Municipal Fiscal Powers and Functions A/B: National Treasury response to public submissions

Meeting report

National Treasury response to public submissions on Municipal Fiscal Powers and Functions Amendment Bill

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury (NT), and Ms Mmachuene Mpyana, Senior Economist: Local Government Finance Policy, NT, took the Committee through the responses to the public submissions.

City of Cape Town

The City of Cape Town welcomed the definition of bulk engineering services, but required clarity or guidance on the process and frequency of activities to align the budget and spatial development frameworks. It was proposed that the words 'engineering services' be replaced with 'municipal engineering services,' and a concern was raised that this definition did not deal with the case where a private homeowners’ association was responsible for engineering services within the boundary of a common property.

There was concern that the definition of internal engineering services did not consider rare cases where bulk and link engineering services were part of internal engineering services. It was suggested that a clause be inserted to indicate that a municipality could, with the agreement of the developer, classify an engineering service as either external or internal. The proposed Bill was that in Section 9I, where a bulk or link engineering service was intended to service subsequent developments and traverse the internal boundaries of the land development by an applicant, both the municipality and the applicant must agree that both services must be regarded as external engineering services.

It was raised as a concern that there was a need to look at the relationship of the applicant referred to in the Spatial Planning and Land Use Management Act (SPLUMA), who was not necessarily the landowner, and the definition of 'own' in the Municipal Fiscal Powers and Functions Amendment (MFPFA) Bill. The National Treasury was, however, of the view that none of these terminologies was wrong, but it would be best to stick to existing practices and terminologies as far as possible, and make it to align with those concepts used in the SPLUMA.

Concerning Section 9F on the engineering services agreement, the City of Cape Town (CoCT) suggested that this clause be inserted in the SPLUMA, given that section 49 of the SPLUMA refers to the provision of engineering services, and this requirement would be imposed through planning legislation. The National Treasury had responded that the CoCT’s suggestion was not supported, given that the requirement to conclude an engineering services agreement was not a planning issue, but a legal issue, and any sphere of government could prescribe key matters to be regulated through an agreement.

In section 9G on the provision of external engineering services by landowner, the CoCT was of the view that this clause would, in practice, commit the City's budget prioritisation in areas which were not necessarily a priority. However, NT's response indicated that this view was incorrect, given that section 9G came into play in instances where the municipality did not have the funding or capacity to install the required infrastructure, and agreed with the applicant that the applicant would install this infrastructure.

The CoCT also raised concern that the Bill did not cater for a scenario where an applicant was responsible for the installation of a bulk engineering service if the land development required the installation of a bulk water engineering service other than the applicable service master plan or capital budget of the City, if the City, in the conditions of approval, required the applicant to perform the installation. The NT had responded that the provision of bulk engineering services was the responsibility of the municipality and not the applicant. However, the municipality may require that the applicant contribute towards the cost of providing these bulk engineering services to service their land development, or agree with the applicant to install the required bulk engineering services on behalf of the municipality instead of paying development charges.

Free Market Foundation

Ms Sandra Sekgetle, Director: Local Government Finance Policy, Intergovernmental Policy and Planning, NT, took the Committee through the concerns of the Free Market Foundation (FMF).

The FMF was of the view that regulating engineering services -- such as municipal roads, solid waste disposal, electrical street lighting, water, stormwater drainage and gas -- encroached unconstitutionally on areas of exclusive provincial legislative competence or matters of concurrent provincial competence.

Further, it was of the view that the memorandum of objects to the Bill allowed the National Assembly (NA) to override any amendments made by the National Council of Provinces (NCOP) regarding the MFPFA Bill. They further indicated that this would be a contravention of the Constitution and a violation of the rule of law.

The FMF acknowledged that the power of municipalities to impose taxes, levies and duties may be regulated by national legislation, but cautioned that such national legislation should not undermine provincial legislative powers or subvert parliamentary procedures.

Discussion

The Chairperson raised the point that sometimes the Committee received submissions that carried no substance, but given that the City of Cape Town was a metropolitan municipality, they had to be accorded the highest level of regard. Therefore, in principle, it should be that if people who were supposed to appear before the Committee could not make it, they must be given the same status as though they were present. That was the main reason it was important to summarise submissions precisely.

He added that following last week's debate, Parliament should not hand over some of its functions to the Executive. This was something that had been repeatedly raised and had gained a lot of support. This was not National Treasury's fault, but it was the responsibility of the Committee to put pressure on this matter.

Mr D Ryder (DA, Gauteng) said the submissions had been useful, although the focus was mainly on the Cape Town submissions, and not so much on others. Referring to the metro's general comments, which the Treasury had not necessarily focused on, he drew the Committee’s attention to page two, paragraph two of the submission, which stated that while acknowledging and accepting the principle of user pays, prospective micro developers often lacked upfront financing, which could impact on the viability of developments. What was being raised here was quite concerning, because they were saying that there was somehow a reduction in the pool of people who could afford property developers. This went against what this government had been trying to achieve in terms of ensuring inclusivity by lowering the threshold and barriers of entry, to create a more even playing field. This was mainly because the same developers that had been developing for the last years were still the ones that could continue developing. After all, they had the financial muscle behind them.

Mr Ryder indicated that he was unsure of the need for this Bill, as there was already legislation that gave authority. This was because the bulk contributions were already being levied by many municipalities. Therefore, there might be duplication, and any attempt to try a one-size-fits-all approach on this issue would take away the ability of municipalities to govern themselves. Was it not better to have the Bill in section 76, rather than in section 75?

Ms D Mahlangu (ANC, Mpumalanga) appreciated Treasury’s involvement with the metros and the South African Local Government Association (SALGA). In the presentation, the concerns of the City of Cape Town had been raised, and she believed that in the engagement with the CoCT, the responses from Treasury would have included the view of other municipalities and SALGA.

What would the impact be of changing the entire engineering services to municipal engineering services? What difference would it be if it was maintained as internal engineering compared to changing it to municipal engineering services?

Mr M Moletsane (EFF, Free State) echoed the point raised by Mr Ryder on having the Bill in section 76 instead of section 75. When the Bill was presented, the Minister of Finance had written a letter on 5 April to the Standing Committee, making some recommendations of some amendments not to be taken into consideration and not to be approved. What had been the progress of the two amendments?

The Chairperson commented that the provincial and national governments should not run away from their responsibilities. The Bill holds that the provincial government, in general, could respond. However, it would be irresponsible for the national government not to intervene within the constitutional constraints. However, if things are not working, there must then be a review of these processes.

He added that there was a need for this Bill, not because the national government wanted to unduly intervene in provincial governance. He asked for further clarity on section 76.

Had National Treasury received any public submissions on this Bill, including its constitutionality?

National Treasury's response

Adv Empie van Schoor, Chief Director: Legislation, National Treasury, said that the normal process had been followed regarding the Bill. Before going to Cabinet, a preliminary opinion was obtained from the State Law Advisor. Before the final version was tabled before Parliament, it was further scrutinised by the State Law Advisor.

The only change made in the National Assembly was a reference to this Act that was amended. Now that this was before this Committee, the National Treasury had requested two amendments.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said that what the Constitutional Court had stated was that a bill must have to deal with matters, and when those matters that it was dealing with in a substantial measure affected one of the items in Schedule 4 or 5 of the Constitution that set out the concurrent legislative competencies of provincial and national government, it must be a Section 76. However, nothing in the Bill stated it must be a Section 76.

Section E in schedule 4 and 5 dealt with local government issues. In terms of Section 44, where the national government could intervene under certain circumstances, not all of that legislation must be Section 76. When looking at Schedule 4, the competency of regional planning and development could be seen, and when looking at Part B, there was municipal planning. Both the state law advisor and National Treasury had looked at those competencies to determine if the Bill regulated them.

On the issue of the substantial measure of the Bill’s competencies, Adv Jenkins said that the Bill did not regulate municipal or regional planning. However, it created the opportunity for local government to levy charges when there were those kinds of developments to strengthen local government's maintenance, as well as the establishment of services. Nothing said the Bill must be a section 76, although it enabled development at the local government level. It did not regulate that development to the point where it fell within those concurrent competencies.

He added that there had been extensive consultation with the relevant stakeholders to ensure a correct classification of the Bill. This was because a wrong classification of legislation would inevitably lead to a challenge in the Constitutional Court, as had previously occurred.

Ms Fanoe responded on the necessity for the Bill, and said that the reference made to SPLUMA, that development charges may be levied, was correct. The understanding between the two departments from the inception of the SPLUMA was that the National Treasury would do the more detailed regulation. This was because the municipal user charges and municipal taxes should ideally be done by National Treasury, although it was currently a shared responsibility between National Treasury and the Department of Cooperative Governance and Traditional Affairs (COGTA).

What was quite important was what would happen if National Treasury did not regulate these charges. Currently, it was not just references to the SPLUMA that regulated development charges, as there were currently pro-provincial ordinances in place that regulated development charges. They were developed by different provincial administrations that put their own rules and regulations in place. The provincial ordinances did not cover all the municipalities within those specific provinces, and this was causing legal confusion. What was currently happening was that municipalities brave enough to levy development charges, were often open to litigation, while other municipalities that wanted to levy development charges did not do it because they were scared that they would face litigation that would keep them in the courts for long periods. Therefore, the reason for putting in place the legislation was to remove the confusion and create a more uniform system. However, this did not completely remove the autonomy of municipalities, as there was room for flexibility for substantial choices.

Regarding the reference to 'municipal engineering services' versus just using 'engineering services,' the main reason why that had been done was to create complementarity between the legislation, the Municipal Fiscal Powers and Functions Act and the SPLUMA, so that there were no different types of definitions throughout the legislation. In addition to that, although the CoCT had come to the Committee, National Treasury had received substantial input from municipalities during the public consultation process. This had been a rigorous process with various perspectives collected from different municipalities. National Treasury had taken a lot of time during the public consultations to work through the inputs, and to make sense of the feedback received from the municipalities.

Ms Fanoe said that National Treasury had not presented the two amendments of the Bill to the National Assembly. This was not because there was a lack of interest in making the presentation, but was because the two technical corrections had unfortunately been picked up only after the presentation was made to the National Assembly. That had been why the Minister wrote to the Chairperson of the Select Committee to ask that these be considered, so these amendments would, of course, need to be resubmitted to the National Assembly to consider as well.

Ms Mpyana responded on the issue of allowing development charges to be paid as an upfront charge. She said that although National Treasury was saying that development charges should be paid as an upfront charge, provisions in the Bill indicated that they could also be paid in tranches. This had been done as National Treasury had noted that other developments had been undertaken in various phases, so it would cost a lot of money for developers to pay upfront for the whole phases of the project. This allowed for the development of a payment schedule that indicated when each phase would be starting, including the amount paid for each phase.

The Bill made provision for municipalities to grant exemptions and rebates to developers. This consideration considered small-scale developers, to promote inclusivity in the system. These municipalities could grant them rebates or even exemptions, but they needed to comply with a set criteria and policies that the municipalities had set out.

Ms Mpyana said that National Treasury had consulted with the Department of Human Settlements (DHS), and they had welcomed the Bill, indicating their support. The issue that the DHS raised had been around contributing towards development charges, because they were of the view that their grants made provision for funding bulk infrastructure. However, National Treasury had indicated that although the grants did make such provision, there could be instances where one might find that the 30% earmarked towards the provision of bulk infrastructure might not be enough to provide the required infrastructure, thus prompting a need to top up, unless the municipality decided to grant an exemption or a rebate.

On the impact of referring to 'municipal engineering services' instead of 'internal engineering services,' Ms Mpyana told the Committee the definition that had been provided in SPLUMA for internal engineering services stated that these internal engineering services could be owned and operated by either the municipality or the private sector. That was the reason National Treasury was saying that there was a need to enter into an engineering services agreement, because in that engineering services agreement, there would also be a need to specify, once the infrastructure had been completed, who would be responsible for that infrastructure in terms of owning it, and also operating it, and they also had to ensure that it complied with the norms and standards.

Further discussion

Mr Ryder said that he found the comments given by National Treasury contradictory, specifically the issue of tranches cited by Ms Mpyana, including the ability of municipalities to deliver the charges in tranches. Looking at page 5 of the Bill, Chapter 3A, Subsection 5, it states:“Unless otherwise provided for in the conditions of approval of a land development, an applicant must pay the full amount of a development charge before developing or utilising the land…” Mr Ryder said that this indicated that tranches would fall specifically under "unless otherwise provided for the conditions of approval." This meant there was a need to apply for those tranches right up front and know what the project would entail. This was probably not a very fair way of looking at it.

He asked National Treasury to specify where the Bill explicitly said there would be a ring-fencing of the funds to ensure they were used for their intended purposes.

Different municipalities had different needs which were based on their varied circumstances. Therefore, bringing a Bill that would force all municipalities, despite their differences, to a one-size-fits-all approach was not constructive. It would not work for smaller municipalities that might not be able to draw up complex bylaws to deal with the different situations that were going to come into play.

Treasury's responses

Ms Fanoe said that ring-fencing was not part of the Bill. Reading through the sections in the Bill, there was no reference to accounting. However, the idea was to include the budgeting for development charges, as per the municipal chart of accounts, which was thorough, so that there was transparency. However, this was still a work in progress and more guidance would be given through the regulations and the guidelines. The whole idea was to make it easy for municipalities to comply -- not to make it an over-and-above reporting system, but to make it a part of the existing system.

On the contradictory remarks made by various municipalities, she said National Treasury did not receive comments from the smaller municipalities, but from the larger municipalities who wanted additional clauses in the Bill to ensure that the system was redesigned to be in line with current practices.

Regarding the tranches issue, Ms Mpyana said that Section 9A, subsection 5 of the Bill, as highlighted by Mr Ryder, stated that "…unless otherwise provided for in the conditions of approval…" That provision had been put in because it was linked to Section 53 of the SPLUMA, which states that the developers or the applicant could not be allowed to register a property unless they were fully compliant with all the provisions of the approval. Therefore, the Bill now states that unless otherwise provided for in the conditions for approval, it could either be indicated that the development charges would be paid upfront, in tranches, or once the development had been completed, it could be checked that the conditions of approval had been complied with before the property could be transferred or sold.

Although the Bill did not specify ring-fencing, Section 9A (3) indicated that development charges could be used only for the purpose for which they had been collected, and that was for the provision of capital infrastructure assets.

Other municipalities had raised concerns about the use of ‘developer’ or ‘landowner,’ while others disagreed with both. However, after the public consultation and engagement with various stakeholders, a decision was made to use 'applicant'. This was the terminology that was also used in the SPLUMA, and it was broad enough to cover the person that development charges would be claimed from.

The Chairperson said this was a good Bill, and it had been long overdue, though there were concerns that needed to be ironed out. The responses given by National Treasury were practical, but it was important to scrutinise their practicality, especially regarding what was happening on the ground. This was mainly because municipalities had diverse needs with different capacities to implement the Bill.

The Chairperson suggested giving everyone at least a week to go through the Bill, and the Committee would look at it clause by clause in the next meeting.

The meeting was adjourned.