury.

He noted the apologies received from Mr W Aucamp (DA, Northern Cape) and Ms M Mamaregane (ANC, Limpopo).

Briefing by National Treasury on the Municipal Fiscal Powers and Functions Amendment Bill

Ms Malijeng Ngqaleni, Deputy Director-General (DDG): Intergovernmental Relations, National Treasury, said that the proposed amendments are very important, because they enable municipalities to finance a very important infrastructure that is key for the investments that are required to support the economy, and to also increase access to services. The amendments are not informed by a new source of revenue, but it is an existing source of revenue for municipalities that is very fragmented in its regulation and has not been standardised. The Bill intends to formalise and ensure equitable charging of this important source of revenue.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, gave an overview of the local government fiscal framework.

A major concern is that municipalities are underinvesting in infrastructure, which impedes economic growth and development. Development charges could therefore assist municipalities to address this funding gap in the development of municipal infrastructure that will unlock growth.

Ms Sandra Sekgetle, Director: Local Government Finance Policy, Intergovernmental Policy and Planning, National Treasury, highlighted the objectives and key reforms introduced in the Bill. She said that once the Bill is enacted, it will:

- Ensure accountability and transparency in the establishment, collection, and expenditure of development charges;

- Provide a uniform regulatory framework to ensure that at least the basis for, principles and method of calculation will be the same across municipalities;

- Create legal certainty for all parties on how development charges are imposed and regulated;

- Promote accountability and the predictability that current residents, especially the poor, are not required to subsidise the cost of commercially viable developments. Therefore, the incidence of the cost is more accurately and equitably assigned to those who directly benefit from the infrastructure, rather than being spread amongst all ratepayers;

Ms Mmachuene Mpyana, Senior Economist: Local Government Finance Policy, National Treasury, took the Committee through the definitions of the key concepts in the Bill, as well as a summary of the provisions in the Bill;

The presentation set out what municipalities should do to prepare for the passing of the legislation, and the capacity and support that National Treasury would provide to municipalities;

Ms Fanoe took the Committee through the proposed technical changes to the Bill.

(See presentation for details)

Discussion

The Chairperson suggested that the Committee raise policy questions and thereafter National Treasury would take the Committee through each line in the Bill. He asked Members for their opinion.

Mr D Ryder (DA, Gauteng) said that he presumed that the Committee would still have a discussion on the public participation process, and that going through the Bill line-by-line would not be the final step.

The Chairperson said that the Committee were briefed on the concepts and policy issues of the Bill. He asked the Committee Secretary to indicate when there would be public hearings.

The Committee Secretary, Mr Nkululeko Mangweni, replied that the public hearings are scheduled for 19 September 2023.

Mr Ryder said that it appeared as if the Bill was mainly about development charges, which raises alarm bells, because many municipalities have been imposing these charges for quite some time within their rights. The Spatial Land Use and Management Act (SPLUMA) further confirms that municipalities can impose development charges.

He was uncertain if the Bill was needed. He asked National Treasury to provide an explanation on why the Bill was needed when municipalities already have the right to impose development charges, as regulated through various other pieces of legislation.

He had major concerns that the Bill had been tagged as a Section 75 Bill. Noting the content of the Bill, he did not believe that the Bill had been appropriately tagged. He believed it should have been handled as a Section 76 Bill, with the appropriate public participation at a more devolved level than the National Assembly. 

He said that he noted the comment in various places that National Treasury does not believe traditional leaders needed to be consulted on this. He wondered if this was accurate, because it assumed that traditional leaders were happy that municipalities handled all of the issues relating to bulk infrastructure development on shared land.

He reiterated the question about the relevance of the Bill, because development charges were already regulated through other pieces of legislation. He asked if the Bill was intended to standardise the regulation of development charges, because that would contravene sections 151(3) and 151(4) of the Constitution, which says that national government cannot interfere with how local government does its work. It will force local government to standardise development charges. He said that no two municipalities are the same. There are massive differences. Some municipalities use development charges as incentives to develop, or as disincentives to develop, depending on their particular requirements at the time.

He believed the Bill would have been a great idea if there was no existing bulk infrastructure, and any new development would rely on developing new infrastructure. But, in cases where municipalities have underutilised surface capacity and existing infrastructure, they may want to incentivise the uptake of that capacity by offering competitive discounts and advantages to potential developers.

He noted that one of the presenters made a comment that municipalities are still able to decide whether they want to levy development charges or not, but that comment seemed to be contradicted in other parts of the presentation where it was said that the Bill intended to standardise the regulation of development charges.

He was pleased to hear that National Treasury would audit skills and capabilities, because there are probably less than 20 municipalities in the country that can effectively draft and negotiate engineering services agreements.

He looked forward to the inputs made during public hearings, especially inputs from the South African Local Government Association (SALGA). He hoped that the municipalities would also make presentations to reflect their perspectives, because metro municipalities are not the same as local municipalities.

He asked if the Bill acknowledged that the Municipal Infrastructure Grant (MIG), the Regional Bulk Infrastructure Grant (RBIG) and various other grants are not working as well as they should.

Mr M Moletsane (EFF, Free State) noted that one of the presenters mentioned that the municipalities should come forward regarding the assistance they need for capacitation in implementing the Bill. He said that not all municipalities will be bold enough to come forward and request assistance.

He also noted that the presentation emphasised that development charges are not new but are an existing source of municipal revenue. It is a matter of trying to formalise and standardise development charges.

He asked National Treasury whether it had any plans to support and equip the municipalities to have the capacity to implement the Bill.

Mr S Du Toit (FF+, North West) said that, from his point of view, the Bill is trying to supplement the work that the district municipalities are supposed to do regarding the provision of bulk services. It places a huge responsibility on the developers who are supposed to contribute to that specific municipal area by developing the area. It is known that most municipalities are in financial constraints.

He was concerned about the development charges because they are not necessarily ring-fenced. Should a municipality not honour their part of the deal in terms of the installation of bulk services, the municipality must reimburse a portion of the development charge. It is ultimately the developer that takes the risk to do the development. It may result in huge financial losses. It is common knowledge that district municipalities are failing the local municipalities at this stage, by not providing bulk services.

He asked about National Treasury’s view concerning district municipalities. He said that, in most cases, the focus is on funding the salaries of employees, directors and municipal managers, and not effectively delivering services and supporting the local municipalities.

He asked for more information on the proposed technical changes regarding the “parks and open spaces”.

The Chairperson reiterated Mr Ryder’s question about the Bill being a Section 75 Bill. Almost all Bills that relate to local government are Section 76 Bills.

He asked about SALGA’s position on the Bill. He asked whether SALGA had been consulted before the Bill was introduced to Parliament. He asked about SALGA’s response to the Bill being gazetted, as well as SALGA’s response to the Bill being before the National Assembly.

He questioned why it took so long to introduce such a Bill. The Bill seemed overdue. He said that he had been part of a team that played a role in shaping this model. He maintained the view that the values which underline the model is correct, but a plethora of issues had been underestimated. He believed that the Bill had the correct aim. He asked how many public submissions were processed by the National Assembly.

He raised concern that National Treasury had identified some mistakes with the Bill after the National Assembly had adopted it. He noticed that this has been happening quite regularly, which shows that the quality exchange between National Treasury and Parliament officials is declining.

Input by Parliamentary Legal Advisor

Adv. Frank Jenkins, Senior Parliamentary Legal Advisor, referred to the question about the tagging of the Bill. He said that the tagging of the Bill was done according to a test that the Constitutional Court set down, known as the substantial measures test. There are functional areas of concurrent legislative competence between national and provincial government. One would determine whether the Bill regulates those competencies.

Various areas in Schedule Four, part B, of the Constitution deal with municipalities. It sets out certain areas like municipal planning, health services and municipal public transport. The question is whether the Bill regulates these functional areas. Adv. Jenkins said that the Western Cape High Court had dealt with this question in another court case. One must remember that the test is for direct regulation and not for a knock-on effect. The primary purpose of the Bill is to amend the Municipal Fiscal Powers and Functions Act, and to provide a regime for municipalities to levy development charges. That provision has been in other pieces of legislation, so it is not a new matter. It deals with levying charges for development, so there is certainly a knock-on effect on areas such as municipal planning, municipal public works, etc. It is a side effect of the legislation. The Bill tries to set uniform practices around the specific area of development charges.

Therefore, Parliament’s legal unit advised the Joint Tagging Mechanism that the Bill does not directly affect those functional competencies in Schedules Four and five of the Constitution.

In so far as referrals to the National House of Traditional and Khoi-San Leaders (NHTKL), the Bill does not contain provisions that directly affect the traditional or Khoisan communities, nor does it contain provisions that will affect the customary law or customs of traditional or Khoisan communities. If a municipality decides to develop and levy development charges, it will certainly have to consult with the relevant traditional or Khoisan leaders, as is required in law.

Adv. Empie van Schoor, Chief Director: Legislation, National Treasury, added that the view expressed by National Treasury and the State Law Advisers is that it is a Section 75 Bill. It was then left for Parliament’s Joint Tagging Mechanism to decide whether that was correct or not.

Further Discussion

The Chairperson asked if questions had been raised about the tagging of the Bill in the National Assembly. If so, he asked who had raised those questions.

Ms Fanoe replied that there were no questions regarding the tagging of the Bill when National Treasury did its presentations in the National Assembly.

The Chairperson asked if anyone had raised questions about the tagging of the Bill during public hearings.

Ms Fanoe replied that only SALGA made a presentation during public hearings, but SALGA had not raised concern about the tagging of the Bill.

The Chairperson said that he presumed that the Members of Parliament would discuss the Bill within their caucuses, and thereafter make inputs on the Bill. He presumed that the tagging of the Bill would have been raised as an issue, but no one had raised that issue. He was surprised to hear that there was only one submission during the National Assembly public hearings.

Mr Ryder said that he disagreed with Adv. Jenkins’s view on the tagging of the Bill, but he had noted the response.

National Treasury’s Response

Ms Fanoe referred to the questions regarding the necessity of the Bill, especially since municipalities legally have the right to levy development charges. She said that development charges are regulated through various pieces of legislation, including SPLUMA, which does not put any norms and standards in place. Currently, provincial ordinances regulate development charges, but not all municipalities are subject to the provincial ordinances. The various provincial ordinances deal with development charges in different ways. This has resulted in many developers taking the municipalities to court regarding the development charges.

The legal uncertainties regarding development charges and it being regulated differently in various places are causing problems for municipalities to levy development charges. Although development charges are a source of revenue for municipalities, a number of municipalities are reluctant to levy development charges at this stage, due to battles with developers in this regard. The Bill does not intend to over-regulate development charges, but it intends to put standard practice in place to ensure uniformity. This is so developers will feel they are paying their fair charge, and municipalities may also optimise this revenue source. The legislation amendments have been implemented to make it a win-win situation for municipalities and developers. National Treasury had substantial consultation with all stakeholders involved in the process and numerous public consultations. Throughout its consultations, National Treasury has learnt a lot and tried to put a fair system in place.

She reiterated that the right still rests with the municipality to levy development charges. The reference to “may” implies that some municipalities may opt to levy development charges, while other municipalities will opt not to levy development charges. If a municipality opts to levy development charges, it will then make the whole municipal area subject to development charges. Certain rebates and exemptions may be provided only in terms of municipal policy. If a municipality wants to push certain developments and levy lesser development charges, it is still able to do that. The Bill does not infringe on the rights of municipalities.

She referred to the question about district municipalities not providing support to local municipalities. She made the example of water and sanitation, where either a district municipality is authorised to provide water and sanitation, or a local municipality is authorised to provide water and sanitation, but it will not be a joint responsibility in the same municipal area. However, it is not decently implemented as it should. For example, the conditional grant money and equitable share do not necessarily go to the municipality that provides the service; they go to the municipality that is authorised for water and sanitation, electricity and refuse removal. The responsibility is either with the district municipality or the local municipality. In situations where a district municipality is authorised to provide water and sanitation, and the local municipality also provides water and sanitation, the reality is that there should be a service level agreement and a funding agreement in place to regulate it, which is unfortunately not always the case.

Development charges will be linked to the municipality authorised for that service. For example, if the local municipality is not authorised to provide water and sanitation, it will not be able to levy a development charge. If the district municipality is authorised to provide water and sanitation, it will be able to levy a development charge.

She agreed with Mr Ryder’s comment that it would be good to hear the perspectives of municipalities during the public hearings. She suggested inviting some of the development institutions might also be helpful.

The Chairperson said that the public hearings are done as normal. The Committee would publicise the Bill and invite all stakeholders to comment. Much of this should have been done on the National Assembly’s side, because it is a Section 75 Bill.

Ms Mpyana referred to Mr Moletsane’s question about the capacitation to implement the Bill. She replied that it is true that not all municipalities would come forward to request assistance in terms of the capacity needs in their area. National Treasury held a pre-capacity workshop earlier this year in March, where it invited all municipalities. The pre-capacity workshop was to indicate how National Treasury would undertake the capacity assessment project. There was good representation, but some municipalities from other provinces did not pitch up. National Treasury will develop proforma development charge policies, and proforma bylaws and issue the regulations. It will also develop a development charge calculator to assist municipalities in implementing development charges.

National Treasury has been hands-on in assisting municipalities with their policies to levy development charges. It will also hold provincial training throughout the country, where all categories of municipalities will be invited for training on the various tools that have been developed. National Treasury is working hard to ensure the municipalities are well capacitated to implement development charges.

She referred to the question about the reinvestment. She replied that a provision has been put in the Bill to indicate that development charges should be used for the purposes for which it has been collected, which is for the provision of infrastructure. Municipalities are not allowed to use development charges for any other purpose, except for the provision of infrastructure. So, municipalities cannot use it to pay their employees’ salaries, nor can it be used for any other administrative function. It is only meant to be used for funding infrastructure.

She referred to the question about the technical changes to “parks and open spaces”. She said that section 50 of SPLUMA already indicates that, where a land development application provides for the use of land for residential purpose, such an application should be subjected to the cost of land for the provision of parks and open spaces. It is the responsibility of the applicant. The Bill provides that municipalities are also allowed to use development charges to contribute towards the cost of land for the provision of parks and open spaces, which the applicant has to pay for because of the proposed land development that they want to develop within the municipal area.

She referred to Adv. Jenkins’s question on why the Bill does not regulate the functional area of municipal planning. She replied that the Bill is purely meant to regulate the financial aspects of municipalities and not municipal planning. Municipal planning is being regulated through SPLUMA.

Ms Fanoe referred to the Chairperson’s question of why it had taken so long to process this legislation. She replied that the provisions in the Bill are something that came from a big request from the metros, particularly for this type of regulation for development charges.

The Chairperson said he had played a role in the integrated development framework. He clarified that he did not imply that the provisions should have been done along with the first local government Bills.

Ms Ngqaleni said that the research and the work that National Treasury had done concerning this legislation had been done a while ago, but some processes had to be complied with. She said that the development charges bring value into the system, because of the requirements to be transparent and account for what development means in terms of the bulk services, irrespective of who they serve. Even developments that serve the poor, for which development charges cannot be charged, need to be accounted for transparently and costed. The conditional grants come in to support developments that benefit the poor or enable the inclusion of the poor in some commercial developments.

Chairperson’s Comments

The Chairperson said he was very surprised to hear that only one stakeholder took part in the public hearings before the National Assembly. More policy issues will arise as this Committee processes the Bill.

He suggested that the officials from National Treasury take the Committee through each line in the Bill.

Municipal Fiscal Powers and Functions Amendment Bill

Ms Fanoe clarified that the Bill does not only deal with development charges. The Bill is intended to add a new section that deals with development charges in addition to what is in the current legislation.

Ms Mpyana took the Committee through the Bill, highlighting the proposed changes on the matters relating to development charges.

(See document attached for details)

Closing Remarks

The Chairperson noted a message in the chat box indicating that the Committee had received two public submissions so far.

The Committee Secretary said the submissions were from the City of Cape Town and the Free Market Foundation.

The Chairperson said he did not understand why the stakeholders had not participated in the National Assembly’s public hearings, but the Committee will process their submissions.

The meeting was adjourned.