BRIEFING DOCUMENT ON THE INTERVENTION IN UTHUKELA WATER (PTY)LTD WITH SHAREHOLDERS BEING THE AMAJUBA AND UMZINYATHI DISTRICT MUNICIPALITIES AND THE NEWCASTLE LOCAL MUNICIPALITY

1. PURPOSE

To provide a briefing report to the Select Committee on Local Government and Traditional Affairs on the intervention by the Executive Council of the Province of KwaZulu-Natal undertaken in terms of Section 139 of the Constitution at Uthukela Water and the present status quo in the entity.

2. LEGISLATIVE PROVISIONS

Section 106 (1) (b) of the Municipal Systems Act, provides as follows;-

“_ (1) If an MEC has reason to believe that a municipality in the province cannot or does not fulfil a statutory obligation binding on that municipality or that maladministration, fraud, corruption or any other serious malpractice has occurred or is occurring in a municipality in the province, the MEC must-

(b) if the MEC considers it necessary, designate a person or persons to investigate the matter”

Section 139 (1) (b) of the Constitution, provides as follows;-

“When a municipality cannot or does not fulfil an executive obligation in terms of the Constitution or legislation, the relevant provincial executive may intervene by taking the appropriate steps to ensure fulfillment of that obligation, including-

(b) assuming responsibility for the relevant obligation in that the municipality to the extent necessary to –

(i) maintain essential national standards or meet established minimum standards for the rendering of a service;

(ii) prevent that Municipal Council from taking unreasonable action that is prejudicial to the interests of another municipality or to the province as a whole; or

(iii) maintain economic unity; or”

3. BACKGROUND

The reasons for the section 139 (Constitution) intervention have their roots in a section 106 (Municipal Systems Act) intervention instituted by the MEC responsible for local government.

The background to the intervention in terms of section 139 of the Constitution is briefly the following :-

1. Resulting from the allocation of powers and functions to District and Local Municipalities, and the assessment in terms of section 78 of the Local Government: Municipal Systems Act, 2000, undertaken by the uThukela District Municipality, Amajuba District Municipality, Umzinyathi District Municipality, and Newcastle Local Municipality relating to the mechanisms through which the water service is to be delivered, the said municipalities in their capacity as Water Service Authorities, established uThukela Water Partnership.

2. The rationale behind the establishment of the partnership was ostensibly an economy of scale, and to provide water and sanitation services to all relevant communities as economically as possible.

3. uThukela Water (Pty) Ltd was subsequently established and considered as a municipal entity reporting to the four municipalities contemplated above in terms of the provisions of the Local Government: Municipal Finance Management Act, 2003. The uThukela District Municipality subsequently resiled from the partnership due to differences with the other partners of the partnership, and continued to perform its own Water Services Authority functions.

4. During the latter part of 2004 correspondence from various parties was submitted to the Department, and the Department was notified of various activities of uThukela Water (Pty) Ltd and the uThukela District Municipality.

5. As a result of these allegations, the MEC for Local Government, Housing and Traditional Affairs deemed it necessary to establish the details surrounding the establishment of uThukela Water (Pty) Ltd, and the legal, administrative, financial and service delivery mechanisms and the implications thereof, by instituting an investigation in terms of Section 106 of the Local Government: Municipal Systems Act, 2000.

6. Enhance Strategies CC was appointed to conduct the investigation with the following terms of reference:

6.1. research the process of establishment of the Company, its legal status, form and organisational structure;

6.2. determine the shareholding of the four water service authorities, the assets/liabilities contributed by each municipality and the computation of the share allocation;

6.3. determine the quantum of water and sanitation tariffs throughout the area served by the Company, subsequent to its establishment and assess the impact on the communities;

6.4. determine the extent to which the establishment of the Company has enhanced the provision of free basic services;

6.5. determine any possible personal or private business interests which directors and senior management, including family, spouses, partners or business associates, may have in the company;

6.6. determine the recruitment process followed in the appointment of senior management of the Company;

6.7. determine the remuneration and allowances paid to the directors and senior management of the Company;

6.8. ascertain the institutional framework for accountability and corporate governance;

6.9. determine the financial status and health of the company;

6.10. determine the reasons for and the process followed in the expulsion of uThukela District Municipality from the Company; and

6.11. determine the impact of such expulsion on water service delivery within the uThukela District Municipality as well as the remaining area served by the Company.

7. The findings of this report were conveyed to the Mayors of all four Municipalities, the Chairperson of uThukela Water (Pty) Ltd, the Minister of Provincial and Local Government, the Minister of Water Affairs and Forestry, and the Minister of Finance on 3 November 2005.
8. The Mayors of the relevant municipalities were also instructed to table the findings of the investigation report at a full council meeting, and were given 21 days to respond to the findings contained in the report. No formal responses were received from any of the municipalities.
9. A briefing session was held with the Minister of Water Affairs on 5 July 2005 resulting in the establishment of a multi-disciplinary task team, comprised of all relevant stake holders, to develop and implement a turn-around strategy.
10. This task team met on numerous occasions, and meetings were also held with the municipalities, which were attended by the MEC for Local Government, Housing and Traditional Affairs, as well as Senior Officials in the Department, in an attempt to assist the municipalities to regularise the provision of their water service authority functions in relation to uThukela Water (Pty) Ltd.
11. Despite undertakings from the municipalities to co-operate in the implementation of the turn-around strategy, no positive results were achieved due to a lack of commitment from the said municipalities.
12. On 17 October 2007, a meeting was held at offices of the Department, which was attended by Mayors and Municipal Managers of the parent municipalities as well as officials of the Department of Water Affairs and Forestry, and uMngeni Water. At this meeting the Department was informed that the municipalities intended adopting resolutions with regard to uThukela Water (Pty) Ltd, and the Department was also informed that the shares into uThukela Water (Pty) Ltd had finally been transferred to the parent municipalities on 11 September 2007.
13. The Department was subsequently informed that the municipalities all adopted resolutions that –
1. a due diligence investigation in respect of uThukela Water (Pty) Ltd be instituted forthwith, in order to inter alia establish the exact current assets and liabilities of the company;
2. a forensic investigation in respect of uThukela Water (Pty) Ltd be instituted forthwith to ensure accountability;
3. pending the results of the above and the discussion thereof and report thereon by the shareholders to their various Executive Committees, the planned joint assessment in terms of Section 78 of the Local Government: Municipal Systems Act, 2000, be held in abeyance;
4. the cost in respect of the above be carried equally by the three Water Service Authorities; and
5. the timeframe for completing these investigations be set at 2 months.

14. The Municipalities appointed Ngubane and Company on 31 October 2007, to perform the due diligence and forensic audit of uThukela Water (Pty) Ltd.

15. On 8 November 2007 Ngubane and Company met with the Managing Director of uThukela Water (Pty) Ltd, to commence the audit and investigation. However, Mr. Ngubane was advised by the Managing Director of uThukela Water (Pty) Ltd not to commence, in view of the fact that the Board had advised the parent municipalities of certain pre-conditions they wanted to be met before the audit and investigation was to commence.
16. The parent municipalities decided that they cannot be prescribed to by the Board of Directors of uThukela Water (Pty) Ltd, and by 20 November 2007 all three Executive Committees of the parent municipalities resolved that –

16.1 all the Non-Executive Directors of uThukela Water (Pty) Ltd be relieved from their duties for the duration of the investigation;

16.2 the Managing Director of uThukela Water (Pty) Ltd, for the duration of this investigation, be requested to be absent from office on special leave on full pay;

16.3 that the shareholder representatives be authorised to appoint an interim Administrator to perform the functions of the Board of Directors; and

16.4 legal guidance be obtained to ensure compliance with the relevant legislation.

16.5 It is evident that:-

· Continued complaints by communities of the non-delivery of water and sanitation services that have been carried by various provincial and national newspapers reflect poorly on public confidence in our system of local government, and indicate that there appears to be poor financial management within uThukela Water (Pty) Ltd.

· The lack of commitment by the parent municipalities and the poor performance by the Board of Directors of uThukela Water (Pty) Ltd, have given rise to an untenable situation, which is having a detrimental impact on the communities they serve.

· The non-compliance by the parent municipalities and the Board of Directors with legislative prescripts applicable to both municipalities and companies has created a legal risk that the actions of the Board of Directors may be declared to be ultra vires and void.

· Although the parent municipalities had embarked on a process to attempt a review of the performance of the municipal entity in compliance with sections 109 of the Local Government: Municipal Finance Management Act, 2003 and 93C of the Local Government: Municipal Systems Act, 2000, it is the view of the Provincial Executive committee that this is a case of “too little, too late”, and that an immediate intervention was required by the Provincial Executive Council to ensure service delivery and to restore governance in respect of this crucial function.

17. The Provincial Executive Council therefore resolved to intervene in Uthukela Water, as follows :-

17.1 The executive council intervenes in terms of section 139 (1) (b) of the Constitution in the Amajuba District Municipality, the Umzinyathi District Municipality and the Newcastle Local Municipality, and to assume responsibility for those municipalities’ water service authority functions;

17.2 Cabinet mandates and authorises the MEC for Local Government:-

a) to appoint a multi-disciplinary task-team of specialists with appropriate expertise and knowledge in the relevant disciplines to undertake a forensic investigation and an assessment of uThukela Water (Pty) Ltd, including of that entity’s company, governance structure and operational structure; provisioning, procurement and recruitment systems and practices, as well as the implementation thereof in the recent past; compliance with applicable legislation; verification of assets, liabilities, revenue and expenditure; and other related matters;

b) to prepare recommendations for the future provision of basic water supplies for the communities served by the Amajuba District Municipality, the Umzinyathi District Municipality, and the Newcastle Local Municipality, including of the future of the entity; the best means of providing such services, and any other recommendations flowing from the assessment process to be undertaken, as well as on the course of action and turn around strategy to be implemented as a result assessment of the process.

c) To undertake any actions he/she deems necessary arising from the recommendation process necessary for the provision of basic water supplies for the communities served by the Amajuba District Municipality, the Umzinyathi District Municipality, and the Newcastle Local Municipality in an efficient, effective and cost-effective manner, including;

i) to determine how best future water service provision in the area should be delivered, and through which structures, and if necessary to remove all Directors of uThukela Water (Pty) Ltd as contemplated in section 93G of the Local Government: Municipal Systems Act, 2000, and to liquidate uThukela Water (Pty) Ltd as contemplated in section 93C (b) of the Local Government: Municipal Systems Act, 2000, in the event that the performance review commenced by the parent municipalities justifies such a decision;

ii) to ensure the adoption and implementation thereof by the Amajuba District Municipality, the Umzinyathi District Municipality, and the Newcastle Local Municipality;

iii) to determine an exit and handover strategy to the entity or organs determined by the MEC as the best vehicle for future water service provision in the area;

17.3 Pending the outcome of the process referred to above, the MEC is mandated and authorised:-

a) to suspend or recall all Directors of uThukela Water (Pty) Ltd as contemplated in terms of section 93G of the Local Government: Municipal Systems Act, 2000;

b) to appoint a multi-disciplinary task-team of specialists with appropriate expertise and knowledge in the relevant disciplines to manage uThukela Water (Pty) Ltd pending the outcome of the 3-stage process referred to above.

4. CURRENT STATUS

1.1The following actions have occurred:-

· An interim Administrator, Mr D Naidoo of Umgeni Water, to perform the functions of the Board of Directors as per section 93H of the Municipal Systems Act, has been appointed.

· Mr Frank Stevens of eThekwini Metro has been appointed to manage uThukela Water (Pty) Ltd, to ensure service delivery, as well as to do an assessment of the operational structures, procedures, systems and policies of the entity.

· Ngubane & Co have been appointed as the preferred service provider, to do the performance review and forensic investigation originally intended by the parent municipalities.

1.2 It is necessary to involve the parent municipalities in the process to ensure continuity in the performance of the water function and this will assist with the adoption of outcomes of the intervention and the ultimate handover after completion of the intervention process.

1.3 It is clear that this intervention is legally complicated and complex. As the process unfolds in implementation, it will be required, from a legal perspective, that compliance with all legislation is maintained.

1.4 A meeting of all members of the intervention team including the departmental management responsible for the process as well as the administrator, technical support team and service providers undertaking the performance review and forensic investigation was held on 22 February 2008 and roles, responsibilities, timeframes etc. agreed to.