Ex parte: NATIONAL TREASURY

In re: CONSTITUTIONALITY OF CHAPTER 11 OF THE LOCAL GOVERNMENT : MUNICIPAL FINANCE MANAGEMENT BILL

OPINION

INTRODUCTION

1 Consultant is the National Treasury.

2 We have been briefed with a copy of a proposed substitute to Chapter 11 of the Local Government: Municipal Finance Management Bill ("the Bill") as introduced in the National Assembly. We have been briefed further with a copy of a proposed amendment to section 139 of the Constitution (approved by Cabinet, published for comment and to be introduced in parliament within the next 30 days). For the purposes of this opinion, we will refer to the provisions of s 139 as "the proposed amendment" to the Constitution.

3 Our advice is sought on the constitutionality of Chapter 11 of the MFM Bill in relation to the proposed amendment to s 139 of the Constitution. We are advised that opinions on the constitutionality of Chapter 11 of the Bill as introduced in the National Assembly were previously sought from, amongst others, Trengove SC. However, since those opinions, both Chapter 11 and the proposed amendment to s 139 of the Constitution were revised. Hence the need for this opinion.

4 In considering the constitutionality of Chapter 11 in relation to the proposed amendment, we will focus on the following two aspects of Chapter 11, as requested by Consultant, namely:

4.1 Financial Watch Issues (ss 89, 90); and

4.2 Financial Emergency Issues (ss 96 and 97).

5 We will also give consideration to the question of whether the proposed amendment to s 139 of the Constitution obviates the need for the provisions in Chapter 11 of the Bill.

CONSTITUTIONAL PROVISIONS REGARDING LOCAL GOVERNMENT

6 In terms of s 151(2) of the Constitution the executive and legislative authority of a municipality is vested in its municipal council.

7 In terms of s 151(3) a municipality has the right to govern, on its own initiative, the local government affairs of its community, subject to national and provincial legislation, as provided for in the Constitution.

8 In terms of s 156, a municipality has executive authority in respect of, and has the right to administer -

8.1 the local government matters listed in schedule 4B and 5B;

8.2 any other matter assigned to it by national or provincial legislation (s 156(1)(b)).

9 In terms of s 156(2) a municipality may "make and administer by-laws for the effective administration of matters which it has the right to administer".

10 Finally, in terms of s 156(5) a municipality has the right to exercise any power concerning a matter reasonably necessary for, or incidental to, the effective performance of its functions.

11 Municipal finance is not listed in schedule 4B or 5B as being a local government matter. However, municipalities have certain fiscal powers in terms of Chapter 13 of the Constitution (s 229 of the Constitution and in any event, the exercise of financial powers is in our view "reasonably necessary for, or incidental to, the effective performance" of the municipal functions listed in schedules 4B and 5B (s 156(5)).

12 Municipalities accordingly have executive authority in respect of, and the right to administer, their own finances.

13 The right of municipalities to administer their own finances does not deprive parliament of the power to legislate regarding municipal finances. This is made clear in S 151(3) of the Constitution which provides that the power of municipalities to administer their own affairs is 'subject to national and provincial legislation, as provided for in the Constitution.'

See: Executive Council, Western Cape v Minister for Provincial Affairs & Constitutional Development and Another 2000 (1) SA 661 (CC) para 29

14 S 44(1)(a)(ii) of the Constitution confers on parliament the power to pass legislation with regard to any matter, including a matter within a functional area listed in Schedule 4, but excluding, subject to subsection (2), a matter within a functional area listed in Schedule 5.

15 Municipal finance is not a matter which is listed in schedule 5 (which deals with functional areas of exclusive provincial legislative competence) and hence does not fall outside of the legislative competence of parliament. Accordingly, parliament has the competence to pass legislation with regard to municipal finance.

16 In any event, s 164 of the Constitution provides that "[a]ny matter concerning local government not dealt with in the Constitution may be prescribed by national legislation or by provincial legislation within the framework of national legislation".

17 There is an obvious tension between the constitutional principle that parliament may legislate regarding municipal finance on the one hand, and the constitutional principle that municipalities have the right to administer their own finances on the other. This tension is addressed in s 155(7) and 151(4) of the Constitution.

S 155(7) OF THE CONSTITUTION

18 S 155(7) of the Constitution provides as follows:

"The national government, subject to s 44, and the provincial governments have the legislative and executive authority to see to the effective performance by municipalities of their functions in respect of matters listed in schedules 4 and 5, by regulating the exercise by municipalities of their executive authority referred to in s 156(1)."

19 S 155(7) permits parliament to regulate municipalities in the exercise of their executive powers, whether by legislative or executive means.

20 The effect of this provision is that parliament may not only legislate with regard to local government matters, but it may also require local government to exercise its executive authority in a particular way. In other words, s 155(7) confers on parliament the power to regulate the exercise of municipal authority by prescribing how municipalities must exercise their executive authority and supervising their conduct in doing so.

In Executive Council, Kwa Zulu Natal v President of the RSA 2000 (1) SA 661, para 29, the Constitutional Court stated that:

"[29] Municipalities have the fiscal and budgetary powers vested in them by chap 13 of the Constitution, and a general power to 'govern' local government affairs. This general power is 'subject to national and provincial legislation.' The powers and functions of municipalities are set out in s 156 but it is clear from ss 155(7) and 151(3) that these powers are subject to supervision by national and provincial governments and that national and provincial legislation has precedence over municipal legislation. The powers of municipalities must however, be respected by the national and provincial governments which may not use their powers to 'compromise or impede a municipality's ability or right to exercise its own powers or perform its functions,' (emphasis supplied)."

S 151(4) OF THE CONSTITUTION

21 S 151(4) provides:

"The national or an provincial government may not compromise or impede a municipality's ability or right to exercise its powers to perform its functions."

22 The importance of this provision is highlighted by s 156(3), which provides that a by-law which conflicts with national or provincial legislation is invalid "[s]ubject to s 151(4)". A by-law will prevail over national or provincial legislation in circumstances where such legislation compromises or impedes a municipality's ability to exercise its powers.

23 S 151(4) clearly imposes a constraint on the powers of the national sphere of government. In the words of Ngcobo J in Executive Council, Western Cape v Minister of Provincial Affairs 2000 (1) SA 661 at para 29G-I:

"The Constitution ... protects the role of local government and places certain constraints upon the powers of parliament to interfere with local government decisions... if an Act of Parliament is inconsistent with such constraints it would to that extent be invalid."

24 S 151(4) qualifies the power of parliament to enact legislation dealing with municipal finance. National legislation dealing with municipal finance will be invalid if it compromises or impedes a municipality's ability or right to exercise its powers or to perform its functions.

25 The inter-relationship between the abovementioned constitutional provisions may be summarised as follows:

25.1 in terms of s 156(1) (read with s 156(5) of the Constitution), a municipality has "executive authority in respect of, and the right to administer" its own finances;

25.2 parliament has the power in terms of s 155(7) to "regulate" the exercise by municipalities of their executive authority;

25.3 a distinction must be drawn between national legislation which deprives a municipality of its executive authority on the one hand, and national legislation which regulates the exercise of such authority on the other;

25.4 national legislation which deprives a municipality of its executive authority will fall foul of s 156(1);

25.5 national legislation which regulates the executive power of municipalities is authorised by s 155(7), and will not be unconstitutional.

26 Even if, however, national legislation does not deprive a municipality of its executive authority in respect of municipal finance, such legislation must not "compromise or impede" a municipality's right to exercise its authority (s 151(4) of the Constitution).

27 Accordingly, parliament's power to enact legislation regarding municipal finance is subject to two qualifications:

27.1 such legislation may not deprive a municipality of its executive authority (s 156(1)); or its legislative authority in respect of municipal finance (s 156(2));

27.2 such legislation may not "compromise or impede" a municipality's ability to exercise its powers or perform its functions (s 151(4)).

28 The words "compromise" and "impede" both import subjective criteria which call for value judgments as to whether or not in any particular case the legislative provision in question "compromises" or "impedes" the relevant municipality's right to exercise its authority or merely regulates it with the object of achieving "the effective performance by municipalities of their functions".

29 The New Oxford Dictionary of English (1998) defines the verb "compromise" inter alia as "weaken (a reputation or principle) by accepting standards that are lower than is desirable". (378)

The word "impede" is defined in the same work as "delay or prevent (someone or something) by obstructing them".

30 Both words thus carry the strong connotation that the conduct which may not be "compromised" or "impeded" is appropriate or laudable conduct. It follows that the test in each case will be two-fold:

30.1 does the legislation in question as a fact obstruct or tend to obstruct the exercise by a municipality of one of its powers;

30.2 if so, is such obstruction in furtherance of a more effective exercise of power by the municipality, or will it lead to an obstruction of the proper exercise of power.

RELEVANT PROVISIONS REGARDING MUNICIPAL FINANCE

31 The proposed amendment to s 139 of the Constitution provides:

"The following section is hereby substituted for s 139 of the Constitution:

Provincial supervision of local government

139. (1) When a municipality cannot or does not -

(a) fulfil an executive obligation in terms of legislation or the Constitution;

(b) approve a budget or revenue-raising measures giving effect to the budget, or

(c) fulfil any other obligation specified by an Act of Parliament, the serious or persistent breach of which threatens the health and safety of residents of the municipality,

the relevant provincial executive may intervene by taking any appropriate steps to ensure fulfilment of that obligation [, including -]

(2) The steps a provincial executive may take in terms of subsection (1) include -

(a) issuing a directive to the Municipal Council, describing the extent of the failure to fulfil its obligations and stating any steps required to meet its obligations, and

(b) assuming responsibility for the relevant obligation in that municipality to the extent necessary -

(1) to maintain essential national standards or meet established minimum standards for the rendering of a service.

(2) to prevent that Municipal Council from taking unreasonable action that is prejudicial to the interests of another municipality or to the province as a whole: or

(iii) to maintain economic unity.

(3) If a municipality, as a result of a crisis in its financial affairs, is in a serious or persistent breach of its obligations to provide basic services or to meet its financial commitments, the provincial executive must intervene by taking effective steps to resolve the crisis, including -

(a) adopting a recovery plan to restore the municipality to financial health; and

(b) if the municipality cannot or does not implement the recovery plan -

(i) assuming responsibility for the implementation of the recovery plan; and

(ii) approving a budget and revenue-raising measures giving effect to the recovery plan.

(4) Section 100 applies if a provincial executive cannot or does not fulfil an obligation in terms of sub-section (3).

[(2)] (5) If a provincial executive intervenes in a municipality in terms of subsection [(1)(b)] (2)(b) -

(a) the intervention must end unless it is approved by the Cabinet member responsible for local government affairs within [14] 40 days [of] after the intervention began;

(b) notice of the intervention must be [tabled in] submitted to the provincial legislature and [in] to the National Council of Provinces within 14 days [of their respective first sittings] after the intervention began;

(c) the intervention must end -

(i) unless it is approved by the Council within [30] 180 days of its first sitting after the intervention began; or

(ii) if it is disapproved by the Council earlier, and

(d) the Council [must] may review the intervention regularly and may make any appropriate recommendations to the provincial executive.

[(3)] (6) National legislation may regulate -

(a) the [process] processes established by this section, and

(b) the implementation of this section.".

32 S 139(6) envisages that national legislation may be enacted to regulate the processes by means of which provincial government and national government might intervene in the affairs of local government and to provide for the implementation of the section.

CO-OPERATIVE GOVERNMENT

33 Ss 40-41 of the Constitution impose certain constraints on the powers of national government. In particular, s 41(1)(g) of the Constitution provides as follows:

"All spheres of government and all organs of state within each sphere must ...

(g) exercise their powers and perform their functions in a manner that does not encroach on the geographical, functional or institutional integrity of government in another sphere."

34 It was held by the Constitutional Court in Premier, Western Cape v The President of the Republic of South Africa 1999 (3) SA 657 (CC) para 57 and 58 that s 41(1)(g) of the Constitution is concerned with the way power is exercised, not with whether or not a power exists. That is determined by the provisions of the Constitution:

"[58] Although the circumstances in which s 41(1)(g) can be invoked to defeat the exercise of a lawful power are not entirely clear, the purpose of the section seems to be to prevent one sphere of government using its powers in ways which would undermine other spheres of government, and prevent them from functioning effectively. The functional and institutional integrity of the different spheres of government must, however, be determined with due regard to their place in the constitutional order, their powers and functions under the Constitution, and the countervailing powers of other spheres of government."

35 S 41(1)(g) seeks to prevent one sphere of government from using its powers in ways which undermine other spheres of government and prevent them from functioning effectively.

CHAPTER 11 OF THE BILL

36 Chapter 11 is entitled "FINANCIAL PROBLEMS IN MUNICIPALITIES" and is divided into 5 parts:

36.1 Part 1: Avoiding, identifying and solving problems (ss 88-93);

36.2 Part 2: Financial recovery plan (ss 94-95);

36.3 Part 3: Financial emergency (ss 96-99);

36.4 Part 4: Protection in a financial emergency (ss 100-102);

36.5 Part 5: Establishment, functions and administration of municipal recovery service (ss 103-110).

37 PART 1 - AVOIDING, IDENTIFYING AND SOLVING PROBLEMS

37.1 Financial Aspects of Co-Operative Governance

37.1.1 S 88 of the Bill enjoins the national and provincial governments to: "support the development of financial management capacity in municipalities"; "assist municipalities' efforts to identify and resolve financial problems"; and "monitor the financial performance of municipalities."

37.1.2 S 88(2) enjoins the municipalities to monitor and manage their financial affairs so as to foresee and avoid financial problems wherever possible and to identify and resolve any financial problems at the earliest possible stage.

37.1.3 S 88(3) enjoins councillors and municipal officials to co-operate with national and provincial efforts to identify and resolve financial problems in municipalities.

38 There is in our view nothing objectionable about s 88 of the Bill. It merely gives effect to the principles of co-operative governance and inter-governmental relations as provided for in s 41 and s 154 of the Constitution.

39 Section 154(1) provides:

"The national government and provincial government by legislative and other measures, must support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers and to perform their functions."

40 Provincial Financial Watch

40.1 S 89 of the Bill obliges the MEC responsible for local government, who knows of a serious, chronic or recurrent financial problem in a municipality to:

(a) place the municipality under financial watch;

(b) notify the municipality, the provincial premier, the minister of finance, and the minister for provincial and local government that the municipality has been placed on a provincial financial watch; and

(c) act promptly and in consultation with the municipality to identify the causes of, and potential solutions to, these financial problems.

40.2 The constitutionality of s 89 must be considered in relation to the proposed amendment of s 139 of the Constitution.

40.3 Section 139(3) provides:

"(3) If a municipality, as a result of a crisis in its financial affairs, is in a serious or persistent breach of its obligations to provide basic services or to meet its financial commitments, the provincial executive must intervene by taking effective steps to resolve the crisis, including-

(a) adopting a recovery plan to restore the municipality to financial health; and

(b) if the municipality cannot or does not implement the recovery plan -

(i) assuming the responsibility for the implementation of the recovery plan; and

(ii) approving a budget and revenue raising measure giving effect to the recovery plan:

(4) S 100 applies if a provincial executive cannot or does not fulfil an obligation in terms of subsection (3)." (emphasis provided)

40.4 Section 139(3) enjoins the relevant provincial executive to intervene where a municipality, as a result of a crisis in its financial affairs, is in serious or persistent breach of its obligations to provide basic services or to meets its financial obligations. Not only is the relevant provincial executive required to intervene but he is also required to take effective steps to resolve the crisis. Such steps may include and are not limited to adopting a recovery plan to restore the municipality to financial health; and if the municipality cannot or does not implement the recovery plan, to assume responsibility for the implementation of the recovery plan; and approve a budget and revenue-raising measures giving effect to the recovery plan.

40.5 Section 139(6) then goes on to provide that national legislation may regulate the processes established by the section and the implementation of the section. Insofar as the declaration of a provincial watch can be interpreted to be a process emanating from s 139, s 89 is permissible.

40.6 As stated earlier, national and provincial governments have legislative and executive authority to see to the effective performance by municipalities of their functions in respect of matters listed in schedules 4 and 5, by regulating the exercise of municipalities of their executive authority referred to in s 156(1).

40.7 In terms of s 151(3), a municipality has the right to govern, on its own initiative, the local government affairs of its community, subject to national and provincial legislation. Lastly, the national and provincial governments may not compromise or impede a municipality's ability or right to exercise its powers or perform its functions.

40.8 Section 89, neither seeks to deprive a municipality of its executive powers nor to compromise or impede its ability or right to exercise or perform its functions. It merely seeks in the exceptional circumstances of "serious, chronic or recurrent financial problems in a municipality" to place such municipality under financial watch. This is in our view sanctioned by section 155(7) of the Constitution and is accordingly constitutionally permissible.

40.9 Section 89 also provides for notification to various important parties including the municipality itself of the fact that the municipality concerned has been placed under provincial financial watch and more importantly provides for consultation with the municipality to identify the causes of, and potential solutions to the problem. In this respect it neither compromises nor impedes a municipality's ability or right to exercise its powers or perform its functions.

40.10 The legislature has seen fit to assign the function of placing a municipality under financial watch to the relevant provincial executive in terms of s 89(a). In our opinion such assignment is not constitutionally impermissible.

40.11 In terms of s 125(1) of the Constitution, the executive authority of the provinces is vested in the Premier of that province.

40.12 In terms of s 125(2) of the Constitution, the Premier exercises this authority by, inter alia, performing any function assigned to the provincial executive in terms of the Constitution or an Act of parliament.

40.13 Parliament has seen fit in terms of s 89 of the Bill to confer upon the MEC responsible for local government, the power to place a municipality that is experiencing serious, chronic or recurrent financial problems under financial watch.

40.14 The Constitution, however, places certain constraints upon the powers of parliament when conferring discretionary powers. In this regard, it must limit the risk of an unconstitutional exercise of the powers that it confers.

40.15 In this regard, the Constitutional Court has more recently held that "where a wide discretion was conferred upon a functionary, parliament must provide adequate guidelines as to the manner in which those powers are to be exercised".

See: Dawood v Minister of Home Affairs 2000 (3) SA 936 (CC)

Janse Van Rensburg NO v Minister of Trade & Industry 2001 (1) SA 29 (CC) para 25.

40.16 In our view section 89 does not fall foul of the injunction to provide adequate guidance as to the manner in which the powers of the provincial executive should be exercised. The guidance appears from the section itself.

41 National Financial Watch

41.1 Section 90 of the Bill enjoins the minister of finance, if he knows of "serious, chronic of recurrent financial problems" in a municipality and has reason to believe that adequate steps are not being taken by the municipality and the provincial executive to identify and resolve these problems, to consult with the provincial executive and the minister for provincial and local government. If the minister is of the view, following such consultation, that further measures are needed to resolve the municipality's financial problems, the minister must - (1) place the municipality under financial watch; (2) notify the municipality, the provincial executive and the minister for provincial and local government that the municipality has been placed on a national financial watch; and (3) identify the causes of, and potential solutions to these financial problems in consultation with the municipality.

41.2 Section 139(4) of the proposed amendment of the Constitution provides for the application of s 100 of the Constitution, if a provincial executive cannot or does not fulfil an obligation in terms of subsection (3).

41.3 Section 100 of the Constitution, which is entitled "National Supervision of Provincial Administration", provides:

"When a province cannot or does not fulfil an executive obligation in terms of legislation or the Constitution, the national executive may intervene by taking any appropriate steps to ensure fulfilment of that obligation, including -

(a) issuing a directive to the provincial executive describing the extent of the failure to fulfil its obligations and stating any steps required to meet its obligations; and

(b) assuming responsibility for the relevant obligation in that province to the extent necessary to -

(i) maintain essential national standards or establish minimum standards for the rendering of a service;

(ii) maintain economic unity;

(iii) maintain national security; or

(iv) prevent that province from taking unreasonable action that is prejudicial to the interests of another province or to the country as a whole.

(2) If the national executive intervenes in a province in terms of subsection (1)(b) -

(a) notice of the intervention must be tabled in the national council of provinces within 14 days of its first sitting after the intervention began;

(b) the intervention must end unless it is approved by the council within 30 days of its first sitting after the intervention began; and

(c) the council must review the intervention regularly and make any appropriate recommendations to the national executive.

(3) National legislation may regulate the process established by this section."

41.4 In terms of s 100 of the Constitution, the national government oversees the province's exercise of its executive powers. If a province fails to fulfil any of its executive obligations, the national government may intervene in terms of s 100(1) to ensure that the obligation is fulfilled. Steps which may be taken include - issuing of directives to the provincial government or, in certain circumstances, the direct assumption by the national government of responsibility for the neglect of executive obligations. Any decision to assume responsibility for a provincial executive obligation lapses unless it is ratified by the national council of provinces within 30 days of its first sitting following the intervention of the national government.

41.5 S 100(1) of the Constitution does not permit a violation of legitimate provincial authority. As pointed out by the Constitutional Court, s 100(1) gives "no power to the national government where a province properly carries out its executive obligations".

See: Ex parte Chairperson of the Constitutional Assembly in re: Certification of the Constitution of the Republic of South Africa, 1996 (4) SA 744 (CC) at paras 263-6

41.6 Any attempts by the national government to exercise powers under s 100(1) where a province is properly complying with its executive obligations would probably be unconstitutional and invalid.

41.7 S 100(3) provides that national legislation may regulate the process established by s 100. The legislature has in the circumstances seen fit to define and give predictability to the steps that the minister of finance should take in the event of failure by the provincial executive to take effective or adequate steps to resolve the financial problem of a municipality. These steps are set out in s 90 of the Bill.

42 Serious, chronic or recurrent financial problems

Section 91 of the Bill seeks to give definition and meaning to the term "serious, chronic or recurrent financial problems" by including the conditions set out in paragraphs (a) to (j) thereof. As required by the Constitutional Court in the Dawood (supra) and Janse van Rensburg (supra) decisions, the legislature has provided clear guidance to the administrative functionaries, viz. the relevant provincial executive and the minister of finances, as to the meaning of "serious, chronic or recurrent financial problem". This is, in our opinion, permissible.

43 Identifying possible solutions

S 92 of the Bill is not, in our view, unconstitutional. It merely regulates the process that the minister of finance, the provincial executive or their designees may follow in identifying the causes of, and possible solutions to a municipality's financial problems.

44 Termination of financial watch

Section 93 of the Bill provides for the termination of the financial watch by the provincial MEC or the minister of finance when he or she determines that the serious, chronic or recurrent financial problems that gave rise to the financial watch have been resolved. The legislation does not impose a restrictive time frame on the MEC or the minister of finance to terminate the financial watch but instead, (and correctly so), leaves that decision for termination in the discretion of the MEC or the minister of finance.

45 PART 2 - FINANCIAL RECOVERY PLAN

45.1 Sections 94 and 95 of the Bill provide for the preparation and implementation of a financial recovery plan ("the recovery plan").

45.2 In terms of s 94(1) the recovery plan must be submitted to the municipality, the municipality's creditors and the provincial executive for consultation. S 94(2) provides for certain mandatory aspects that must be covered by the recovery plan. Section 94(3) goes on to provide that, amongst other things, the recovery plan may provide for sanctions including the suspension of the remuneration or other benefits of members of the council or officials should they fail to co-operate in the implementation of the recovery plan; that it should provide special control measures to prevent unauthorised irregular expenditures; and that it should provide budgetary parameters and identify the tax rates, tariffs and revenue collection measures that are necessary for financial recovery.

45.3 Section 94(4) requires the recovery plan to consider the extent to which financial problems in the municipality are attributable to, amongst others, structural financial imbalance, (as where the municipality's potential revenues from all sources are not sufficient for obligations it must meet in terms of the Constitution and national legislation); or transitional factors in the local economy that temporarily impair ratepayers and service customers' ability to pay rates, fees and charges.

45.4 The recovery plan is furthermore required to note the existence and extent of such causes in a written report to the provincial executive, the minister for provincial and local government and the minister of finance.

45.5 In terms of s 94(5) the recovery plan must, at least 14 days prior to finalisation thereof, be submitted for comment to the municipal manager, the provincial executive, the minister for provincial and local government, the minister of finance, the municipal financial recovery service and any creditors who have not been paid in a timely fashion. The recovery plan must also be made available to the public and the media during normal business hours for inspection and copying.

45.6 In terms of s 94(6) the MEC or a minister must submit the recovery plan to the municipality and the municipal council must either adopt the recovery plan and any budget, revenue and expenditure measures required by the plan or they must adopt a resolution stating what steps it intends to take to resolve its financial problems.

45.7 In terms of s 94(7) if the municipal council does not adopt the recovery plan or otherwise fails to implement the plan, then the MEC or minister must determine whether the steps that the council has identified are adequate to resolve the municipality's financial problems. If the minister or MEC determines that such steps are not adequate, he or she may adopt a recovery plan and any measures necessary to implement the plan on behalf of the municipality and they shall have the same force and effect as if they had been adopted by the municipal council.

45.8 Section 94 is, in our opinion, not unconstitutional. It does not compromise or impede the municipality's ability or right to exercise its powers or perform its functions neither does it deprive a municipality of its powers and functions. In this regard, s 94 makes provision for consultation between the municipality and the province in preparing and finalising the recovery plan.

45.9 In terms of s 95 when a recovery plan has been adopted for a municipality all revenue, expenditure and budget decisions must be taken within the framework of and subject to the limitations of the financial recovery plan. The municipality must report to the provincial executive and to the municipal financial recovery service in a manner and at such intervals or upon the reaching of such objectives as the financial recovery plan shall prescribe. Any amendments to the recovery plan must be made in the same manner as it was originally adopted.

45.10 In terms of s 95(d) the municipality, provincial executive or minister may apply to court in accordance with the provision of Part 4 of Chapter 11 for the declaration of a financial emergency.

45.11 In terms of s 95(e) the implementation of the recovery plan is an obligation of the municipality and if the municipality does not fulfil that obligation, the provincial executive must intervene in terms of s 139 of the Constitution in order to ensure that the recovery plan is implemented. If the province does not fulfil the obligation of implementation of the recovery plan, then the minister of finance must intervene in terms of s 100 of the Constitution in order to ensure that the recovery plan is implemented.

45.12 Section 139(3) of the proposed amendment to the Constitution provides for the adoption by the provincial executive of a recovery plan to restore the municipality to health. Save for requiring the provincial executive to adopt a financial recovery plan to restore the municipality to health and assuming responsibility for its implementation if the municipality does not or cannot implement the recovery plan, s 139 provides no further guidelines on the preparation and actual implementation of financial recovery. Hence the need for s 94 and s 95.

45.13 Once again s 94 and s 95 provide in our view adequate guidance to the functionary responsible for its preparation. They provide guidelines for its preparation, its adoption, failure to adopt and for a reporting system after adoption. S 94 and s 95 of the Bill are accordingly not unconstitutional.

46 PART 3 - FINANCIAL EMERGENCY

46.1 Ss 97 and 98 envisage that the following procedures will apply to municipalities in financial difficulties:

46.1.1 application may be made to court by certain interested parties such as the council or the municipal manager, or the MEC for finance in the province for a declaration that a municipality is in a financial emergency;

46.1.2 a court may only declare a municipality to be in a financial emergency if it is satisfied that at least one of the conditions listed in s 96 exists and more importantly that there is a serious fiscal or financial problem in the municipality that impedes the municipality from meeting its obligations.

46.2 In terms of s 97(3) if a court declares that a municipality is in a financial emergency the provincial executive must immediately consult with amongst others, the minister of finance and the municipal council to determine what steps must be taken in the short term while a recovery plan is being prepared or reviewed.

46.3 If a plan has already been adopted for the municipality then the provincial executive must immediately request the municipal financial recovery service to review such recovery plan and recommend any changes that may be necessary or appropriate to ensure that it complies with s 94 of the Bill.

46.4 If no recovery plan has been adopted for the municipality, the provincial executive must immediately request the municipal financial recovery service to prepare a recovery plan which complies with s 94 of the Bill.

46.5 Should the municipal council fail to adopt the recovery plan or fail to implement the recovery plan, the MEC responsible for local government must adopt the recovery plan and any measures required by the recovery plan on behalf of the municipality and they shall have the same force and effect as if they had been adopted by the municipal council.

46.6 S 97(4) provides for any application for a financial emergency to be heard by the court as promptly as possible.

46.7 S 97(5) provides that if a court declares that a municipality is in a financial emergency, it may order that legal proceedings by any creditor may be stayed for a period not exceeding 90 days to allow for the review of, or preparation of, a financial recovery plan.

46.8 S 98 provides for an application for the termination of a declaration of financial emergency. It sets out which institutions may bring an application for such termination and on whom the relevant notices must be served.

46.9 S 98(3) provides that should a court find that a financial emergency no longer exists, it must terminate the declaration of financial emergency.

46.10 The financial emergency provisions are detailed and give clear guidance to the Court as to when a financial emergency may be declared. They also set out certain principles to be adhered to by the provincial executive. In our view the financial emergency provisions are not unconstitutional.

46.11 Section 99 deals with the effect of a declaration of a financial emergency on a boundary redetermination, in terms of the Local Government: Municipal Demarcation Act 27, of 1998 ("the Act"). The section does not, in our view, offend against any provisions of the Constitution.

47 PART 4 - PROTECTION IN A FINANCIAL EMERGENCY

Application for Extraordinary Relief

47.1 In terms of s 100 of the Bill if the municipal financial recovery service, on reasonable grounds, is of the view that the financial emergency cannot be resolved without restructuring the municipality's obligations to creditors, then the municipal financial recovery service may apply to court for an order to stay legal proceedings by any creditors and the execution of any process against the municipality for a period not exceeding 90 days at a time; to suspend the obligations of the municipality to its creditors until the declaration of the financial emergency's termination; or to terminate the obligations of the municipality to its creditors, and to settle claims proportionally taking into account the preference of claims.

47.2 Section 100(2) furthermore provides for notice of the application for extraordinary relief to be given to certain parties such as all creditors, to the municipal manager etc.

47.3 Section 101 sets out the conditions that must be satisfied before a court can grant a suspension application in terms of s 100(1)(b).

47.4 Section 102(1) sets out the conditions that must be satisfied before the court may grant a termination application in terms of s 100(1)(c).

There is, in our view, nothing constitutionally impermissible in the provisions.

48 PART 5 - ESTABLISHMENT, FUNCTIONS AND ADMINISTRATION OF MUNICIPAL FINANCIAL RECOVERY

48.1 Sections 103 - 110 of the Bill deal with the establishment, functions and administration of municipal financial recovery service. There is, in our view, nothing constitutionally impermissible in these provisions.

49 CONCLUSION

49.1 Chapter 11 of the Bill seeks to establish a detailed set of procedures, overseen by National and Provincial Government and authorized by the Judiciary, to deal with municipalities when they run into financial crisis.

49.2 The basic objective of the procedures provided for in Chapter 11 is to return the affected municipality to a position of financial health so that it may function sustainably and pay its debts. The relevant provisions provide progressively interventionist steps through which that objective may be achieved, from provincial financial watch to a form of curatorship.

49.3 Whilst Chapter 11 may intrude upon the autonomy of municipalities in order to restore financial soundness, the intrusion is designed to be temporary and ceases upon the achievement of its objective. The requirement that the High Court should declare the existence (and cessation) of a financial emergency reduces the risk of undue political interference by provincial or central authorities in the affairs of local government.

49.4 The proposed section 139 intervention does not in our view obviate the need for the process set out in Chapter 11. Although the section is relatively detailed, it is by no means exhaustive and leaves, in our view, sufficient space and latitude for supplementary national legislation in the form of Chapter 11. There are furthermore no provisions of Chapter 11 which are in conflict with or which derogate from the proposed section 139. More particularly, although the proposed s 139 confers a power of intervention upon the provincial executive only, the reference in s 139(4) to s 100 of the Constitution makes it clear that in the event of the provincial executive failing to fulfil the obligations cast upon it by s 139(3), the national executive may intervene.

49.5 The structures, procedures and processes envisaged in Chapter 11 are accordingly in our view constitutionally permissible.

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C D A LOXTON S C

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F KATHREE

Sandown Chambers

25 July 2002