Municipal Finance Management Bill: hearings

Appendix 1

The White Paper on Local Government's approach to municipal lending is, "a vibrant and innovative primary and secondary market for short and long term municipal debt should emerge. To achieve this, national government must clearly define the basic rules of the game". (white paper on local government, 9 March 1998) The National Regulatory Framework for Municipal Borrowing and Financial Emergencies, approved by Cabinet in 2001, similarly identifies the importance of borrowing in the municipal sphere of government, to achieve rapid delivery in the short to medium term, through the development of long-term debt instruments in the market. The Intergovernmental Fiscal Review for 2001 states "The public sector alone does not have the resources to meet infrastructure requirements of communities.... national government spending on municipal infrastructure can complement private sector investments by focusing on those municipalities unable to access private capital." (IGFR 2001, p 174) We welcome this Bill and commend the Treasury for its far-reaching intentions to achieve sound financial practice in the municipal sphere through the introduction of the Bill, and of recognising legal and regulatory constraints to lending.

Whilst the banking sector has in its engagements with government on the Bill, emphasized the importance of good business practice in municipal government, we also recognise that municipalities are different to businesses in two main respects:

their primary business is fixed to a geographic and demographic reality i.e. when business is bad they can't seek new markets, liquidate or seek automatic recourse to other spheres of government to fix financial problems, and secondly, municipalities must service social and economic needs of the population within their areas of jurisdiction i.e. they have a constitutional obligation to conduct certain basic minimum activities with revenues collected from taxpayers. It is for these two reasons; stronger regulatory measures are required, than would normally be found in the private business environment. In addition, the fact that lending for municipal infrastructure is mostly of a long-term nature, means that the lending environment must be secured through legal and regulatory means to offer stability and security. We see this Bill as the statutory basis for achieving this.

In the National Regulatory Framework for Municipal Borrowing and Financial Emergencies, the approach set out by Treasury is one in which the market should be encouraged to meet as much demand for capital as is possible and affordable -which also helps to ensure funds are allocated by the market to projects and municipalities that prove themselves creditworthy - which in turn encourages sound local financial management practices. Creditworthiness depends fundamentally on assessment of results. It is therefore necessary that credible, accurate and consistent information is readily available for each municipality wishing to borrow. Collectively, this information provides trends, which offer useful insight into the predictability of future performance. Perceptions of stability are largely based on the legal and regulatory environment because this is what clarifies and offers a sense of predictability about how matters will be dealt with in the future, which in turn enables more accurate pricing and appropriate supply of funds through the creation of secondary markets. The reporting and disclosure provisions of the Bill go a long way towards making this a reality.

This year's national budget sees a real increase of 11,4% to municipal government (R8, 5 bil), growing at a 6% per annum to R10 bil. in 2004/2005. Future projected growth is based on the assumption that by 2005, revenue collection by municipalities will have increased substantially. It is also based on an assumption that creditworthy municipalities are expected to fund their own capital expenditure through municipal borrowing. We acknowledge there are differences in revenue collection capabilities both in terms of revenue base and capacity to collect. We are aware for instance that Johannesburg has improved substantially to achieve 90% collection, whilst Durban has achieved 110%. We are also aware however, that there will be many municipalities who fall far short of these good achievements. The objective to optimise private capital funding in municipal areas which are creditworthy, thereby freeing up scarce fiscal resources for those municipalities which are not, means that lenders must have reliable information; remedies and recourse. Whilst we have commented on these provisions in the Bill, the overall intention of the Bill is in our view correct.

The gains the MFMB aims to achieve in improving municipal financial management and thereby creating a sound platform for lending should be seen in conjunction with the provisions of the Municipal Structures and Systems Acts. Whilst there is some scope for rationalizing these three pieces of legislation to avoid overlaps, we would urge that the scope created for sound borrowing and lending practices in the MFMB, is not undermined or weakened by substituting provisions in the other two Acts. In particular, the scope for political discretion determining the fate of a municipality in financial trouble or procedural hurdles for partnerships with the private sector brings uncertainty into the lending environment.

The problems in the municipal lending environment, from a lenders perspective revolve around factors, which prevent municipalities getting access to credit, made more difficult by a market, which is highly selective. For many larger secondary cities, further borrowing off their existing own revenue base can not occur, because their creditworthiness may be threatened i.e. further sustainable revenue sources need to be developed. For the metro's, there is still significant scope for borrowing, and the problem in metro's therefore, is not over-borrowing. The market is selective because there are no sovereign guarantees in place and for the level of risk, investors and lenders can get better returns elsewhere. This in turn lays a heavy burden of proof on municipalities to establish creditworthiness, credible guarantees and forms of security, which have value and are accessible.

Furthermore, lenders would like greater certainty regarding the rules of the game in the market by public finance institutions. Whilst there is growth in private debt of new loans taken up by municipalities, that of DBSA supercedes this, and there are some instances where these could have been privately issued. Commercial lenders are therefore faced with uncertainty as to whether they should risk their resources pursuing municipal borrowing or not. In instances where municipalities issue tenders for finance, private sector role-players are competing against DBSA for these tenders.

Treasury estimate that some R32 bil. debt is on the books of municipal governments; further that most of the new debt is of a short-term nature. Long term lending to municipalities has been flat for the past 4 years at about R11 bil. Credit enhancement measures (municipal bond insurance; Treasury Trusts, interception of intergovernmental transfers, bond banking and debt syndication) are underdeveloped because of a historic situation in which debt was perceived to be secured by government guarantees, and since then, because of a lack of confidence that credit enhancement can really address systemic risks in this market. Assumptions by Treasury in their budget strategy, indicates a gap between the reality of where we are and where it is intended municipalities should be in 3 years to 5 years from now. To fill this gap, numerous actions in all spheres of government and the private sector will be needed. The importance of the Bill however, is that it provides nationally accepted standards, rules and responsibilities which are critical to sound financial management and responsible lending. The Bill itself can not deal with capacity; it can not create loan agreements - what it can do is lay the basis for resolving many of the problems which prevent creditworthy municipalities from accessing credit. The Bill compels us all to meet our respective responsibilities according to the same set of clear rules in the municipal sphere.

Our submission of 8th February 2002, speaks to the significance of certainty; security; stability and transparency as the fundamental building blocks of a robust and vibrant lending environment. The critical issues below are an elaboration of these building blocks. The Bill in our view speaks satisfactorily to most of these critical issues, and where we have good reason, we have suggested changes to the provisions as indicated in our submission.

General sectoral problems mean that there is systemic risk in the municipal market. Now that the amalgamation process is complete, there is greater jurisdictional certainty and together with the legal and regulatory certainty provided by this Bill, government has taken some significant steps towards removing systemic risks. knowledge of, and information about a particular municipality will enable case-by-case risk analysis - disclosure and guidelines on reporting in the Bill provide the foundations. Therefore, even if capital markets are slow to respond, individual municipalities can access credit directly or through intermediaries, driven off their own viability.

To our knowledge, there is still a great deal to be done in consolidating balance sheets, liabilities, specifically revenue and encumbered assets, of the newly amalgamated municipalities. Since these are fundamental to credit ratings, we would suggest that the certainty created by finalisation of the demarcation process, be supported by targeted work in the municipal sphere, with the assistance of other spheres, development finance institutions and existing capacity in municipalities, which could be shared. We would suggest that the Bill go further by providing for the Minister to declare a specific date by which consolidation of financials and balance sheets be achieved.

The Municipal Demarcation Board (MDB) acknowledged in its paper on the financial impact of demarcation in 2000, that financial sustainability was seen as essential to the success of the demarcation process. In the long run it is likely that the new municipalities will be better off financially, but in the short to medium term, some may be worse off. Since lending is identified as an important component of the overall financial strategy for municipalities delivering, but lenders have limited access to reliable information, sustainability cannot be assessed. Financial stability and sustainability of municipalities, heavily reliant on own revenue generation, means that the state of the local economy, its diversity and prospects, has a significant impact on credit assessments by lenders. Therefore, lenders are unlikely to enter municipalities, which have a weak economic base, unless significant revenue streams from other spheres of government are guaranteed. A municipality's creditworthiness can be threatened by three sets of factors: Political instability in the council or between the council and other spheres of government; poor management; negative local economic growth. Experience suggests that where the cause of financial distress lies in political level conflicts, existing provisions for intervention provided for in the constitution take too long, and are subject to the discretion of parties involved. In many cases, by the time that meaningful action is taken, it is too late. In the case of the latter two causes of financial distress, good and timeously disclosed information should trigger actions by officials designated to deal with financial management, and lenders, to begin managing the municipality out of the problem. i.e. the rules regarding what triggers effective action must be clear, so that the outcomes can be more certain.

The Municipal Demarcation Board stated in the same paper, that a lowering of quality/negative re-rating of amalgamated municipalities would require outside intervention, or upward capital cost change. Further, that the poor tradability of bonds in the secondary market has no direct bearing on municipal exposures, only that future ability to raise capital will be made more difficult. Off a point of departure that financial sustainability is important, and given the reliance in policy and municipal financial strategy on lending, it is clear that some basics need to be put in place - municipalities need to be rated if there is to be lending. Rating cannot occur if the information is not available, and ratings are likely to be lower if there is no certainty. Poor tradability of bonds lowers their value, thereby driving up risks and costs because less finance would be sourced through pooling in secondary markets, and more would have to be sourced directly in primary markets - which means less municipalities will access private finance.

Whether less municipalities means less smaller problems i.e. consolidated municipal areas are more creditworthy; or less bigger problems i.e. consolidated areas means greater burdens off the same revenue base and therefore less creditworthy, makes no real difference to what lenders need to make an assessment - certainty that information is accurate and credible, stability in that past trends are likely to persist, and security that remedies will be swift, fair and accessible - the accuracy of a risk assessment, and therefore pricing of debt, will be driven off the credibility and availability of information. For this reason, reporting and disclosure are essential to financial sustainability, and effective intervention mechanisms to stability and security, and we support the strongest essential provisions in this regard.

Lending until now has been undertaken under fairly outdated and draconian conditions. Historically a perception existed in the market, that government guarantees would cover loans. Lending has taken place in a somewhat ad hoc manner. Trends in the form of municipal debt show that loan debt has been substituted for securities debt because of poor financial information and unclear rules. Security for municipal lending therefore constitutes a new asset class, which requires a clearer understanding of security in the municipal lending sphere i.e. what you can and can't take as security. Whilst the Bill only limits recourse on essential assets, and leaves the discretion to decide the types of security that can be offered, "predictable" security is yet to be tested in the market. Part of the assessment of whether a remedy is suitable or not, includes looking at whether legislative provisions for remedies, and rules regarding access to security are adequate. Good provisions, which clarify rights and remedies in this regard, help to reverse the trends on debt type. We believe that the Bill could go further in respect of provisions regarding accessing security.

Clarity lowers costs because rules are up front. Where there is existing debt, clarity is still needed on how to secure it in the absence of guarantees from other spheres, and in the absence of adequate financial systems at municipal level, which enable lenders to see what revenue streams or assets remain unencumbered. The ability for political decisions to affect revenue flows through amendments to powers and functions, and restructuring of utilities, further adds to the problem of realizing access to securities. Access to security and remedies in the event of default are as much factors in assessing risk as are repayment capacity.

Remedies like restructuring of debt, loan covenants in contracts have little bearing when there is financial collapse swift, fair and effective remedial action makes lenders more comfortable, and also enables negative action to be confined to the municipality involved. Thus, absence of effective remedies damages municipalities who are compliant who could access debt in the market, and heightens the scope of demands for guarantees.

Procedures by which debt should be incurred, and respective responsibilities involved are well covered in Chapter 5 of the Bill. In view of the above reasons, we have made specific comments on these responsibilities as we believe that the Bill could go further in establishing rules by which access to security will occur, whether a financial emergency has been declared or not.

Municipal revenue is mostly derived from own revenue sources (90%+), which should offer an important opportunity for leveraging private capital. It is estimated that municipalities who are creditworthy could handle 2 to 4 times the current levels of debt, thereby enabling more delivery sooner, and spreading the cost over time, lessening the strain on municipal cashflow in the short to medium term. It is mostly metros who could leverage 2 to 4 times through borrowing, and given that there is a concentrated of South Africa's population in urban areas, this is an important area to focus on. For most already indebted large secondary cities, scope for further debt off existing revenue is limited. Unless there is a dramatic increase in their ability to collect and/or grow their revenue base, their ability to borrow will be constrained by the extent to which intergovernmental transfers increase their total revenue.

Transfers through the Division of Revenue are typically small contributors by comparison, and intergovernmental transfers from national and provincial spheres have in the past been uncertain. The 3-year budgeting exercise, linked to IDP's, means that the strategic focus of expenditure, consistency in priorities and accountability to the local electorate should enable better predictability. In addition to the predictability of revenue, municipalities are forced to limit what they deliver to what they can afford. What is of significance to lenders about this Bill under the circumstances, is that there are no bail-outs, and ultimately when all else has failed, lenders stand to lose as much as taxpayers in that the Bill provides for discharging of obligations by order of court under the financial emergency provisions.

Overwhelmingly the heavy reliance on own revenue means stronger local capacity and timeous disclosure of operational and financial performance is necessary from a lenders perspective, to establish certainty and stability in the municipal lending market. The Bill provides a clear framework for the nature of capacity required, which when coupled with the national capacity building strategy under the auspices of the Department of Local and Provincial Government, could rally all initiatives in a focused and coordinated manner to implement the capacity required.

Disclosure has a beneficial impact for local government operations, because regular reporting of operating results and financial conditions, and in a consistent format means transparency is improved, and therefore empowerment through information occurs. From the lender's perspective, a credit analysis looks at a range of financial and operational factors. On the financial side, general and project debt repayment ability off revenues will be important, and therefore sources of revenue, ability to collect from these sources and similar revenue related matters. On the operational side, the particular municipality's record of good governance indicated by the functioning of governance procedures, turnover of management and general levels of skills of persons responsible for recommending and implementing council decisions. It is therefore suggested that certain public disclosures by municipalities are triggered automatically by certain events eg. Default should trigger disclosure by the auditors of the municipality; resignations or dismissal of a CEO, Mayor and Chief Financial Officer should trigger a similar disclosure. Although provision is made for disclosure in the Bill, and the possibility of a national register which reflects loans, liabilities, encumbered assets and revenue streams for each municipality by Treasury, we believe that automatic disclosures on critical information which impact on municipal creditworthiness and stability be included.

Ability to cross-subsidise non-trading activities from utility revenues without compromising the long-term sustainability of utilities, usually depends on good management - a challenge in itself. However, there is in our context, the added dimension of political discretion regarding powers and functions over a range of revenue generating activities, including utilities. The complexity of this matter is well-illustrated by the Regional Electricity Distribution System (REDS). REDS is to pose a serious challenge to the liquidity and cash flow management of municipal entities, and therefore to their creditworthiness, because revenue from electricity distribution sales forms such a large proportion of municipal revenue for 237 out of 252 municipalities.

The electricity distribution restructuring therefore comprises a significant negative annual impact on municipal finance. It is still not clear what equity the 237 municipalities who currently distribute electricity will have in the regional electricity distributors, but for 12 of these, which account for 75% of electricity sales will be most significantly affected. Whilst regional restructuring will enhance economies of scale, enable equitable regional prices (presently range from 16c to 60c/kilowatt/hr) the short to medium term impact will be significant to the financial health of municipalities in general. At the same time, delays with the restructuring process (attempts over 10 years) also carry high costs. Municipal Demarcation Board (Report on financial issues facing local government post demarcation, MDB, 24 October 2001) estimate this delay to cost municipalities about R250 mil. per month. The electrification challenge is summarized in the Energy White paper "...if the industry is expected to both contribute to funding other municipal services and to pay for the electrification programme over the long term, it will experience financial bankruptcy without alternative funding and pricing mechanisms, a reduction in the generation and transmission prices.. .or substantial increases in tariffs". In the same way that long term electrification needs must be financed, so too must the loss in revenue caused by restructuring of the utility service, to cover the costs of the non-trading functions. Most concerning to lenders from this example, and a concern which extends to other utilities, is the absence of certainty over powers and functions and national restructuring initiatives. To overcome this uncertainty and potential impact on revenue streams to municipalities, we propose that there be a provision in the Bill to ensure that any changes to cashflow, in particular changes to revenue streams which impact on lenders, not only be approved by council, but also obtain agreement from existing lenders.

Borrower capacity is recognized as an important constraint in the ability of municipalities to meet the requirements of the Bill. Does this imply that the implementation of the Bill be phased according to weak and strong municipalities? Does this imply that certain provisions should not apply to certain municipalities? We do not support differentiation in the application of provisions of the Bill, as we believe that the incentive to access intergovernmental transfers on an ongoing basis and to obtain a good credit rating, created by this Bill, are the right incentives for municipalities to focus and obtain appropriate capacity. The perceived absence of capacity is not a good reason to exempt municipalities from application of rules for good municipal financial management capacity should be targeted at achieving this standard where it is lacking, and not the converse.

A strong argument against phasing would be that those municipalities who obtain full compliance with the Bill will be more likely to achieve financial stability than those who don't. In addition, credit rating by the market will differentiate on the basis of achievements towards greater stability and viability. Ironically, phasing in a manner, which exempts municipalities having to comply with provisions of the Bill, will probably exempt those municipalities who require immediate capacity and attention. The consequence of phasing will be that borrowing will be constrained by an absence of capacity and compliance.

It is probable that capacity of municipalities can very rapidly be enhanced through a concerted and focused effort by organizations such as the DBSA; tertiary institutions, government and even lenders on improving the financial, strategic and operational skills of municipalities. Centralising Treasury functions in municipalities or agencies, which do have capacity to undertake the treasury function on behalf of those who don't, is a suggestion, which enables municipalities to comply with the Bill whilst simultaneously building their internal capacity. If there is any constraint on scale of capacity development, it should initially be focused on municipalities who have the financial strength (revenue base) but not the human capacity to access private markets, since it is these which will relieve fiscal burden by being able to access private capital off their revenue base if they have capacity.

Another way of addressing the implementation constraints, which has been suggested, is government identifying them through grading of municipalities. In financial markets, credit rating will look at credit and liquidity risks and therefore the financial, operational and corporate governance factors underlying municipal management. Credit ratings will thus throw up municipalities who are not making it. We suggest, that given the comprehensiveness of credit rating procedures, and the importance of credible ratings to lenders, that credit-rating be formally solicited. The National Treasury position in the Regulatory Framework for Borrowing clearly sets out a preference for government's efforts being directed to assisting municipalities move towards being able to access markets on their own. An argument, which we support against government grading, is that like phasing, a tiered system would be difficult for municipalities to progress out of, once implemented.

Since the municipal lending market is underdeveloped and selective, we do not believe that sufficient differentiation or competition exists for niche market lending to municipalities in a less creditworthy position. In practice, the treasury approach is more realistic and less wasteful, in the sense that the market will rate municipalities anyway - what is more important presently, is that they can be rated by the market individually, and therefore obtain the benefits of good governance. Ratings, together with other useful social and economic information, would clearly signal which municipalities are in need of special assistance - this should be the focus of government assistance efforts to municipalities - borrower capacity is critical to the development of capital markets, and therefore capacity to establish financial viability; information; disclosure and track record help to develop this market for lending.

Whilst the role of the DBSA can be framed in broader developmental terms, or even broader structural terms, for lenders the issues regarding the role of DBSA in the municipal market is focused on the extent to which there is complementarily rather than competition, and if there is to be competition, the extent to which such competition is fair. The Intergovernmental Fiscal review for 2001 says" public spending may also crowd-out the role of the private markets in infrastructure investment if allocated in direct competition to private sector agencies" (IGFR, 2001, p175) It goes on to indicate that the growth in public sector municipal debt through primarily the DBSA, is inconsistent with the policy goal to increase private sector investment. If we take our lead from the White Paper on Local Government, municipalities must borrow based on a market system and on lenders' pricing credit to reflect the risks they perceive. Why is the mandate of DBSA difficult for commercial lenders, in this regard?

The answer lies in level playing fields. While DBSA in terms of its mandate, is required to be a sustainable financial institution, and is now required to pay tax; by virtue of its public sector ownership, the DBSA does not attract negative sentiment for not providing a direct return to its shareholder, and nor does it have to carry the cost of capital adequacy requirements which other banks do. This means that although DBSA raises capital in the markets, pricing of its products can afford to be lower than commercial lenders because of its special status. Whilst these are matters to be resolved at a policy level rather than in this Bill, they are pointed out because these contradictions in government policy have practical negative application in the municipal lending environment. e.g. if DBSA were to use grant funds which it receives from national government for national programmes, such as municipal capacity building, in support of its own lending operations, in competition to private lenders, this would mean that crowding out is taking place using grant resources, and would pose a danger to municipal borrowing policy. In so far as the Bill is concerned, we have therefore suggested provisions, which help to address these difficulties at an operational level, from a commercial lenders perspective.

In the Regulatory Framework for Municipal Borrowing and Financial Emergencies, Treasury poses 3 questions on how DBSA might offer assistance to municipalities:

Does the assistance leverage private investment; how likely is the assistance to crowd out private sector capital and to what extent is the form of assistance likely to increase moral hazard risk? We believe these questions to be accurate and a reflection of the concerns of banks, which will hopefully be addressed at a policy level in the near future.

The Bill lays the legal and regulatory basis for better quality, transparency and ease of assessment of creditworthiness - it does not guarantee creditworthiness. In addition, depending on the credit rating obtained, municipalities will have more options for funding than they presently do- borrowing; credit enhancement mechanisms, own revenue and government grants. If the Bill is implemented and municipalities comply, it is anticipated that more and more municipalities will become creditworthy through prudent financial management. We believe that the Bill's strongest features, which need to be implemented and enforced, are as follows:

GAMAP standards and procedures

Timeous reporting and disclosure

Ongoing reporting of key financial performance indicators

Solicited credit-rating of municipalities

Pre-emptive and remedial interventions triggered by non-compliance events

Failure to enforce these features through swift and deliberate interventions aimed at restoring normality, will further erode confidence by perpetuating systemic risk. More importantly, given fiscal constraints and the challenges of service delivery, watering down the decisiveness of intervention mechanisms will lessen the likelihood of rapid and sustainable delivery.

Appendix 2

IMATU wish to submit the following comments in respect of the proposed Bill and request that the Parliamentary Officer incorporates these comments into her presentation to the Parliamentary Committee:

Section 36 of the bill gives the responsibilities to the official of the municipalities without giving them resources or tools to meet such responsibilities. For instance section 41(g) gives the officials the responsibility to manage liabilities and to safeguard the assets of thc municipalities within the officials area of jurisdiction without ensuring that there are enough security measures to enable the officials to carry out its duties. This may result in many officials being charged with misconduct conducted not due to their faults.

The Municipal Manager is vested with responsibilities, which realistically cannot be met. These responsibilities are provided for under section 22, 35, 36, 37, 38, 40, 65,66 and 71.

Giving one individual too much responsibilities amounts to deconcentration of power which will render the Municipal Manager unable to perform all duties properly as most of these responsibilities cannot be delegated. This may result in the Municipal Manager being charged in performance of his duties incapacity or poor performance. It is advisable that these powers vested on the Municipal Managers be distributed on the officials or structures having administrative and decision-making power.

Furthermore, section 22(3) renders the Municipal Manager liable for unauthorised or irregular expenditure by the political structure or functionary structure unless he informed the structure in writing that the expenditure is likely to be authorised or irregular. It is unfair to render a person responsible for actions of other people. Why cant the structure that approved expenditure be held liable for such unauthorised and irregular expenditure? What if the Municipal Manager did not know at the time of the expenditure that it was irregular and realises only after a while?

Penalties given to officials for offences committed are irregular in that no distinction is made between offences committed negligently and those committed intentionally. Section 114 provides a penalty of five years imprisonment or a fine for offences committed by officials. This section does not differentiate offences committed intentionally from those committed negligently. It is our submission that where negligence is present in the commission of those offences, officials should be treated leniently as they committed offences with no intention of prejudicing anyone's interests. Further, the fact that the official is charged and convicted within the department involves a lot of stress and trauma for the official, which does not warrant a criminal charge. Criminal charges should be instituted only against officials who committed the offences willfully or purposely and not to those who committed the offence due to negligence. Negligent behavior should be addressed in terms of the applicable disciplinary code that attaches itself to the individual through his / her Conditions of Service.

The provisions for misconduct specified in the Act may contradict the provisions for misconduct in the relevant conditions of service of an employee.

There must be a cross reference to the disciplinary code in terms of the conditions of service as is the case in the Municipal Systems Act which in Point 14 of the Code of Conduct stipulates: 'Breaches of this code must be dealt with in terms of the disciplinary procedures of the Municipal…' as well as a reference to Schedule 8 of the Labour Relations Act.

Section 111(5) of the Bill is also contradictory to the provisions of Section 210 of the Labour Relations Act.

Financial misconduct is not always a ground for dismissal and it cannot be generalised as such. Each case should be judged on its own merits.

Section 113(c) turns normal disciplinary offences into criminal offences. This is totally unacceptable as transgressions of the stipulated sections should only be grounds for disciplinary actions against the individuals.

Section 115(1)(d) also infringes on the stipulations of the disciplinary procedures of a Municipality which prescribes the composition of the Disciplinary Committees.

We fail to understand the reason for wanting to prescribe the composition of the Disciplinary Board

Misconduct by Financial Employees must be disciplined in terms of the same rules and procedures as are applicable to all other employees of a Municipality.

Section 52(4) provides that the number of officials on a governing board of a municipal entity may not exceed the prescribed number but there is no number specified in the bill nor is there provision that the number can be determined by regulation.

Exemptions may be given where: "practicalities prevent the strict application of this Act".

The "practicalities that are referred to are not qualified in any way, nor are any other ways of assessment or criteria set, which leaves the granting of 'exemption' wide open for abuse in general.

It also provides for inconsistent treatment and decision making in respect of exemption applications.

It is proposed that the "practicalities" be qualified.

Appendix 3

As one of the leading sources of finance for municipal infrastructure in South Africa, the Development Bank of Southern Africa is supportive of this Bill in its present form with only a small number of concerns and proposals that will enhance its efficacy.

Since early 1998 the DBSA has assisted Government in the preparation of a framework for municipal borrowing with the intention of increasing the supply of finance for the development of municipal infrastructure. This Bill reflects the intentions of Government to provide the stable and predictable environment needed to encourage private sector investment in municipal services.

We believe the Chapter on Financial Emergencies goes a long way to set up the required predictable environment. We express the hope that this will only be resorted to in the most extreme circumstances. Last year the DBSA set up a "Workout Unit" charged with assisting stressed municipalities to find ways out of their financial woes. The unit is also undertaking workouts on behalf of INCA and the Public Investment Commissioners. We trust that this will remain the preferred approach to serious financial problems in municipalities wherever possible.

We are pleased to note that many of our concerns, prompted by earlier drafts, have been addressed in the Bill before Parliament. The following specific comments are designed to improve the workings of the Act and to give further comfort to lenders.

The DBSA has two concerns on short-term debt:

S24(3)(b) does not allow a municipality to renew or re-finance short-term debt under any circumstances. There is, however, a possible requirement to re-finance short-term debt in the event of a financial emergency. If it is intended that S25(4) be used to allow this, [the clause allows long-term debt "to support financial restructuring" in a financial emergency] it may need to expressly say so, or S24(3)(b) would need a caveat such as the addition of "except where a financial emergency has been declared and the measure is included in the financial recovery plan."

There is a need for some form of transitional measures to pay off short-term debt, or convert it into long-term debt where a municipality has used short-term debt inappropriately in the past. Bearing in mind that many municipalities will not be able immediately to obtain long-term debt, we suggest an additional sub-clause to S118 [Transitional provisions] allowing a municipality with short-term debt that cannot be repaid within the financial year during which the Act is passed, to apply to National Treasury for a grace period of one financial year.

We welcome the requirement for the financial recovery specialist to consult with creditors, as specified in S99(2)(b). As mentioned in one of our previous submissions, we would have preferred a requirement for creditor approval, but accept the compromise position in the hope that such consultation will enable creditors such as the DBSA to provide advice, skills and resources from their not inconsiderable experience.

Notwithstanding the above, it appears that the requirement to consult creditors will not be enforceable unless it is included in the conditions to be applied by the Emergency Authority when approving the plan. We propose that S99(6) includes compliance with subsection (2) in addition to compliance with subsection (3) as it reads now. Likewise, S99(9)(c) on amendments to the plan, must include compliance with subsection (2).

This section deals with the extension of a financial emergency under certain conditions, when the area of the municipality is changed. We suggest that the use of land area as a criterion in S102(l)(a) is a rather blunt and possibly misleading instrument. We propose that this be changed to rateable value since there is a possibility that a large amount of relatively unoccupied land might be excised or added without changing the financial situation of the municipality. The same could not be said of a large proportion of rateable value.

The last part of S104(2) reads: "...if the security in question was given in good faith and at least six months' application." It appears that the words "before the" were omitted in front of the word "application". The same problem appears in S105(2)(a).

There has long been a debate about how best to instill responsible fiscal behaviour in municipal councils. It appears that the bill in its present form does no more than introduce a degree of embarrassment for councillors and officials who allow municipal finances to decline seriously (assuming they are doing nothing illegal). On the other hand, S105(1)(c) may require the discharge of large numbers of employees.

We would like to propose that a clear signal be sent to councillors that in the event of an application for extraordinary relief then their remuneration would be seriously affected. We propose for consideration that a S104 action (suspension of municipal obligations) should trigger a 75% reduction in councillors' pay, and a S105 action (termination of municipal obligations and proportional settlement of claims) would clearly result in no pay, and no right to register a claim as a creditor for any outstanding allowances etc. To drive home the point, we should also consider including in S100(3) [powers of financial recovery specialist] reference to the recovery plan providing for a reduction in councillors' allowances during the period of the financial emergency.

Enquiries:

Oupa Nkoane, Policy Analyst, DBSA 011 3133426

Barry Jackson. Policy Analyst, DBSA 011 313 3686

Appendix 4

The above matter refers.

The Community Law Centre (UWC) hereby submits the following comments:

It is submitted that the Bill does not promote democratic and developmental local government as entrenched in the Constitution. While sound financial administration is essential, the Bill overreaches its goal.

The Constitution creates strong local government as one of the spheres of government alongside national and provincial government. This has been done in order to strengthen democracy and promote development.

Democracy entails an opportunity to participate and be part of government decisions. Decentralising development matters to local government is a critical element thereof because it strengthens community participation. Strong local government holds considerable promise for deepening democracy. The opportunity for residents to influence decision-making at local level through voting and participating in government affairs is enhanced when local government is given real powers and responsibility.

People should have a say in government's development initiatives. It is a given fact that peoples' preferences can be matched much better at local level than at national level. Critical is the element of accountability towards the local citizenry Local governments that are given responsibility over their own affairs and resources become more prudent managers of their affairs and more prudent users of those resources. Accountability to senior governments creates dependency and a skewed accountability: local governments don't have to justify to the local population how moneys were spent and a commitment to national government as opposed to the local citizenry is created.

If local government is forever treated as an infant sphere of government and not given the latitude to govern, make mistakes and learn from its mistakes it will not rise to the occasion that the Constitution envisages.

The Bill must be assessed in light of these two goals.

The Bill does not strengthen democratic government at local level because it undermines local accountability, initiative and self-reliance.

First, the Bill prescribes how the council should be structured by creating, for example, the position of "councillor for financial matters". This interferes with the notion of self-governance about internal structures (s 160 of the Constitution).

Second, the Bill imposes numerous reporting duties to the National Treasury which may tend to undercut the principle of primary responsibility and accountability to the municipal council. See for example clause 36(o)): before establishing a new entity, the municipal manager must inform the National Treasury and the provincial treasury. Why? While it is simply a reporting duty, it may easily lapse in an informal permission seeking exercise.

Third, the municipal manager rnust promptly report to the MEC any interference by a councillor in the staffing or financial management responsibilities of the municipal manager (clause 36(l)). The first responsibility is to report such a matter to the entire council so as to enhance local self-reliance to solve own problems, rather than create a culture for running to "big daddy".

Fourth, clause 41 (2)(b) provides that the National Treasury may impose limitations and conditions to a specific delegation made to an official by a municipal manager. This clause is unconstitutional for want of compliance with section 160 of the Constitution. Section 160, in particular subsections (1) and (6) protect the right of municipalities to regulate their internal affairs. The role of national departments is to provide the framework for delegations, which may include minimum requirements or standards. However, if national departments were allowed to determine conditions for individual delegations, this would amount to interfering with that municipality's institutional integrity and it would harm the notion of accountability towards the municipal council.

Accountable democratic local government does not mean that local government is autonomous. It functions within a system of intergovernmental relations and cooperative government, which includes a system of regulation and supervision of local government by both the national and provincial governments. The Bill is, however, at odds with the system that the Constitution establishes.

The municipal reporting duties to both the National Treasury and the provincial treasuries may result in the situation that one sphere, probably the provinces, may regard their monitoring duties as a duplication of the national effort rending their own thus superfluous. Moreover, with intervention powers shifted to a national body in terms of chapter 11, the incentive for provinces to perform their monitoring and support duties is taken away.

Chapter 11 creates the institution and procedure for intervening in a municipality in case of financial emergency. Without the accompanying constitutional amendment, which would authorize such an intervention, it is not possible to judge its constitutionality. On the face of the document, the procedure prescribed in chapter 11 excludes the supervisory role of the NCO P. Section 1 39 of the Constitution creates the necessary political checks and balances to maintain the distinctiveness of local government which is absent from chapter 11.

The national government has the constitutional mandate to regulate the exercise by municipalities of their executive authority (section 155(7) Constitution). The essence of regulation is that it provides a framework within which local government must function without prescribing outcomes. If outcomes are prescribed, it is not longer regulation but control. This not only exceeds the constitutional mandate of national government, but also takes away local government's responsibility to manage it own affair in an accountable and self-reliant manner.

Examples of overregulation are:

- A municipality may change a bank account during a financial year only with Treasury approval (clause 8(2)(b)).

- Treasury prescribes the annual budget growth factor (clause 5(2)(d)).

- In general, the National Treasury may "issue instructions" in terms of clause 106(1). While there are sound reasons to provide "guidelines" and frameworks, the issuing of instructions is by definition the exercise of supervisory control.

- The range of issues on which regulations can be issued embraces any conceivable area of financial management. Extensive regulation may stifle local initiative.

- The delegation of powers by a municipal manager can be prescribed by the National Treasury (clause 41(2)(b)).

- A municipality may establish a municipal entity only for the provision of services "and such other purposes as may be prescribed [by the National Treasury]" (clause 46(1)(b)).

- The National Treasury prescribes the limit of councilors and officials on a governing board of a municipal entity (clause 53(4)).

- The Bill overregulates the selection process of the governing board (clause 54).

- The National Treasury may in exceptional circumstances designate the accounting authority of a municipal entity (clause 58(3)).

The overregulation of local government is also explicitly recognized in the Bill:

The National Treasury may on good grounds approve a departure from a treasury regulation or instruction imposed in terms of the Bill (clause 109). Such a provision can only lead to legal uncertainty and ad hoc decision making

Clause 5(2)(h) authorises the stopping of funds by the National Treasury, in terms of section 216(2) of the Constitution, to a municipality if it commits a serious or persistent material breach of this Act.

The Constitution limits the stopping of funds in terms of section 216(2) to breaches of generally recognised accounting practice, uniform expenditure classifications and uniform treasury norms and standards.

Clause 5(2)(h) of the Bill appears to broaden the scope of the stopping of funds substantially by linking it to a breach of the Act. Even though the Bill implements section 216(1), there are provisions in the Bill that do not constitute generally recognised accounting practice, uniform expenditure classifications or uniform treasury norms and standards.

The non-compliance with those provisions, as problematic as it might be, does not warrant the stopping of funds. An example of such provision is the selection process for appointing a governing board (s 54).

It is submitted that, in order to preserve the system of intergovernmental fiscal relations, the stopping of funds in terms of clause 5(2)(h) should be clearly linked to serious and persistent breaches of the three types of measures, mentioned in section 216(1)(a)-(c) of the Constitution.

Serious consideration must be given to the areas where the Bill overlaps other local government legislation, in particular the Local Government: Municipal Systems Act 32 of 2000. There are instances where the Bill contradicts the Systems Act. An example is the subdelegation to contractors.

Clause 45(1 )(c)(ii) empowers the chief financial officer to subdelegate to a contractor. This is in conflict with section 59(1)(a) of the Municipal Systems Act where the recipients of delegated powers are limited to political structures, political office bearers, councillors and staff members.

(In any event, the delegation of powers to a municipality's contractors seems undesirable. Contractors are not part of the municipality's staff-establishment, they do not fall within the realm of a municipality human resources policies including the Code of Conduct for officials in the Systems Act. They are bound only by the contract that stipulates the service they provide and the conditions thereto.)

Another example is the contradicting definitions of 'basic municipal services' in the Systems Act (includes environmental services) and 'minimum essential municipal service' in the Bill (excludes environmental services).

Prof Nico Steytler

Jaap de Visser

7 March 2002