Municipal Infrastructure Investment Unit: briefing

Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
2 November 2004
MUNICIPAL INFRASTRUCTURE INVESTMENT UNIT: BRIEFING

Chairperson: Ms N Ntshulana-Bhengu

Documents handed out:
Municipal Infrastructure Investment Unit presentation
Municipal Demarcation Board explanatory document
MIIU Annual Report (not yet on MIIU website)
[MIIU website: www.miiu.org.za]

SUMMARY
The Committee met to receive a briefing on the activities of the Municipal Infrastructure Investment Unit which facilitates private sector investment in municipalities. This Unit is due for closure in 2006 and it requested the Committee's support for its continuation. Numerous issues were raised by Members in particular it emphasised that the municipalities in rural areas needed more focus by the Unit. The MIIU explained that it had to adhere to its mandate which was to facilitate private sector investment in municipalities with sufficient revenue base. Poorer municipalities would require more active intervention by government where inadequate payment was the norm. The MIIU said it would try to engage with poorer municipalities where potential for improved revenue existed. The Committee also raised its concern that the Unit had not responded to previous questions put to the Unit by the Committee.

MINUTES

The Chairperson stated that the Committee wanted to support the MIIU in carrying out its mandate and ensure sound relations between government and the institution. The adoption of the Committee's Business Plan and Budget Proposal would be conducted at the next Committee meeting due to time constraints. Members had to attend a meeting of the Joint Budget Committee at mid-day.

Municipal Infrastructure Investment Unit presentation
Ms M Hesketh (Chairperson-MIIU) provided some background on the Unit which was created to facilitate private sector investment into municipalities. The intention was to improve those aspects of municipal service delivery that could benefit from private sector investment and financial expertise. Infrastructural development was not a focus point and this was covered by National Treasury and the Department of Provincial and Local Government. The Department was responsible for the MIIU which initially received funding from the National Treasury and USAid. and operated as a section 21 company. The unit was designed as a temporary intervention with a limited life-span and specific short-term objectives currently extending to February 2006. The Board represents both the public and private sector that oversees the establishment of partnerships between municipalities and private businesses. The unit responds to demands arising from municipalities by providing a grant to pay for preparation work preceding development initiatives and ensure quality control. The viability of projects and potential impacts are determined before capital is expended. The municipality together with private companies would cover the capital costs. The unit comprises five project managers and three support staff.

Ms D Magugumela (the new CEO-MIIU) stated that the unit was established in 1998 with substantial seed capital of R20 million and received annual allocations from the National Treasury. Approximately R10 million was disbursed to municipalities in the past financial year. Capital expenditure referred to money allocated for consultancy services and feasibility work before the commencement of projects. The core business revolved around the construction and design of mechanisms to facilitate service delivery. Some donor support had been received at times but not in the current financial year. Expenditure of R16 million occurred in 2003/2004 with a 24% efficiency ratio. Costs relating to Public Finance Management Act (PFMA) compliance were increasing but efficiency targets were being met.

New products were formed designed to improve overall effectiveness of delivery. 78% of spending focused on grant funding with 12% allocated to support functions. Diagnostic services directed at poorer municipalities had been scaled down in the past year. Revenue enhancement was crucial and the infusion of management expertise into municipalities was encouraged. Improved customer care was generating increased revenue collection and higher savings rates were encouraged to cover outstanding charges. The Development Credit Authority had been established as a loan guarantee facility funded by USAID to assist with infrastructure projects. The facility would guarantee loans awarded to a municipality by financial institutions.

KwaZulu-Natal had received the majority of support in the past financial year followed by Gauteng due to large revenue bases and extensive urban areas. Water and sanitation projects comprised the majority undertaken in the essential services sector. Electricity provision is under review resulting in limited interest from investment sources. The affordability of services by community members is a key component of the decision-making process. A vigorous feasibility study occurs before project implementation begins. Ten completed projects were reported in 2003 involving partnerships between municipalities and the private sector. 84 active projects were underway during the year and high efficiency was maintained in funding. Contract monitoring and evaluation was a growing aspect of activity focused on continued involvement in projects after signing. Records of case study documentation were being established to provide knowledge for future reference. In conclusion, the Unit requested that it be given a continued budget after 2006.

Discussion
Mr S Mashudulu (ANC) pointed out the Unit's concentration within urban areas to the detriment of rural areas. The skills of MIIU needed to be retained to counteract the use by certain municipalities of questionable consultancies. Evidence of delivery by MIIU did exist and the Committee had to take cognisance of this. The enhancement of skills was a government priority and the MIIU should continue to play a role.

Mr M Nonkonyana (ANC) requested clarity on when the new CEO assumed office and whether outstanding issues had been handed over in document form. The cost-efficiency ratio was commendable but compliance with the PFMA fell short of the target and reasons for this shortfall were necessary. An urban bias appeared to prevail within the activities of the unit. He asked whether a strategy had been formulated to advocate for the continued existence of the MIIU and whether meetings had occurred with the Minister and the Department.

Mr W Dorman (DA) asked whether the Municipal Finance Management Act had resulted in improved interest from private sector finance in municipal investment or did problems remain. He asked whether the MIIU sought to address revenue collection shortcomings by attracting relevant private sector skills. The enhancing of internal administration processes was a priority that the MIIU could contribute towards.

Ms Magugumela replied that the positioning of the unit within the Department had been a workable arrangement regarding effective service delivery. However, the unit also had to create partnerships with the private sector in a regulated manner. An alignment between the DPLG and the Treasury was encouraged to form a support vehicle for the unit. The unit operated in many parts of the country in a flexible way depending on each project's requirements. The poorer areas should access additional funding from a central source. Details of the previous report were passed over to the incumbent CEO and the understanding was that an additional meeting was to be arranged to highlight concerns held by the Committee. The compliance of the PFMA requirements had been met in a more cost-effective manner than anticipated and was not an under-performance. Various programmes were in place to support the less-capacitated regions. The Department was keen to retain the unit's skills within the municipal sector but definite plans had not been finalised regarding the future arrangement. Revenue streams of a municipality could be viewed as an asset that could attract private institutions and enhance their ability to obtain finance and form partnerships. The MFMA should therefore be regarded as a positive development.

Ms Hesketh asserted that the impact of the MFMA had been both positive and negative. Financial discipline promotion was a welcome development but the MFMA had added further layers of compliance that hindered partnership creation. Municipalities were faced with a more arduous enabling process that impacted negatively on service delivery.

Ms Magugumela stated that the unit concentrated on identifying service providers that could enhance revenue collection by applying diagnostic methodology to malfunctioning municipalities and recommending solutions or run the municipality for a certain period until efficiency prevailed.

The Chairperson stated that issues had been raised by Members during a previous meeting and a report sent to the then-CEO for comment. She asked whether the report had been received and what steps had been taken to address the pertinent issues. The Committee required feedback on whether progress had been made in resolving these concerns.

Ms Magugumela acknowledged receipt of a report and stated that the assumption was that an additional meeting outside of normal Committee meetings would be held to clarify issues. No written response had been sent regarding issues in question but such a document would be providing following further study of the original report.

Mr B Solo (ANC) stated that the lack of feedback hindered the oversight role of the Committee and it was the responsibility of the unit to provide adequate information. The documentation relating to the presentation had been received by Members at the last minute preventing a proper appraisal of the material. More information was required on the request for the extension of the MIIU to assist the Committee in making appropriate recommendations. The listed projects appeared to be unessential considering the dire need of many municipalities and the value of some projects was questioned. The privatisation of cemeteries, for example, resulted in increased costs for residents. Clarity was sought on revenue enhancement for municipalities and whether private concerns would receive payment on behalf of councils.

Mr M Likotsi (PAC) asked whether poorer regions were being marginalised by the MIIU due to the need for partnerships between the public and private sectors as business would not be interested in limited returns on investment. He asked what steps the unit undertook to make municipalities aware of its existence and what services could be provided.

Ms Magugumela referred to the Unit's meeting with the Committee on 7 June 2004. There had been insufficient time at that meeting for Members to detail their concerns. She believed that a meeting was to have been scheduled within six months to discuss these concerns.

Mr Solo responded that a number of the issues had been raised in 2003 and should have been dealt with.

The Chairperson stated that the important task was to establish a strategy to deal with the problem. The Committee would be provided with an opportunity to reflect on the issues and a letter would be sent to the MIIU containing concerns together with the report in question. The MIIU would have an opportunity to consider the issues and formulate suitable answers for the next meeting.

Ms Magugumela acknowledged limited activity within the Northern Cape although a road show had been conducted highlighting services that could be provided. The unit had invested in improving the dissemination of information but some poorer areas were difficult to access due to a low revenue base.

Ms Hesketh stated that the MIIU had to adhere to its mandate which was to facilitate private sector investment in municipalities with sufficient revenue base. Poorer municipalities would require more active intervention by government where inadequate payment was the norm. The MIIU would try to engage with poorer municipalities where potential for improved revenue existed. Rural areas remained the priority of the Department.

Mr Likotsi reminded Members of the presence of large corporations within poorer regions such as De Beers in the Northern Cape and stated that such companies should be involved in municipal projects.

The Chairperson asserted that the MIIU should be assisting municipalities with capacity enhancement to improve service delivery. Areas with limited capacity should be identified and focused upon. Involvement would raise the ability of the municipality to collect increased revenue and create much needed job opportunities. Payment of services necessitated income-generating employment. The private sector should be assisting those municipalities that could not provide proper service at present. Continued focus on the Metros was problematic for the Committee as a class division was intensified resulting in the continued underdevelopment of poorer regions.

Ms Magugumela replied that poorer areas would receive increased attention from the unit in collaboration with private companies in accordance with the prescribed mandate and essential issues within communities would be emphasised. However, it was important to maintain a distinction between the private sector and the donor community. The intention of revenue enhancement was not to create a cash cow for consultants but to improve the flow of payment to the benefit of the municipality in question.

Ms M Gumede (ANC) requested a commitment from the MIIU to develop the underdeveloped and not continue to assist the well-resourced municipalities.

Ms Magugumela replied that numerous interventions had occurred in poor areas involving assessment of needs in partnership with the Department.

Mr Solo suggested that an official of the Department should accompany the unit in future. Motivation for continued existence was required to assist the Committee. Diagnostic studies could be promoted as evidence of the need for continuation. The rural areas needed more focus.

Mr Dorman stated that the MIIU cannot account for the behaviour of business. Business representatives should be invited to provide an account of their position regarding local government. The private sector would concentrate on those areas with adequate revenue base while allowing government to focus on the remainder. Strategies should be devised to attract business into those areas where revenue bases needed to be enhanced.

The Chairperson responded that the MIIU was not being asked to account for business and the mandate of the unit was understood. The unit would respond to a request from a municipality and undertake a feasibility study and involve the private sector. A balance would be found between the interests of the private sector and the municipalities. The problem lies where previously benefited areas continue to receive support to the detriment of the disadvantaged. The technical knowledge of the private sector is needed to uplift poorer councils and strategies should be devised to facilitate this. The MIIU has to secure the interests of both the private and public sectors. The business sector had made a number of commitments to develop society and the Committee should establish what progress had been made in this regard. A uniform approach was needed to establish the capacity of municipalities.

Ms Magugumela replied that the monitoring and evaluation undertaken by the MIIU was focused on specific projects and not on the municipalities themselves. Municipal projects are long-term projects and capacity was needed to manage the impacts such as debt obligations.

Mr Solo emphasised that the business sector had to participate in all developmental initiatives as the state could not meet all the challenges. The MIIU had an important role to play in this regard and should be continued. Further detail was sought on specific projects listed.

Ms Magugumela replied that the Mfuleni housing project centred on the divestment of council property due to maintenance costs. Naledi was an active project involving a nature resort and buildings and plans were being drawn up.

The Chairperson stated that Members' questions related to observations arising from visits to specific geographical locations. The essence of the questions focused on the evaluation of empowerment initiatives. A progress report on the Mzundusi airport was requested. Reference was made to a project in a Brazilian town utilising a particular model to enhance waste management. She asked whether the MIIU considered models used in other countries as viable options for South Africa.

Ms Magugumela stated that feedback would be provided on the Mzundusi airport after inquiries. The unit did consider international research but financial limitations was a constraint.

The Chairperson asked the MIIU to provide an account of the challenges it faced and what assistance the Committee could render to improve efficacy.

Ms Hesketh replied that the interaction had been a valuable learning experience and would contribute to further enhancing the effectiveness of the unit. Government needed to rethink the approach towards infrastructural development. The National Treasury and the Department should develop an integrated plan to promote service delivery. A meeting should be held with the MIIU once the plan was formulated. The Committee should encourage discussion within government around municipal service delivery in the future. Considerable talent within MIIU should not be lost to the sector through the Unit's closure.

Mr Nonkonyana stated that the issue of closure would be discussed with the Department. The Committee was determined to see delivery on the ground and supported the notion of a partnership with the private sector.

The meeting was adjourned.