The Municipal Systems Bill is meant to provide for mechanisms and processes that enable municipalities to promote social and economic development and to deliver essential services. The financing of municipal services is a key concern of the Financial and Fiscal Commission (FFC), and the comments in this submission relate to clauses in the Bill which touch on the sources and manner of such funding.

1. Municipal service delivery (Chapters 1 & 8)

The term "municipal services" is not defined in Chapter 1. In relation to the concept of municipal services being "financially sustainable" (Section 1(x)), the lack of a definition has implications for the funding of the various kinds of services.

All goods can be placed on a continuum, with private goods at the one extreme and pure public goods at the other. Electricity and water are a fairly equal mixture of public and private: on the public side, once electricity and water are made available as a service, technically they are available to all without extra cost. On the private side, water and electricity can be charged per unit used because it is feasible to employ an exclusion device for those who do not want to pay. Under normal conditions, each of these services may generate a revenue stream that can finance both capital and operating expenditure.

As one moves toward the public end of the continuum, it becomes more difficult to charge per unit used and spillover effects play a significant role. Refuse removal and sewerage are generally not charged on a per-unit basis, and because the provision of refuse removal and sewerage has positive spillover effects for all residents in a jurisdiction, a case can be made for partial subsidisation of the costs from general revenue sources.

Municipal roads are primarily public in nature, as it is generally not feasible to exclude non-paying beneficiaries. Due to the fact that municipal roads must be maintained regardless of congestion, average costs in the form of rates are generally used.

The degree to which a municipal service is "public" in its nature therefore has implications for a) the sources of funding; and b) the extent to which each source funds the service.

1.1.2 Implications for specific clauses in the Bill

Lack of definition of "municipal services": definitions should be provided which recognise the degree to which a municipal service is a public good.

Definition of "financially sustainable": Section 1(x) states that each municipal service should a) generate revenues sufficient for the operation and maintenance of the service; b) generate a reasonable surplus (or a reasonable profit, in the case of a business enterprise); and c) generate sufficient capital requirements for the performance of the service.

This definition should be revised to take account of:

• the implications of "financial sustainability" for the various municipal services. For example, the extent to which a service is expected to generate revenues to cover both capital and operating expenditure should be outlined, as should the source of the funding (whether service charges, cross-subsidies, or other subsidies);
• the degree of cross-subsidisation within and between the different types of services. It is important that municipalities retain the management flexibility to deploy resources in a manner that takes account of local circumstances, promotes lifeline tariffs, and does not cause economic distortions (if the burden falls too heavily on well-resourced users). There currently appears to be a contradiction between the definition of "financially sustainable" and the potential provision for cross-subsidisation of services in Section 86(1)(b)(i));
• the relationship between the generation of a surplus (or profit) and the efficient provision of that service. An efficiently delivered service can generate a deficit owing to local conditions, conversely a service can generate a surplus and yet be delivered inefficiently. Furthermore, a service may generate a surplus or deficit according to the income distribution of the consumers paying for the service. It may be that per-unit costing provides a more accurate measure of efficient service provision than does the generation of a surplus or deficit.

2. Municipal service delivery

• Reference is made to the "minimum level of basic municipal services" in Section 67(1), yet it is unclear that it is the constitutional prerogative of national government, in consultation with the provincial and local spheres of government, to determine the minimum level of service. The Commission suggests that the phrase be amended to read, "…in the municipality have access to at least the nationally-determined minimum level of basic municipal services".
• Sections 68(2)(d) and (e) indicate that tariffs must reflect actual costs and be set at financially sustainable levels. As noted in 1.1.1 and 1.1.2 above, the various municipal services have different funding requirements, and the definition of "financially sustainable" is problematic as it precludes the possibility of subsidisation across municipal services. It is suggested that Section 68 as a whole be amended to reflect the distinction between different kinds of municipal services.

Section 14 provides for the assignment of functions to municipalities by Cabinet members or MECs, and outlines the role of the FFC in this process.

1. Comment

This section is welcomed as it gives further content to the role of the FFC as assigned by the Constitution, the Financial and Fiscal Commission Act, and the Intergovernmental Fiscal Relations Act.

Section 14(4) empowers the Cabinet member, MEC, or organised local government to request that the FFC make an assessment of the "financial implications of the assignment for the municipalities or municipality concerned". This implies a micro-management role for the FFC whereby the FFC could be requested to assess the implications for any specific municipality in the country.

In outlining the role of the FFC, Section 229 of the Constitution indicates that the FFC is expected to advise on national legislation pertaining to municipal fiscal powers and functions. An oversight role is thus implied for the FFC. In fulfilling this role, the Commission has recently applied a "costed norms approach" to the delivery of social services by provinces, whereby it suggests the manner in which national norms and standards can be costed. The FFC would be of the view that the same approach be considered for application to municipal service delivery.

While it is the prerogative of Parliament to give further content to the FFC’s role as provided in Section 3 of the Financial and Fiscal Commission Act of 1997, it is suggested that the FFC’s oversight role as assigned by the Constitution not be replaced by too strong a focus on day-to-day financial management issues. The suggestion here is therefore to replace the phrase, "to make an assessment of the financial implications of the assignment for the municipalities or municipality concerned" in Section 14(4) with "to make an assessment of the manner in which the function can be costed".

1. Assignment of functions

• Sections 14(1) and 14(2) outline the process for the assignment of functions to municipalities by Cabinet members / MECs, but they cover only the functions outside those specified in Part B of Schedules 4 and 5 of the Constitution. This leaves a significant "grey area" untouched, as national legislation often gives content or guidelines to Schedule 4 and 5 functions. Such legislation often tends to have significant financial implications for municipalities. Section 14(1) could thus be amended to read as follows:

A Cabinet member initiating the assignment of a function to municipalities generally by way of national legislation in terms of section 44(1)(a)(iii) or 156(1)(b) of the Constitution, or regulating local government functions in terms of section 156(1)(a) of the Constitution, must…

Section 14(2) would thus be amended to read:

An MEC initiating the assignment of a function to municipalities in the province by way of provincial legislation in terms of section 104(1)(c) or 156(1)(b) of the Constitution, or regulating local government functions in terms of section 156(1)(a) of the Constitution, must…

• In a similar vein, Section 14(3) indicates that appropriate steps to ensure sufficient funding for assigned functions must be taken, however functions falling within Part B of Schedules 4 and 5 are again exempted. This could be addressed by adding "and" after Section 14(3)(a), and replacing "and" with "or" after Section 14(3)(b).
• Furthermore, "sufficient funding" is difficult to assess where no norm or standard for the function has been determined. It is therefore suggested that Section 14(3) be amended to read, "must take appropriate steps to ensure sufficient funding for the performance of the assigned function by the municipalities or municipality concerned, according to the minimum norm or standard determined for that function, if – "

3. Additional issues of a financial nature

• Section 55(c): In metropolitan areas, it is not unusual for officials to make investments of R15 million on a daily basis. What needs to be approved by Council is the investment policy, and the clause could thus be amended to read, "make investments outside of the investment policy framework of the municipality".
• Section 110: this section is welcomed, however it does not cover a range of situations in which landholders can evade the provisions of this Section. For example, there is an increasing problem where property is registered in the name of a closed corporation, and ownership of the property is transferred by changing the names of members, thereby circumventing the deeds registration process. Similarly, participants in trusts and share block schemes can evade the provisions of Section 110. It is suggested that this Section be revised in order to close this loophole.

The explanatory Memorandum accompanying the Bill indicates that "no direct financial implications are foreseen" in its implementation, as the DPLG has made budgetary provision for the guidelines and handbooks to be produced.

The financial implications for only the national sphere of government were considered, and municipalities will encounter significant costs in the implementation of the legislation. For example, the development and implementation of new planning systems (Chapter 5: Integrated Development Planning) and performance management systems (Chapter 6) will, in most municipalities, require costly outside expertise.

It is important that these significant costs be noted as the question will inevitably arise as to which sphere of government will bear responsibility for supplying the necessary resources. It can be argued on the one hand that the Bill is providing the foundation for democratic, accountable, and efficient government, and that this is inherent to the local government mandate; on the other hand, the Bill will require entirely new mechanisms to be developed to give effect to these principles. A case could therefore be made that the financial responsibility for the implementation of the Bill should be shared by the national and local spheres of government.