ATC231011: Report of the Select Committee on Finance on the Municipal Fiscal Powers and Functions Amendment Bill (National Assembly- Section 75, B21b-2022), Dated 10 October 2023
NCOP Finance
Report of the Select Committee on Finance on the Municipal Fiscal Powers and Functions Amendment Bill (National Assembly- Section 75, B21b-2022), Dated 10 October 2023
1.Introduction
The Municipal Fiscal Powers and Functions Amendment Bill (MFPFAB) seeks to amend the Municipal Fiscal Powers and Functions Act (MFPAFA) of 2007; to establish an unambiguous, fair and consistent basis for municipalities to recover Development Charges (DCs) for all new land development projects that require statutory approvals through the municipal land use planning system; bring about a more standardised framework for financing municipal infrastructure; enable applicants to accurately estimate their DC’s liabilities; and ensure that municipalities can provide the required infrastructure timeously National Treasury (NT).
2.Public Participation Process
On 05 September 2023, the Select Committee on Finance (SeCoF) received a briefing on the MFPFAB from NT. The Committee received two written submissions from the Free Market Foundation (FMF) and the City of Cape Town (CCT). On 19 September 2023, NT responded to the issues raised in the two submissions. The Committee held a meeting on 26 September 2023, to deliberate further on the policy aspects of the Bill, before the adoption of the report, on 10 October 2023.
3.Objectives of the Bill
The objective of the MFPFAB is to amend the MFPFAA, 2007, to insert certain definitions; to regulate the power of municipalities to levy DCs; to set out the permissible uses of income from DCs; to provide for the basis of calculation of DCs; to provide for municipal DCs policies; to provide for community participation and making of by-laws in order to give effect to policy on DCs; to provide for engineering services agreements; to provide for the installation of external engineering services by applicants instead of payment of DCs; to provide for the consequences of non-provision of infrastructure by a municipality; to provide for rebate and exemption on the payment of DCs; to provide for dispute resolution, delegations and financial misconduct and transitional provisions relating to DCs; to empower the Minister to make regulations for the effective implementation of matters relating to DCs; to amend the Spatial Planning and Land Use Management (SPLUMA), 2013; and to provide for matters connected therewith.
4.Key issues raised in the submissions and responses by the National Treasury
The two submissions received primarily focused on engineering services-related concerns, particularly the technical amendments to the definitions; the engineering services agreement and the installation of bulk external engineering services by the landowner; and the constitutionality of the MFPFAB.
4.1Definitions
The City of Cape Town (CCT) sought guidance on the process and frequency of activities to align the Budget and Municipal Spatial Development Frameworks (MSDF). NT committed to providing guidance in this regard, through the DC guidelines which will be issued once the Bill has been enacted.
On a proposed recommendation that the definition of internal engineering services should be replaced by "municipal engineering service", NT explained that as defined in section 1 of SPLUMA, an internal engineering service means an engineering service within the boundaries of a land area which is necessary for the use and development of the area and which is to be owned and operated by the municipality or service provider. The onus rests on either the municipality or a service provider to agree and indicate the party that would be responsible for the ownership of the internal engineering services after completion.
A concern was raised that at present, it is confusing to work through two different laws to piece together the process required when requiring municipal engineering services. A recommendation was made that NT should look at the relationship of the applicant referred to in SPLUMA, who is not necessarily the land owner, and the definition of owner in the MFPFA. NT expressed its view that none of these terminologies is wrong, however, it would be best to stick to existing practices and terminologies as far as possible and it makes sense to align concepts with those used in SPLUMA. NT explained that the definition of the applicant, as contained in SPLUMA, is broad enough to include a person to whom the land concerned has been made available for development in writing by an organ of the state or such person’s duly authorised agent; and/or a person acting as the duly authorised agent of the owner.
A concern was raised that the definition of internal engineering services does not consider rare cases where bulk and link engineering services are part of internal engineering services. A proposal was made to insert a clause that, in certain cases, a municipality can, with the agreement of the developer, classify an engineering service as either external or internal. NT explained that this concern has already been addressed in section 9I, which indicates that “where a bulk or link engineering service is intended to service subsequent developments and traverse the internal boundaries of the land development by an applicant, both services must be regarded as external engineering services”. NT proposed that the Committee considers refining this section 9I to read as “where a bulk or link engineering service is 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”.
Therefore, there are no proposed Bill amendments for consideration by the SeCoF on the first three abovementioned definition proposals.
4.2Engineering Services Agreement
The CCT recommended that the engineering services agreement clause be inserted in SPLUMA given that section 49 of SPLUMA refers to the provision of engineering services and this requirement will be imposed through planning legislation. NT did not support this suggestion given that the requirement to conclude an engineering services agreement is not a planning issue, but a legal issue and any sphere of government can prescribe key matters to be regulated through an agreement. In this instance, the Bill makes provision for a municipality and applicant to conclude the engineering services agreement to regulate key matters that must be considered when concluding an agreement to give effect to Chapter 3A of the MFPFA.
On the City’s recommendation that sub-clause (v) should be removed from the Bill as it cannot contractually commit to future repayments to developers because that might not be in line with their budget process and budget provision, NT clarified that subsection (v) does not refer to repayments but instead refers to engineering and other standards to which the installed internal engineering services or external engineering services must conform.
4.3Installation of external engineering services by the land owner
The CCT raised a concern that in practice, clause 9G, which provides that a municipality must reimburse a developer the cost of installing bulk engineering services where it exceeds the development charge liability, would then commit its budget prioritisation in areas which are not necessarily a priority in terms of the Integrated Development Plan (IDP). The City recommended the following amendment: ".......development, the municipality may reimburse or offset the amount in excess of the development charge provided that it forms part of the municipality's master planning and capital budget prioritisation............". Alternatively, the City requested that the clause be deleted as it could create unrealistic expectations with developers and skew the alignment of the municipality's budget priorities and IDP.
NT explained that the City’s view is not correct given that section 9G comes into play in instances where the municipality does not have the funding or capacity to install the required infrastructure and then agrees with the applicant that the applicant will install this infrastructure on its behalf. The municipality is only expected to reimburse the applicant if the municipality has agreed with the applicant that the applicant installs infrastructure of a greater capacity than what his/her actual land development requires. In this instance, the municipality has no choice but to make the necessary budgetary provisions to reimburse the applicant the excess amount unless the applicant waives his/her claim.
The City raised a concern that Section 65(2) (c) of the Municipal Planning By-Law (MPBL) provides as follows: An applicant is responsible for the "(c) installation of a bulk engineering service if the land development requires the installation of the bulk engineering service other than by the applicable service master plan or capital budget the City, and if the City in the conditions of approval requires the applicant to perform the installation”. However, this scenario is not catered for in the amendments to the MFPFAB. NT clarified that while the provision of bulk engineering services is the responsibility of the municipality and not the applicant, the municipality may require that the applicant contributes towards the cost of providing this bulk engineering services to service his/her land development or agree with the applicant to install the required bulk engineering services on behalf of the municipality instead of paying DCs. This means that a municipality can only levy DCs for providing bulk engineering services which it is constitutionally mandated to provide.
4.4Constitutionality of the Bill
The FMF submitted that, in purporting to legislate about engineering services that include systems for the provision of municipal roads, solid waste disposal and electrical street lighting, the 2022 MFPFAB encroaches unconstitutionally on areas of exclusive provincial legislative competence. NT responded that Schedules 4B and 5B of the Constitution are not applicable as they relate to this Bill and the Bill does not regulate the provision of engineering services but rather the power of the municipality to levy DCs to fund the provision of engineering services.
The FMF further commented that the memorandum about the objects of the Bill maintains that the National Assembly (NA) by mere ordinary majority, overrides any amendments made by the National Council of Provinces (NCOP) to the Bill. The FMF is of the view that that would be a contravention of the Constitution and a glaring violation of the Rule of Law. In response, NT explained that the Bill has been tagged by the Joint Tagging Mechanism of Parliament as a Bill that should follow the procedure set out in section 75 of the Constitution. This is not in contravention of the Constitution or the rule of law.
The FMF further submitted that the Constitution states that, if authorised by national legislation, a municipality may impose taxes, levies, and duties appropriate to local government, and that the power of a municipality to impose such taxes, levies or duties may be regulated by national legislation. It, however, does not authorise the making of national legislation which undermines provincial legislative powers or seeks to subvert parliamentary procedure. NT noted the comment and clarified that before the Bill was introduced in Parliament, it was certified as constitutional by the Office of the State Law Adviser.
None of the comments raised by the FMF were considered by the NT.
5.National Treasury’s proposed technical amendments to the Bill
5.1Clause 1: Development charges definition
The proposed amendments seek to clarify that a DC may contribute to the cost of capital infrastructure assets for engineering services; or such cost as well as the cost of land for parks and open spaces in respect of an application for the use of land for residential purposes; or both these costs as well as, if approved by the Minister for municipal services other than engineering services. Under subsection (b) the term “land for parks and open spaces” is used instead of “open parks and spaces” to accord with the terminology in SPLUMA while under subsection (c) the cost of municipal services other than engineering services is included.
The definition would then read as follows: “Development charges” means a charge levied by a municipality in terms of section 9A(1)(a) and contemplated in section 49 of the SPLUMA, which must contribute towards (a) the cost of capital infrastructure assets required to meet increased demand for existing and planned external engineering services; or (b) the cost referred to in paragraph (a) and the cost of land for parks and open spaces if the land development application provides for the use of land for residential purposes; or (c) the costs referred in paragraphs (a) and (b) and, with the approval of the Minister, the cost of municipal services other than engineering services.
5.2Clause 1: Capital infrastructure assets definition
The proposed amendment seeks to clarify that municipalities can use DCs to contribute to infrastructure to service parks and open spaces and municipal services. Therefore, “capital infrastructure asset” means land, property, building or any other immovable asset, including plant and equipment that accede thereto, which is required for the provision of an engineering service, parks and open spaces or a municipal service.
5.3Clause 4: Section 9G (7)
NT picked a typographical error which makes the intention of subsection (7) incorrect. The amendment proposes to address the omission of the word “not” in section 9G (7) so that it reads as follows: Section 9G (7) (clause 4): If in the circumstances provided for in subsection 9G (6), the municipality does [not] require the installation of link engineering services to accommodate a greater capacity, the municipality must reimburse or off-set the amount of the development charge by the difference between the costs of the link engineering services installed, and the costs of those link engineering services that would have been required for that land development. Section 9G (6) reads “A municipality may require that link engineering services are installed to accommodate a greater capacity than that which is required for the land development, in order to support future development in the area of the land development”.
5.4Clause 4: Section 9I
NT further proposed to substitute clause 9I for the following: Where a bulk or link engineering service is intended to service subsequent developments and traverse the internal boundaries of the land development by an applicant - (a) the municipality and the applicant must agree that the service must be regarded as an external or internal engineering service; or (b) if the municipality and the applicant do not agree as contemplated in paragraph (a), the municipality’s determination applies.
6.Committee’s observations
6.1The Committee notes that the two submissions received primarily focused on engineering services-related concerns and agrees with the NT’s replies.
6.2The Committee takes the submission from the CCT very seriously, as it is a major metropolitan municipality and has given its submission appropriate attention. The Committee regrets, however, that it disagrees with almost all the CCT’s proposed amendments. One of them has prompted rewording of an amendment NT had already brought to the Committee. Many of the proposals can be addressed by regulations and NT will attend to this.
6.3The Committee notes the response from NT on the constitutionality of the MFPFAB and its Joint Tagging Mechanism as a section 75 Bill, that it obtained approval from the State Law Advisors, who expressed the view that the MFPFAB was constitutional, and has been tagged by the Joint Tagging Mechanism of Parliament as a Bill that should follow the procedure set out in section 75 of the Constitution and therefore does not contravene the Constitution. The majority in the Committee agree with this. The DA believes that the tagging is wrong as the bill is undermining a municipality’s ability to operate independently and due to the tagging may potentially have been ignored by a municipality assuming that a section 75 Bill does not impact them.
6.4The Committee further notes the response from the Parliamentary Legal Services Unit that, there is nothing in the MFPFAB that suggests it is a section 76 bill, attention was paid to what the Department and State Law Advisors have suggested, the tagging of the Bill was done according to the Constitutional Court’s substantial measures test, Parliament’s Legal Services Unit advised the Joint Tagging Mechanism that the Bill does not directly affect functional competencies in Schedules Four and Five of the Constitution, the Bill does not contain provisions that directly affect the traditional or Khoisan communities, nor does it contain provisions that will affect their customary law or customs and that no one else raised this matter, other than SeCoF. Emphasis was made that it would be wrong to process a section 75 Bill as section 76. The majority in the Committee agrees with this interpretation.
6.5The Committee notes that neither the NA nor the stakeholders during the NT’s public consultation process raised issues on the constitutionality of the Bill. The Committee further notes that while the NT consulted the South African Local Government Association (SALGA) before the Bill had been introduced to Parliament, SALGA did not make a submission before it. These observations suggest that there is significant consensus on the constitutionality of the Bill. In particular, even SALGA, which usually jealously defends the powers and functions of local government, has not objected to the Bill.
6.6The Committee notes NT’s explanation of the benefits of the proposed amendments to the engineering services, which include complementarity with SPLUMA and MSA, to use the same definitions; and that the engineering system allows the emerging developers to pay DCs upfront or in tranches and the municipalities may grant rebates and exemptions if they comply with the criteria set out. The Committee agrees with NT on this.
6.7The Committee notes NT’s response to the necessity of the MFPFAB that SPLUMA does not put any norms and standards in place; and that the four provincial ordinances which regulate the DCs currently in place are creating confusion, leading to litigations.
6.8The Committee notes NT’s explanation that Section 93A of the MFPFAB made a provision that the DC should be used for the purposes for which it has been collected, which is funding capital infrastructure assets, and that the aim is to include budgeting for DCs. The Committee raises a concern that ring-fencing does not always happen and neither NT nor the Provincial Treasuries have the capacity to monitor that the money ring-fenced is used for reasons set out in the legislation.
6.9 The Committee is concerned that the Bill appears to follow a one-size-fits-all approach which is not constructive, will not necessarily work for some municipalities, and might require complex by-laws. The Committee notes NT’s response that the Bill was crafted with some degree of flexibility and transparency and it creates a balance between the municipality and the developer. The Committee is not convinced by NT’s response and urges it to monitor progress in this regard and make the necessary amendments should this approach create problems.
6.10The Democratic Alliance wants its concerns noted about the rigidity of the Bill and its failure to recognise the very different circumstances in each municipality and questions the degree and value of the consultation process.
6.11The Committee once again, expresses a concern that, while the municipalities are expected to come forward regarding assistance for capacity building in implementing the Bill, not all municipalities will do so, as often happens. The Committee is very concerned about the capacity of the municipalities to implement this Bill and NT’s capacity to monitor its effective implementation.
6.12The Committee is concerned that the Bill may reduce the ability of municipalities to diversify and notes that contradictions are inevitable and that managing diverse local municipalities and the powers they exercise are complex matters. NT’s replies in this regard are too glib. Again, what ultimately matters is what happens in practice, and NT needs to consider amendments in its approach should it be necessary.
6.13The Committee notes that the Department of Human Settlements, as the custodian of SPLUMA was involved in the process, welcomed the developments, and acknowledged that while the grants they administer make provision for bulk services, such a provision may not be enough for the municipal infrastructure required. This too is a matter of serious concern.
6.14The Committee notes that NT had identified some technical mistakes with the Bill after the NA had adopted it. The Committee notes that the Minister of Finance wrote a letter to SeCoF, requesting that the proposed amendments to the Bill be considered. The Committee is concerned that mistakes of this nature have been happening quite regularly, which signals that the quality of Bills being brought to Parliament is declining.
7.Committee’s recommendations
7.1While the Committee believes that the MFPFAB is a very good, necessary, long overdue Bill, it is concerned about the capacity of NT and the provinces to monitor its implementation and the capacity of municipalities to implement it. This has also been raised in several paragraphs in Section 6 of this report.
7.2Several of the observations above suggest recommendations that the Committee expects NT to take seriously.
7.3NT should consider effective sanctions against (including withholding funds from) municipalities that do not use funds allocated for capital infrastructure assets.
7.4NT has to support and equip municipalities with the skills to effectively draft and negotiate engineering services agreements.
7.5The Committee accepts the technical amendments proposed by the Minister, mainly as noted in paragraph 5.4 above, and returns the Bill to the NA for further consideration.
7.6The Committee recommends that, in the next term of Parliament, the Executive after consultation with the relevant stakeholders, needs to consider an overall review of the powers and functions that ensure that they are more conducive to the service delivery, development and other crucial objectives of local government and serve to strengthen local government through more effective support and cooperation from national and provincial government. The powers and functions of the three spheres and the need for effective cooperation among the spheres should be shaped by the needs of a developmental state.
8.Conclusion
8.1The Committee agrees with the amendments proposed in the Bill.
8.2The Committee supports the new amendments to the Bill in section 5 of this report and refers the Bill back to the NA for further consideration.
8.3The Committee reports the Bill [B21B-2022].
Economic Freedom Fighters rejected the report.
Report to be considered