1. INTRODUCTION

The Banking Council and the Development and Public Finance Forum representing the majority of financial institutions involved in the local government market wishes to record its full support for this Bill. We have been in discussions with the Departments of Provincial Affairs and Local Government and Finance, over the last three years in setting up a sound platform for a viable, effective, democratic and delivery oriented local government in South Africa. We have come before this Committee on a number of occasions to either support, strengthen and improve that process in a critical yet constructive manner taking into account the interests of our members. We believe that this Bill, together with the Municipal Finance Management Bill later in the year, will lay a solid foundation for sound financial management in Local Government. We would like to commend the Department and Ministry on the work done on this Bill, its certainly been improved over the last few months.

Our submission will focus on two areas that we feel should be strengthened through appropriate amendments, namely the credit control and debt collection in Chapter 9 and the provincial and national monitoring in Chapter 10.

2. CREDIT CONTROL AND DEBT COLLECTION

Municipalities require adequate access to all sources of revenue in order to fulfil their constitutional obligations. It is therefore incumbent on each municipality to collect all revenue due to it for services rendered. Such collection should be timeous, efficient and effective.

The sad reality, however, is that an increasing number of municipalities do not keep proper records of debtors, take no appropriate action to recover debts and allow debts to accumulate over time. This is reflected in various Auditor-General reports about the state of municipal finances. To compound matters, an IDASA commissioned survey in 1998 (Public Evaluations of and Demands on Local Government) found that a significant proportion of South Africans is prepared to avoid meeting paying their financial obligations to local authorities, if they could get away with it. The failure of municipalities to collect revenues due to them for services rendered and the practice of non-payment before detection has had an adverse effect on the viability, creditworthiness and efficacy of many local authorities.

We are further concerned that a recent Supreme Court of Appeal Judgement (Kempton Park v Kelder) while accepting this principle seems to have, on the facts of that particular case, given the municipality what appears to be an unjustifiably wide discretion in the implementation of debt credit control mechanisms that it had adopted. This might lead to more municipalities paying mere lip service to sound financial management. In the same vein, the present law (as contained in section 89(1) of the Insolvency Act and a number of Provincial Ordinances) allows a Local Authority a preferent claim in respect of arrears rates and, in some jurisdictions, in respect of arrears municipal charges as well.

In cases of default on mortgage loans, financial institutions are obliged by the Code of Banking Practice to explore avenues of rehabilitating a loan. Should these fail, the financial institution is forced to bring the property to a sale in execution in order to recover its losses. Should the property be sold, transfer of ownership cannot pass to the new owner until all outstanding rates and services are paid to the municipality. It is at this point that Local Authorities insist on their preferential claim, which results in the banks being forced to clear the arrears in order to take transfer and buy in a property in default. These rates and services often amount to many thousands of rands.

To demonstrate to members of the Committee the magnitude of the problem, allow me to quote from an article in the Auction Report, April 28 2000, Star Newspaper:

A recent case that has been brought to our attention by one of our member banks, involves an amount of R25 000 as the value of the house, while the outstanding rates and taxes amount was R125 266.

It should be clear by now to the members of this Committee that this preferred creditor status, however well intentioned, has adverse unintended consequences. Surely it could not have been the intention of the legislature, that the creditor of a defaulting rate payer, as opposed to other tax payers, should be compelled to pay the arrears due from the defaulting rate payer if and when that creditor seeks to recover a debt lawfully due to him by attaching the property of the defaulting rate payer.

We have innumerable examples of cases where mortgage lenders have had to pay extraordinary amounts in arrears rates and municipal charges in order to preserve or realise their securities and where they have incurred enormous losses in the process. In none of these cases has there been any censure of the Local Authority for its failure to exercise proper credit control measures. This is clearly untenable and prejudicial to our members.

The present preferred creditor status is a perverse incentive to local authorities and should be done away with.

Furthermore, as a matter of public policy, we strongly believe that it is not statutory protection that should safeguard the revenue due to local authorities, rather it is drastic and immediate steps that need to be taken by all authorities to ensure that revenues are collected from all those who have benefited from municipal services, be they businesses, individuals and communities. Such steps would include:

• keeping a proper and updated record of all municipal debtors;
• taking immediate and appropriate action to recover all debts;
• ensuring better, efficient and timeous debt collection;
• prosecution of those who do not come to any arrangement with municipalities;
• instituting and enforcing credit control mechanisms and;
• regular monitoring and enforcement.

This view seems to be shared by our learned colleagues in the Law Commission, as is evident in their working paper 582 conclusions regarding statutory preference:

In the event that this statutory protection is not repealed immediately, we would, at the very least, recommend the following amendments:

• the right of preference afforded to local a local authority, in terms of section 110, should be for a period not exceeding 2 years in conformity with Section 89(1) of the Insolvency Act.
• the right of preference should be confined only to municipal rates and should not extend to basic and/or service charges for sewerage and water. The latter charges are not an incidence of ownership, but are rather charges for consumable services arising out of a contractual relationship between the relevant owner and the local authority. As Wunsh J. stated in the recent Galloway case (1997(1)SA 348 (W)), Discussing the distinction between charges arising as an incident of ownership and other service charges:

These amendments will go some way towards establishing sound financial management practice in local government. We have looked at lessons from other countries in Africa and beyond and the evidence is conclusive: where property rights are not supported, foreclosure processes are difficult to implement and where a low priority is given to mortgage liens; delinquency and default rates tend to significantly increase. It is clearly also a disincentive to the banking sector to extend mortgage finance to lower income sectors.

1. MONITORING OF MUNICIPALITIES

We support the view that there should be regular and systematic monitoring and capacity building of local government by national and provincial departments. The Bill, however, seems only to deal with monitoring in-cases of mal-administration, fraud and corruption. The reality is that the majority of municipalities require monitoring on matters that relate to financial management. We would therefore argue that this Bill should make provision for monitoring a municipality, by an MEC, when the municipality concerned is in a state of financial distress. In such cases, it would be important for the MEC to consult and inform all affected parties about the nature of the problem and how it will be resolved. Such a pro-active, transparent and consultative approach will go a long way towards resolving real or perceived problems between municipalities in distress and their creditors. We would therefore recommend that the following amendment be considered by the Committee:

There is a view that the contract between a municipality and a creditor should be the only instrument regulating these issues. We would, however, argue strongly that the other spheres of government have a responsibility to bring creditors in the "information loop" quite early on so that the cause of the problem, suggested strategies, accountability and timeframes are known to the creditors, obviously on a confidential basis.

Chairperson, the non-payment of charges for publicity provided services and rates threatens the new democratic order for three reasons. Firstly, as long as urban consumers do not pay for services, the funding base of South Africa’s cities will remain weak, thus threatening the society and the economy. Secondly, by not meeting their financial commitments, citizens are reneging on their part of the ‘social contract’, which is a pillar of any democratic society. Thirdly, it weakens the financial system, as banks become burdened with non-payment of borrowers debt.

In the final analysis, municipal finances must be well managed to provide services, attract capital investments and make the best use of available resources. The changes this Committee is working on today, will ensure that tomorrow:

• Decision-makers make informed decisions,
• The public knows how public funds are managed,
• Investors have adequate and accurate information upon which to base investment decisions, and
• The provincial and national governments are able to fulfil their constitutional obligations towards local government.

I wish to thank this Committee for the professional and collegial manner in which it conducts all its public hearings. It always gives us the feeling that " we have been listened to and heard". We appreciate that, thank you.