Background to Chapter 8A Part 2:

Background to Chapter 8A Part 2:

Corporate ventures:

The provisions in this Part have the following underlying assumptions:

- that municipalities should be allowed to establish companies as mechanisms to assist it in the performance of their functions, but under strict statutory conditions, namely –

1. that the company must be under the sole or joint ownership control of the municipality in order for the company to be controlled as a "municipal entity" in terms of this Act;

2. that joint corporate ventures with organs of state in the national or provincial sphere would be allowed, but that the company in such a case should either be a municipal entity in terms of this Act or a public entity in terms of the Public Finance Management Act;

3. that joint corporate ventures with the private sector should be allowed on condition that the municipality either alone or together with another municipality (or with a national or

provincial organ of state) holds ownership control in the

company. This means that municipalities would not be allowed to take up minority stakes in privately owned companies and that private sector investors can only hold minority stakes in municipal entities;

4. that municipal entities should not be allowed to establish

subsidiary companies or to acquire equity stakes in other

companies;

5. that companies should only be allowed for good reasons, such as service delivery efficiency, clear economic benefits for the municipality, etc.

CHAPTER 8A UTILISATION OF EXTERNAL MECHANISMS FOR PERFORMANCE OF MUNICIPAL FUNCTIONS

Definitional provision

In this Chapter –

"external mechanism", in relation to a municipality, means any of the institutions or persons

mentioned in section 45B (1);

"private party" means any person or institution, including any community based or other non-governmental organisation legally competent to enter into a business transaction, but excludes a municipality, a municipal entity or another organ of state in any sphere of government;

"public-private partnership", in relation to a municipality, means a commercial transaction between a municipality and a private party in terms of which –

(a) the private party for a specified or determinable period –

(i) provides a municipal service on behalf of the municipality;

(ii) assists in the provision of a municipal service; or

(iii) acquires control of a municipal asset to manage it on behalf of the municipality; and

(b) the private party receives a benefit for performing the service, or providing the assistance, or managing the municipal asset, by way of –

(i) compensation from the funds of the municipality;

(ii) charges or fees collected by the private party from customers benefiting

from the service or assistance or the management of the asset; or

(iii) a combination of such compensation and such charges or fees;

"value for money" means that a public-private partnership will result in a net benefit to

a municipality as defined in terms of cost, price, quality, quantity, and risk transfer.

Note: Definitions eventually to be moved to section 1.

Part 1: Appointment of external mechanisms

Application of this Part

45B. (1) This Part applies to the appointment by a municipality of any of the following institutions or persons as a mechanism to assist the municipality in the exercise of any of its functions or powers:

(a) a municipal entity under the sole or joint ownership control of the municipality;

(b) another municipality;

(d) any private party.

(2) This Part does not apply where the appointment of an external mechanism is for a non-renewable period of less than one year.

Statutory regime for appointment of external mechanisms

45C. If a municipality intends to appoint an external mechanism –

(a) for the provision of a municipal service, Chapter 8 of the Municipal Systems Act and the applicable provisions of this Act must be complied with; or

(b) to assist it in the exercise of any of its other functions or powers, the applicable provisions of this Act must be complied with.

Appointments to be effected through written agreements

45D. (1) Any appointment of an external mechanism must be by way of a written

agreement between the municipality and the external mechanism stipulating the terms and conditions of the appointment.

(2) An agreement in terms of subsection (1) must –

(a) provide for dispute-resolution to settle disputes between the municipality and the external mechanism;

(b) bind the external mechanism to furnish the municipality with all information available to the external mechanism which the municipality needs to comply with this Act;

(i) the actions of the external mechanism except as provided by the law applicable to independent contractors;

(ii) any failure by the external mechanism to comply with any duty imposed on it in terms of the agreement; or

(iii) the contractual commitments of the external mechanism, except to the extent expressly stated in the agreement;

(d) provide for the imposition of penalties on the external mechanism for non-performance in terms of the agreement, if the external mechanism is a private party; and

(e) regulate any other matters that may be prescribed.

(3) If an external mechanism is appointed for the provision of a municipal

service, the appointment must be effected through a service delivery agreement in terms of the Municipal Systems Act. In addition to the requirements of that Act, the service delivery agreement must comply with subsections (1) and (2) and include terms and conditions aimed at ensuring that the external service provider –

(a) establishes and maintains effective financial management systems relating to the provision of the service;

(b) accounts on a monthly basis to the municipality for –

(i) any fees collected for the provision of the service in terms of section 81 (2) (a) (vi) of the Municipal Systems Act;

(ii) any money collected by the external service provider for or on behalf of the municipality;

(iii) any funds transferred by the municipality to the external service provider, including funds referred to in section 81 (2) (b) of the Municipal Systems Act; and

(iv) any assets transferred or made available by the municipality to the external service provider for or in connection with the provision of the service; and

(4) When a municipality enters into an agreement referred to in subsection (1) or (3), a copy of the agreement must be submitted to –

(a) the Auditor-General and the National Treasury ; and

(b) the South African Revenue Service, if :

due diligence requires that any party to the agreement or any related agreement obtain professional advice as to the applicability of any general or specific anti-avoidance provision of any law administered by the Commissioner for the South African Revenue Service to the relevant agreement or the agreements considered as a whole; or
the agreement or any related agreements provide for the relevant agreement’s termination or variation as a result of a decision by the Commissioner for the South African Revenue Services or an amendment to any law administered by the Commissioner for the South African Revenue Service.

Competitive bidding process for appointment of private sector external mechanisms

45F. (1) The appointment by a municipality of a private party as an external mechanism must be procured through a process of competitive bidding in accordance with the municipality’s procurement policy referred to in section 105A.

(2) Such a competitive bidding process may limit participation to pre-qualified persons.

Public-private partnerships

45G. (1) If an agreement in terms of section 45D (1) or (3) is a public-private

partnership, the agreement may only be concluded by the municipality if the agreement

will –

(a) provide value for money to the municipality;

(b) be affordable for the municipality; and

(2) If the public-private partnership involves the provision of a municipal

service, Chapter 8 of the Municipal Systems Act must also be complied with.

(3) Before a public-private partnership is concluded, the municipality must carry out a feasibility study that–

(a) explains the strategic and operational benefits of the public-private partnership for

the municipality in terms of its strategic objectives;

(b) describes in specific terms –

(i) the nature of the private party’s role in the public-private partnership;

(ii) the extent to which this role, both legally and by nature, can be

performed by a private party; and

(i) provide value for money;

(ii) be affordable for the municipality; and

(iii) transfer appropriate technical, operational and financial risk to the private

party;

(d) takes into account all relevant information; and

(e) explains the capacity of the municipality to effectively monitor and enforce the agreement.

(4) The national treasury may issue guidelines for carrying out feasibility studies referred to in subsection (3).

(5) When the feasibility study has been completed, the accounting officer of the municipality must –

(a) submit the report on the feasibility study together with all other relevant documents to the council for a decision on whether the municipality should continue with the proposed public-private partnership; and

(b) at least 21 days prior to the meeting of the council at which the matter is to be considered, publish a notice in a newspaper of general circulation in the municipality –

(i) stating particulars of the proposed public-private partnership;

(ii) stating the place, including the website address, where particulars concerning the proposed public-private partnership, including the report on the feasibility study, can be obtained; and

(iii) inviting the local community to submit written comments or representations to the council in respect of the proposed public-private partnership.

(6) Section 45F applies also to the procurement of public-private partnerships.

Management of agreements

45H. The accounting officer of a municipality must –

(a) ensure that an agreement in terms of section 45D (1) or (3) is properly enforced;

(b) monitor performance in terms of the agreement on a monthly basis;

(i) to assist the accounting officer in carrying out the duties set out in paragraphs (a) and (b);

(ii) to liaise with the external mechanism;

(iii) to assist in resolving disputes and differences with the external mechanism; and

(iv) generally to oversee the day-to-day management of the agreement;

(d) regularly report on the management of the agreement to the council; and

(e) make all agreements available to the public within 14 days of signing of an agreement.

Part 2: Corporate ventures

Establishment of, and acquisition of equity stakes in, corporate bodies by municipalities

45I. (1) A municipality may in the exercise of its functions or powers –

(a) establish or acquire a company or other corporate body as a wholly owned asset of the municipality; or

(b) acquire or hold an equity stake in a company or other corporate body, subject to subsection (3).

	(2)	If a municipality establishes or acquires, or holds a stake in, a company or other corporate body in terms of subsection (1), it must comply with the national or provincial legislation which regulates the kind of corporate body in question, but in the event of any conflict between such legislation and a provision of this Act, the provision of this Act prevails.

(3) A municipality may acquire or hold an equity stake in a company or other corporate body in terms of subsection (1) (b), but only if that stake –

(a) gives the municipality sole ownership control of the company or body; or

(b) is a minority stake and the ownership control of the company or body is held by—

(i) another municipality;

(ii) a national or provincial organ of state; or

(iii) any combination of two or more of these institutions, including the first-mentioned municipality.

(4) A company or other corporate body referred to in subsection (1) is –

(a) a municipal entity to which Chapter 9 of this Act applies –

(i) if it is a wholly owned asset of a municipality; or

(ii) if ownership control in the company or body is held by one or more

municipalities; or

(b) is a public entity to which the Public Finance Management Act applies if ownership control in the company or body –

(i) is held by a national or provincial organ of state; or

(ii) is held jointly by a municipality and a national or provincial organ of state.

(5) If a municipality on the date on which this section takes effect holds an equity stake in any company or other corporate body in contravention of subsection (3), it must within five years from that date either dispose of that stake or otherwise rectify its position in relation to its stake in the company or body.

Equity stakes held by private parties

45II. A private party may hold a minority equity stake in a company or other corporate body referred to in section 45I (1) (b), but only on such conditions, including conditions fixing the maximum stake a private party may hold in a such a company or body, as may be –

(a) prescribed; or

(b) determined by the National Treasury in a specific case.

Rationale for corporate ventures

45J. (1) If a municipality intends to establish or acquire a stake in a company or other corporate body in terms of section 45I (1) –

(a) the establishment of the company or body or the acquisition of the stake must be for the purpose of appointing the company or body as an external mechanism in terms of Part 1 of this Chapter to assist the municipality in the exercise of any of its functions or powers; and

(b) the company or body may be established or the stake may be acquired only if this would enhance –
(i) efficiency; or: (ii) the achievement of the strategic objectives of the municipality; and

(2) A municipality may establish or acquire a stake in a company or other corporate

body in terms of section 45I (1) only after any conditions that may be prescribed have been satisfied.

(3) If a municipality establishes or acquires an equity stake in a company or other corporate body for the purpose of using that company or body as a mechanism to provide a municipal service, Chapter 8 of the Municipal Systems Act must also be complied with.

Joint corporate ventures by two or more municipalities

45K. If two or more municipalities establish or acquire a stake in a company or other corporate body in terms of section 45I (1) –: (a) section 45J must be satisfied in relation to each of the participating municipalities; and
(b) the participating municipalities must enter into a mutual agreement determining and regulating –

(i) their relationships in relation to the company or body;

(ii) the exercise of their respective ownership control powers;

(iii) procedures for the resolution of disputes between them;

(iv) procedures for disestablishing the company or body and, if it provides a municipal service, dividing its assets, liabilities, income and expenditure when the service delivery agreement with the entity expires or is terminated; and

(v) any other matters that may be prescribed.

Disposal of companies and equity stakes in companies

45M. A municipality may transfer ownership or otherwise dispose of –

(a) a wholly owned company or other corporate body referred to in section 45I (1) (a), subject to section 13; or

(b) an equity stake in a company or body referred to in section 45I (1) (b) –

(i) subject to section 13; and

(ii) provided that the transfer or disposal would not result in an infringement of section 45I (2) by another municipality which holds a stake in the company or body.

Establishment of, and acquisition of equity stakes in, other corporate bodies by municipal entities

45N. (1) No municipal entity may –

(a) establish or acquire any company or other corporate body as a wholly owned asset of the municipal entity; or

(b) acquire or hold an equity stake in a company or other corporate body.

(2) If a municipal entity on the date on which this section takes effect holds an equity stake in any company or other corporate body in contravention of subsection (1), it must dispose of that stake within five years from that date.