Municipal Fiscal Powers and Functions Bill [B9-2007]: public hearings

Meeting report

FINANCE PORTFOLIO COMMITTEE
9 May 2007
MUNICIPAL FISCAL POWERS AND FUNCTIONS BILL: PUBLIC HEARINGS

Chairperson: Mr N Nene (ANC)

Documents handed out:
Municipal Fiscal Powers and Functions Bill [B9-2007]
Financial and Fiscal Commission: Submission document
Financial and Fiscal Commission: Powerpoint Presentation
Institute of Municipal Finance Officers Powerpoint Presentation
Business Unity South Africa and Chambers of Commerce of South Africa comments
South African Local Government Association Comments
Ekurhuleni Metro Municipality submission (not presented)
City of Cape Town input (not presented)
City of Tshwane Chief Financial Officer comment (not presented)

Audio Recording of the Meeting

SUMMARY
The Committee had heard a briefing from National Treasury the previous day on the provisions of the Municipal Fiscal Powers and Functions Bill, and public hearings were held on the Bill.

The Financial and Fiscal Commission had made a submission to National Treasury in December 2006, and many of its comments had been accepted and incorporated already into the Bill. One submission related to the role of organised local government and the references to this had been clarified. The Commission was satisfied that there was consistency between this Bill and other similar legislation. The comments not accepted related to the role of municipalities, but this was an interpretation issue clarified during the discussion. The Commission confirmed, in response to Members’ questions that it was probably necessary to get legal opinion on whether the regulations infringed constitutional rights of municipalities.

The Institute of Municipal Finance Officers welcomed the enabling parts of the legislation but had concern that local government would not be sharing in an equitable manner in the growth of the economy. Municipalities had suffered a substantial decline in income from abolition of the Regional Service Council levies, and had not been consulted on this issue. Consultation should include organised local government. It recommended the appointment of an independent regulator to deal with approval of municipal taxes. Clause 5 was considered restrictive, and Clause 6 attempted to impose controls rather than exercise oversight and should be amended. Clause 8(2) was problematic. It cautioned against over regulation. Questions by members centred on the consultative process followed by National Treasury, whether the Institute had canvassed the views of every municipality, the possibility of having uniform costings, the five-year review period, the impact of the Regional Electricity Distributors, possible alternatives to the Regional Services Council (RSC) levies. Further questions addressed the point that the Minister should perhaps have the power to control taxes as part of his overriding macro-economic control, whether the Institute had obtained a legal opinion, the fears that municipalities were being short-changed, the reasons why an independent regulator was mooted, and the necessity to involve the Portfolio Committee on Local Government.

Business Unity South Africa and the Chambers of Commerce and Industry welcomed the Bill and believed that it was not inconsistent with the Constitution. It cautioned against increasing the overall tax burden and noted that if municipal taxes increased general tax relief should be given elsewhere. It suggested that there should be a requirement that municipalities must consult with local businesses. It suggested that dispute resolution measures be added. It was concerned that potential overlap between taxes must be avoided. It also requested that the legislation specify that tariffs should be used to improve infrastructure.

The South African Local Government Association believed that the costing should be defined on shared services and be based on Activity Based Costing. It recommended the deletion of Clause 2(d) which did not accurately reflect the contents of the Bill. It recommended that a clause be added to specify that this would not apply to municipal user charges raised under other legislation. Clause 5 held the possibility of giving rise to onerous costs and therefore municipalities should be able to receive implementation support. Clauses 6(d)(ii) and (iii) should be deleted. National Treasury should be asked to give further clarity on the envisaged costs and financial implications. Comments were made about the consultation initiated by National Treasury, which had been done at a technical rather than political level of SALGA. Members asked questions on the distinction between political and technical levels of SALGA, whether it was not appropriate for surcharges, which had been raised for a particular purpose, to be spent only for that purpose, whether the “one size” application of the Bill was appropriate, the tagging of the Bill as a Section 75 Bill, and the costs under Clause 5

Financial and Fiscal Commission (FFC) Submission
Mr Jaya Josie, Deputy Chairperson, FFC, noted that the FFC had made a submission in December 2006, having had its own consultations with stakeholders involved.

Mr Bongani Khumalo, Manager, Fiscal Policy, FFC, indicated that FFC accepted the principles behind the Bill. One of its key submissions related to the role of organised local government. FFC believed that organised local government did not have executive authority to propose taxes and made a comment to this effect. When it had made this point, the wording of the Bill had referred to SALGA” but when the Bill came back after redrafting it had been amended. The Commission also wished to check the consistency between Section 228, dealing with provincial tax powers, and the Bill and found that there was consistency. There were further issues raised relating to alignment of other pieces of legislation dealing with municipal fiscal powers, and FFC was satisfied with the alignment. It said that it wished the Committee to note the submissions made, and those that had been incorporated into the current Bill. Comments made that had not been incorporated into the Bill related to the obligations of municipalities and were fully set out.

Discussion
Mr Y Bhamjee (ANC) asked for comment why the view of the FFC on organised local government imposing taxation was not accepted.

Mr Josie stated that this was a question of the interpretation attached to “organised local government”. Associations could not impose a tax. In the first draft the reference was worded specifically to make reference to SALGA, which seemed to indicate that the principle was not adhered to. If SALGA could make recommendations in regard to taxes to be imposed by municipalities, FFC accepted that would be a different matter. The comments had related to the original way in which the clause was presented.

Mr Bhamjee noted that the Committee had been concerned about whether the autonomy of local government was in any way being compromised.

Mr Khumalo stated that this had been discussed with a reference group on taxation issues. The relevant section required the Minister to regulate, and how that would happen was raised as an issue. The question of whether regulations became an infringement upon autonomy of the fiscal authority was discussed there too. He agreed that there was probably a need to get legal opinion on the issue. As a matter of principle the FFC agreed that the legislation must not impinge upon the rights of municipalities to exercise their constitutionally assigned tax powers.

Institute of Municipal Finance Officers (IMFO) Submission
Mr Krish Kumar, Deputy City Manager, Ethekwini Municipality & Spokesperson, IMFO, indicated that this was broad and enabling legislation which was welcomed. The views he would canvass had been extensively discussed with a number of other stakeholders. There was still concern that local government would not be sharing in an equitable manner in the growth of the economy, particularly the growth of business. A study of the overall income of municipalities in 2005/06 indicated that the RSC levies and electricity accounted for R30.8 billion (38%). In larger municipalities and metros this could be higher; for instance it was 40 in Ethekwini Municipality. Local government was concerned at its increasing dependence on equitable shares, and, in light of the huge backlogs, the lack of a growth-related income stream that could tax businesses would lead to major problems. He noted that the abolition of the RSC levies had removed the main income stream from about 90% of municipalities.

Clause 4 caused some concern. The fact that the Minister had to approve any new form of tax could be restrictive and infringed upon the constitutional rights of municipalities. IMFO believed that the consultation should be broadened to include organised local government, or that an independent regulator be created to deal with approval of municipal taxes.

Clause 5 was considered prescriptive and onerous and would impede on the rights of local government. There was concern that it could take the Minister six months to notify municipalities and another long period to prescribe those regulations. This could impact badly upon service delivery and the tariffs would lag behind. The linking of the gazetting to the financial year could be problematic. No appeal mechanism was provided for.

Clause 6 was seen as controlling rather than oversight and should be amended.

Clause 8(1) was in line with the Constitution, but Clause 8(2) could cause problems. Differentiation was unacceptable and constrained the executive authority of municipalities.

The review period of five years for regulations in Clause 10 was unacceptable as any problems must be speedily identified and resolved. It was suggested that two years was more appropriate.

In respect of clauses 11, 12, 13 and 14 the IMFO suggested that councils should have the autonomy to impose rates, as they understood the needs of the community. Municipalities were over regulated and this was a further over-regulation.

In regard to the business levies, the IMFO was concerned that the Regional Service Council (RSC) and Joint Services Board (JSB) levies had been an effective form of taxation and IMFO would welcome views on the introduction of a turnover tax, which it suggested could be administered by SARS. It was agreed that the collection process had been inefficient but this could have been amended by SARS involvement. The headcount component was not appropriate, but it was suggested that the turnover basis should remain. IMFO further wanted National Treasury (NT) to clarify how long the equitable share given to all municipalities to replace the RSC levy would apply. The Institute tabled a comparison between RSC levies, Gross Domestic Product (GDP) growth and CPIX index, to illustrate its concern that municipalities would be short-changed in relying upon the equitable share formula.

IMFO suggested that it was appropriate for organised local government to be asked for comment, but that this should also extend to metros and major cities. Finally it was submitted that in order for the municipalities to achieve its objects as set out in Section 152 of the Constitution, and to play its developmental duties, there should be no compromise by National or Provincial government of the municipalities’ right to exercise their powers or perform their functions.

Mr Logie Naidoo, Deputy Mayor, Ethekwini Municipality, indicated that the Municipality had taken on the responsibilities of housing, clinics and invariably found that it had to provide top-up funding. The RSC levies used to contribute significantly and the equitable share was not filling that gap. Municipalities, particularly metropolitan councils, were having to find other ways to make good the shortfall. A surcharge had been proposed of 10% on property rates, and 5% on the electricity consumption, in Ethekwini to try to address the shortfall. The introduction of the Regional Electricity Distributors (REDs) would further cut down on the profits.

Discussion
The Chairperson noted that some of the matters raised had been discussed the previous day, particularly issues around the Municipality's constitutional rights. The Committee had already decided that these would be taken for legal opinion. There was no point in debating the matter further at this stage pending receipt of the opinion.

Mr S Asiya (ANC) noted that the Institute had not seen the Bill before it came to the formal parliamentary process, and asked if any processes had taken place prior to the draft Bill.

Mr Bhamjee pointed out that the Bill stated that municipalities had in fact been consulted. He asked for verification whether consultation had in fact taken place.

Mr Kumar said that as CEO of Ethekwini he had not seen the Bill in draft forms. The IMFO had also not been consulted. There were two or three times in which the Task Team had discussed the replacement of the RSC levy system during the past few years. However, it was taken by surprise by the Minister’s speech abolishing those levies as this principle had not been discussed, but only the principles of transformation of the levies. There had been no consultation on outright abolition. IMFO had participated in a task team but had not been given a draft policy statement that could form part of the Bill.

Mr S Marais (DA) asked for clarity whether this submission was being made on behalf of the Metros, in light of the comment particularly since he had called for comments from Metros and major cities. He asked whether they were not already part of local government.

Mr Kumar made the point that exhaustive consultation had not taken place, as there was not time. He had however consulted with the metros, and his presentation included their views. The District Municipalities’ views had not been canvassed.

Ms Fubbs asked how comments had been obtained.

Mr Kumar said that this was via CFOs, Institute of Council members and the metros, all of whom had endorsed what was being presented today.

Mr Marais asked to what extent the facts and circumstances were uniform in local government to determine taxes and benchmarks.

Mr Kumar responded that the costing systems were disparate. Ideally it would be good to have uniformity but this would be highly prescriptive. It might be difficult to provide complete compatibility but it should be possible to assess, on a broad basis, a tariff for kilolitres of water in comparable municipalities and to agree the calculation. .

Mr Marais noted the concerns in relation to the time frames and asked about the capacity and ability of local government, and how problems could be addressed.

Mr Kumar replied that the capacity to engage with formal taxation would be discussed by the South African Local Government Association (SALGA). The capacity of local government to go through an onerous due diligence process was limited, and he anticipated that this kind of process, although possible to arrange in a shorter time, would generally take at least a year. 

Ms J Fubbs (ANC) asked for clarity on the impact of Regional Electricity Distributors (REDs).

Mr Kumar responded that his municipality fully embraced the concept of REDs but stood by the SALGA mandate that any arrangements around electricity supply should not be allowed to impact detrimentally upon the municipalities. 33 % of income was generated from electricity. Continuation of supply was used as a sanction for non-payment of other services. Under the constitution, electricity distribution was a task of local government and he pointed out that it in fact was the best revenue earner.

Ms Fubbs noted the emphasis on the RSC levies, and asked what the percentage was in terms of turnover and payroll.

Mr Kumar said that this varied from municipality to municipality. National Treasury had the figures and they could be made available.

Ms Fubbs asked whether further comments would be made on Clause 8.

Mr Kumar confirmed that IMFO had no problem with Clause 8(1) but Clause 8(2) norms and standards were problematic. This also tied in with comments he would make on macro-economic impacts. The State President highlighted the need to fast track issues of water, sanitation and housing backlogs. Some municipalities had managed to maximise their gearing. Others did not have the capacity to do so and would be putting more in servicing debt.

Ms Fubbs noted that the five-year period prescribed for review of the regulations was a maximum time period. In fact regulations could be reviewed at any time, so she thought IMFO’s concerns on this were unfounded.

Mr I Davidson (DA) said that the crisp issue was the regulation of the tax-levying ability of local authority. The successes in the new South Africa could be attributed in large part to the macro –economic fiscal policies and the tight rein on taxation. If IMFO was asking that the Minister not be able to exercise control over the tax regime of the country as a whole, then the Minister’s ability to keep such a tight rein would be affected and this in turn could affect macro-economic stability. He asked what alternative IMFO would propose.

Mr Kumar replied that the good work of the Minister and National Treasury were fully endorsed and supported. However he would still question the fairness of this particular process and whether it allowed the necessary autonomy to the municipalities.

Mr Bhamjee asked whether the view that the measures could be restrictive and would infringe upon legal rights was a personal view, or the view of a legal team of Ethekwini and / or the Institute.

Mr Kumar confirmed that IMFO had not yet obtained a legal opinion, but would do so on the constitutional issues around whether the Minister and Treasury should regulate this part of the tax regime.

Mr Bhamjee indicated that a wide range of institutions had welcomed the RSC levy abolition. He asked why the concerns around the abolition had not been raised earlier, and when Ethekwini had become aware of the implications.
 
Mr B Mnguni (ANC) pointed out that National Treasury, the previous day, had indicated that there was an ongoing process to assess the correlation between former RSC levies and the grant that would ensure that municipalities were not to be short-changed.

Mr Mnguni asked whether the IMFO’s suggestion to have an independent regulator would not add to regulation in the matter, and why it thought this was necessary.

The Chairperson asked for the reasons why intervention by National Treasury would be seen as problematic but intervention by another independent Regulator would not.

Mr Kumar responded that the principle of independent regulatory bodies – such as the National Energy Regulator – was well accepted, and this was in line with best practice to ensure that national economic imperatives were not being adversely affected. He reiterated that an independent and separate body would be more acceptable than allocating this function to the Minister in addition to his other functions..

Ms Fubbs stated that she had been concerned that there was a need to look at all local authorities, not only those who had large industries in their jurisdiction with greater turnover opportunities. She considered the RSC levies had in fact contributed a fairly small percentage. She found it difficult to correlate the statistics presented with the concerns of IMFO.

Mr Kumar replied that this really came down to setting a system that could give a similar form of taxation. Surcharges did not broaden the base sufficiently. He noted that there were possibilities of plan submission fees, rather than fixed fees, or other forms of taxation, but local government had little revenue that could top up the quantum. The backlogs were a major problem, with huge numbers of people moving to the city centres, impacting on the moving target of meeting service delivery obligations. Municipalities needed to be in line with 6% growth. Electricity accounted for 33% of income, but 33% of local government income for metros would have a substantial effect other ratios, from a financial point of view. An analysis of balance sheets showed that the income played a major role in ratios.

Mr Asiya wondered if these remarks should not also be usefully conveyed to the Portfolio Committee on Local Government. Over regulation was one of the points to be raised.

The Chairperson indicated that the Portfolio Committee on Local Government had been invited but this meeting had clashed with another commitment.

Business Unity SA (BUSA) and the Chambers of Commerce and Industry (CHAMSA)
Mr Des Kruger, Spokesperson, BUSA, indicated that in broad terms BUSA and CHAMSA supported the Bill. IT took the view that the regulations were enabled by the law, and that they were desirable as they would allow the Minister some flexibility. Although BUSA was opposed to the RSC levies, it was happy to support the introduction of the Bill.

Mr Kruger indicated that the taxes to be levied by local government would have the effect of increasing the tax burden. National tax already exceeded the recommended 25%, and the imposition of other taxes meant that the total tax burden would increase further.  If there was an increase in local government taxes then there should ideally be reduction in other taxes. One issue not set out in the memorandum was the concern regarding proliferation of taxes. One concern with the RSC levies had related to this point. The other concern was around the substantial costs of compliance that businesses had to bear, which was exacerbated where one company might operate in a number of regions.

A further issue was that of consultation. Clause 4.2 provided that the Minister of Finance must consult with the Minister of Local Government and other institutions. BUSA regretted that there was no mechanism for consultation at municipal level with business, and therefore that a significant taxpayer had no input on the taxes imposed. BUSA suggested that the municipalities should be required to consult specifically with business before applying the municipal tax.

BUSA believed that an appropriate mechanism should also be incorporated for dispute resolution proceedings.

BUSA was further concerned about potential overlap between the taxes. Outside the six metros the district municipalities and municipalities were defined for the purpose of Section 229 of the constitution and would be subject to this legislation. District and local municipalities would be able to impose taxes, tariffs, surcharges and rates. This meant that there was a danger of overlap. As he understood the position currently, district municipalities were responsible for bulk services, which they then supplied to local municipalities, who passed them on to customers. They should be careful not to impose duplicate levies.

 BUSA was happy with the procedures required for authorisation of applications, but would request that the Act specify what the tariffs must be used for, and in particular provide that the income must be applied to improvement of infrastructure.

Discussion
No questions were asked.

South African Local Government Association (SALGA) Submission
 Mr Lance Joel, Executive Director, SALGA, outlined the constitutional imperatives and noted that municipalities could also be authorised to impose other taxes. The current practice was that municipalities would impose municipal surcharges. Prior to 1 July 2006 metropolitan and district municipalities benefited from the RSC and JSB levies. The Division of Revenue Act had then replaced the levies with a grant.

In regard to the definitions and interpretation, the municipal base tariff was defined, and subclause (e) of this definition suggested that a service could carry costs which were not based on the delivery of a service and could therefore vary from one municipality to another. This gave rise to inconsistency. SALGA recommended that the costs should be defined in terms of shared services and actual service delivery and the costing system should be based on the activity based costing (ABC).

Clause 2(d) stated that the bill would provide for an appropriate division of fiscal powers and functions where two municipalities had the same fiscal powers and functions with regard to the same areas. This did not appear to be an accurate reflection of the contents of the Bill. SALGA therefore recommended that this clause be deleted.

In regard to the application of the Act, SALGA recommended that in order to provide absolute certainty, an additional clause should be included to note that the Act would not be applicable to municipal user charges that were already regulated under the Municipal Systems and Municipal Finance Management Acts.

Clause 5 made provision for requirements to be satisfied pursuant to an application for authorisation to levy a tax. This was comprehensive, but was also very prescriptive and onerous. SALGA thought this would give rise to excessive costs. It asked that consideration should be given to giving municipalities implementation support to enable them to comply with the legislation.

The regulations regarding imposition and administration of municipal tax were dealt with under Clause 6(d)(ii) and (iii). The objectives of the Bill were to regulate the exercise of the power to impose surcharges, and to regulate the exercise of the power to impose levies, taxes and duties. If this was a correct reflection, then these clauses encroached on the municipalities' autonomy to determine their own budget and spending. Therefore SALGA recommended that the clauses be deleted.

National Treasury had indicated that there might be some financial implications for those municipalities whose existing surcharges would need to be reduced once the new norms were assessed and implemented. SALGA was not sure if NT had done any investigation into this, or into the actual financial impact. It therefore sought some clarity as to the detailed envisaged costs. SALGA, as already stated, thought that the applications for authorisation were onerous, and asked for quantification of the costs in compliance.

In regard to the consultative process, Section 229 required organised local government and the FFC to be consulted. National Treasury had embarked on a consultation process, but this was at a technical level, involving officials from SALGA. A written invitation was sent by NT to SALGA for comments on the Bill. The next stage was that a workshop was held on the first draft of the Bill, when SALGA and other stakeholders had attended, but once again this was at a technical level.  SALGA emphasised that when it responded to the call for written comments, its response had put on record the fact that, due to the short timeframes for response, SALGA was unable to go through a full political mandating process and consult with all 283 municipalities. It therefore did not get a political mandate. It had expressed the view that the political principals should be consulted, and that the Bill should be considered by the MinMec forum, but this did not happen. SALGA asked the Committee to get an explanation from NT as to whether there had been any consultation with the political echelons at SALGA.

In conclusion Mr Joel stated that the Bill would give rise to more predictability and certainty. These recommendations were made to promote the best interests of municipalities, to ensure compliance with the intent and terms of the Constitution.

Discussion
Mr A Mnguni noted that surely whatever happened at the level of officials must be made known to the political officials. If SALGA did not have the backing of its political heads, then one could ask whether the representations today had been authorised.

Mr Joel outlined the internal processes followed by SALGA. He distinguished between national departments or provinces consulting with SALGA, and SALGA then consulting internally with members. Those were distinct and separate processes. He confirmed that he was appearing under authority. Albeit that there was a good working relationship at a technical level with the Department of Provincial and Local Government (DPLG) and NT, it was at the political leadership level of SALGA that the highest decisions were taken. The point was that the technical consultation must then also be extended to include political leadership, where the decisions would be taken. SALGA wished to promote consultation at all levels.

Mr Asiya noted that this begged the question as to whether the technical level of SALGA bore the responsibility to pass the information on.

Councillor Johnson, National Executive Committee, SALGA, noted that he himself had not seen the correspondence with NT but noted that SALGA had recently been involved in change of Council and a strategic session would be held in the next few weeks. He undertook to track the responses and make the necessary comments.

The Chairperson ruled that this question should stand over pending National Treasury's response.

Mr Mnguni commented that the Bill was not necessarily prescriptive if the Minister was to be consulted.

No response was given on this remark.

Mr Bhamjee noted the call for deletion of 6(d)(ii). He pointed out that national government was collecting taxes and municipalities were already imposing levies. If a surcharge was being imposed, because of a particular reason, then he felt it should not be allowed to be used for another purpose.

Mr Joel clarified that the legislation could regulate the municipality's ability to collect surcharges. This was not a problem. However, it then went further and tried to regulate how this should be spent, and it was not considered appropriate that legislation designed to regulate the imposition of a surcharge should also attempt to take away the municipality’s autonomy as to spending. Surcharges currently imposed on electricity could be used elsewhere. This was part of the fiscal autonomy to municipalities.

Mr Davidson said that SALGA was representative of a wide range of local authorities, from huge institutions with high capacity and financial acumen, to those much smaller. He was concerned that the Bill proposed to adopt a "one size fits all" approach. He wondered why SALGA was not arguing for a differentiated approach. He thought there was room to argue that the larger and more capable institutions should be relieved of a number of the responsibilities set out in the Bill. He asked for comment whether there should not be a two-tier approach, giving greater powers and lesser regulatory constraints to some while imposing necessary restrictions on others.

Mr Joel said that this could be a useful discussion, but did not think this process could be taken on board during the development of the legislation. Post-enactment, it would be useful to have some guidelines to assist municipalities with the implementation. The differentiation was not appropriate now. This linked in with his comments on the Clause 2(d)

Mr Asiya asked for its comments on the tagging and asked what recourse SALGA would have if this Bill was tagged as a Section 75 Bill

Mr Joel agreed that this was an interesting comment. SALGA had not put forward a slide dealing with this but he could give its views. SALGA’s comments for this Bill fell in line with the views expressed in relation to electricity regulation. That Bill was originally tagged as a Section 75 Bill, had been sent back to Department of Minerals and Energy for reconsideration, and when it was returned the reticulation aspects were included in a Section 76 Bill, as they materially impacted on local government. SALGA would suggest the same approach here, as some processes did materially impact upon the municipalities. He hypothesised that if the Cities of Tshwane, Ekhuruleni and Johannesburg collectively applied to the Minister for a surcharge, this would surely have implications on the province of Gauteng, and therefore they should really consult at provincial level. SALGA was pleased with yesterday's discussions and would be seeking a legal opinion on this tagging issue.  

A member noted that mention had been made of onerous requirements and cost, but he felt that Clause 5 only listed information that should surely already in the system. He asked how the municipalities would be affected by this clause in practical terms.

Mr Joel responded that Clause 5(g) set out the information required, but the methods to be used were not necessarily pre-existing information. The impact on economic development would come in since the municipalities might have to commission a study and research, which would be costly. He noted that SALGA had not gone through the exercise of ascertaining what the costs would be, and therefore requested National Treasury to give comment on those costs.

The meeting was adjourned