Testimony before the Portfolio Committee

Parliament of the Republic of South Africa

12 May 2000

in respect of The Municipal Systems Bill

Chair Carrim, and honorable members of the Committee:

The Municipal Infrastructure Investment Unit (MIIU) expresses its gratitude at being afforded the opportunity to testify with regard to this most important legislation. The MIIU has participated in the dialogue regarding the crafting of this bill commencing with the Bosberaad at Hammanskraal in November 1998 until the present day. Our interest in the Bill stems from our mandate to assist municipalities in preparing projects and engaging private investors to fund municipal services infrastructure. These projects are commonly referred to as public-private partnerships or public-public partnerships (PPPs), and in this Bill, as Municipal Service Partnerships (MSPs). My comments are as to the 20 March 2000 draft.

Since its launch in early 1998, the MIIU has leveraged its R13,8 million of grant funds into privately-financed municipal services infrastructure with a total value in excess of R3 billion over the life of the projects. And, through assistance to municipalities in privatising money-losing, non-core municipal activities, the MIIU has also caused an additional R900 million to flow back into municipal coffers where it may be made available to provide core services to previously-disadvantaged residents. With more than 50 active projects throughout the country, the MIIU is playing the most active role in assisting municipalities access private-sector capital to finance municipal services infrastructure. Our interest in this bill, then, is to express our support for those provisions that assist us in pursuing our mandate, and to suggest amendments to those that we perceive as hindering it.

My remarks will address four different aspects of the bill: (1) Provisions which have the affect of overturning the interpretation of sections 10C(7)(b), 10D(3), read together with section 10G(7)(a)(ii) of the Local Government Transition Act to prohibit municipal councils from delegating the authority to collect revenues for tariffs that have been previously set by the Council; (2) Authorising the Minister to enact Regulations limiting tariff increases; (3) Requiring that any transfer of employees to a third-party services provider be with the consent of the transferring employees; and (4) Permitting non-competitive, directly negotiated third-party service agreements between a municipality and a public sector service provider.

1. Overturning the interpretation of the cited sections in the Local Government Transition Act. Subdivision (2)(a)(vi) of section 75 of the Bill states that a service delivery agreement may authorize a municipality to assign to a service provider responsibility for the collection of service fees from customers in accordance with the municipal council’s tariff policy and the credit control measures established in terms of Chapter 9. Many of you are aware that in both the Dolphin Coast and Nelspruit water and sanitation concessions, legal opinions were rendered by distinguished Advocates to the effect that the cited provisions of the Local Government Transition Act (LGTA) prohibited a service agreement between a municipality and another person, including a private sector company, where the private sector company collects the revenues reflecting the tariffs imposed by the municipality. The ability of a third party service provider to collect revenues for its own account is key to the success of any service agreement. Those nations permitting municipal service provision by third parties invariably have similar provisions governing the collection of revenues generated by the imposition of tariffs. We strongly support this provision, and urge that any attempt to weaken it be steadfastly resisted.

We note, however, that Schedule of 2 of the Bill, "Legislation Amended," does not mention the LGTA. In the Memorandum on the Objects of the Local Government: Municipal Systems Bill 2000, language appears that indicates the government intends to repeal "virtually the entire body of legislation and provincial ordinances inherited from the apartheid era." The LGTA is not, I believe such a piece of legislation. We believe it is important that Parliament repeal those provisions of the LGTA that are inconsistent with this Bill, and do so unequivocally and simultaneously with the Bill’s passage.

2. Authorising the Minister to enact Regulations limiting tariff increases.

Subsection (c) of Section 86, appearing for the first time in the 20 March 2000 draft, permits the Minister to enact regulations providing limits on tariff increases. Such regulations would apparently apply to all service delivery agreements, regardless of the legal status of the party with whom the municipality is contracting. Treasury has established a PPP task force to undertake public-private partnerships at the national and provincial level. This provision would therefor set a precedent for any national or provincial PPPs that rely upon service tariffs for repayment revenue flows.

The problem with this subsection is that it introduces great uncertainty into the financeability of any municipal infrastructure dependent, in whole or in part, upon tariff revenues, and not just financing undertaken as part of a municipal service partnership. Obviously, if a financing is obtained based upon a certain set of tariff increases, agreed-to by the municipality in accordance with its Constitutional authority, and the Minister subsequently limits those increases, the financing fails. The portent of such a regulation, as authorised by this subsection, probably renders unfinanceable any municipal infrastructure project the payment of which is dependent upon mutually-agreed-upon tariff increases, regardless of who the project sponsor is.

The MIIU has had great experience with regard to a similar provision in the Water Services Act. In point of fact, the similar provision in the Water Services Act has, to our knowledge, been a bar to financing of water services agreements by any non-parastatal financial institution, absent a waiver from the Minister. We feel that the financial community will not wish to consider financing municipal infrastructure dependent upon tariff revenues for debt repayment knowing that in each instance they will have to approach the Minister for a waiver, or seek some other form of guarantee. We were led to believe, and are still hopeful, that as part of the processes surrounding the enactment of this Bill, the offending counterpart in the Water Services Act might be amended. The appearance of this provision at this late date is very disappointing, and requires immediate rectification.

3. Requiring that any transfer of employees to a third-party services provider be with the consent of the transferring employees.

The requirement, in subsection (2)(d) of Section 75, that a municipality may transfer or second any of its employees to the service provider, in accordance with applicable labour legislation, and "with the concurrence of the employees concerned" imposes an uncertain requirement in excess of that contained in the Labour Relations Act. The apparently applicable labour legislation is Section 197 of the Labour Relations Act, dealing with the acquisition of a going business, and that section does NOT require the consent of the affected employees. The only requirement is that the transferring employee be accorded the same remuneration and benefits enjoyed while an employee of the transferor. Parliament obviously spent a great deal of time considering all relevant issues when it enacted the Labour Relations Act. Unless there is a clear and convincing need to expand the Act in this instance, we believe that it should not.

The requirement is also unclear. If one employee does not consent, does that negate the consent of all of the other employees? Finally, we note the precedental nature of this provision. We believe that a similar provision, applicable to Treasury’s task force, mentioned earlier, will be a substantial impediment to that initiative. This provision should be amended by deleting the phrase, "with the concurrence of the employees concerned."

4. Permitting non-competitive, directly negotiated third-party service agreements between a municipality and a public sector service provider.

Section 74 of the Bill allows the direct negotiation, without competitive bidding, of a third party service delivery agreement between a municipality and a service utility or municipal business entity established by it, another municipality, or a national or provincial organ of state. The Constitution is unequivocal when it states: "When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost effective." [Emphasis added.] The only exceptions are that an organ of state or covered institution may implement a procurement policy providing for (a) categories of preference in the allocation of contracts; and (b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination.

It is not intuitive that allowing direct negotiation, as described in Section 74, comes within either of the listed exceptions. The benefits of competition are clear. Competition is the mechanism that provides for the most efficient and cost-effective rendering of services, to the benefit of all stakeholders – the municipality, its consumers, and most importantly, its ratepayers. The legislation cannot be justified on the assumption that two public sector entities will deal with each other in the most cost-effective, efficient manner, especially in light of the Constitutional mandate.

To summarize:

This important piece of legislation is the long-awaited mechanism for structuring local government in South Africa and providing the means for consideration of municipal services partnerships by units of local government as an alternative for them to meet their constitutional municipal services provision obligations. Municipal services partnerships and PPPs are key components of national government’s policy for the provision of basic municipal services because they provide a means for accessing private-sector financing in situations where the service could otherwise not be provided. The financial sustainability of the municipality as a separate and interdependent sphere of government could depend upon the ability of municipalities to access private sector financing via MSPs and PPPs. The experience gained at the local level in this regard will also be the template for similar activities at the national and provincial level.

As I indicated in my opening remarks, our purpose today is to highlight those provisions in the Bill that will either help or hinder the ability of municipalities to consider MSPs. The subsection of Section 75 that counters the prohibition contained in the LGTA against a third party service provider collecting revenues from tariffs set by the municipality is crucially important; the repeal of the offending sections of the LGTA must accompany its enactment. The provision authorizing regulations limiting tariff increases must be deleted, as our experience to date has made it clear that the financial community will not accept such a risk. Staff transfers that occur incidental to the granting of an MSP concession should only be governed by the Labour Relations Act. The Constitutional provision requiring competitive processes for services procurement should be strictly construed.

With adoption by Parliament of these principles, Municipalities will have preserved to them the ability to assess the appropriateness of the broadest spectrum of service provision alternatives. If these principles are not adopted, the call by government, re-stated as recently as President Mbeki’s State of the nation speech and Finance Minister Manual’s budget speech, for greater reliance on public-private partnerships to advance services provision will go unanswered.

Thank you.