Operational Levels

1
Select Committee on Security and Constitutional
Affairs - National Council of Provinces
Constitution of the RSA Third Amendment Bill 26
February 2003 Ismail Momoniat Vuyo
Kahla National Treasury
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Overview of Bill

• amends section 76 of the Constitution to avoid
  the splitting of legislation
• revises section 139, which deals with provincial
  intervns in local government, to provide a
  comprehensive scheme for such interventions
• required for chapter 11 of Municipal Finance
  Management Bill on financial emergencies
• amends section 100 re NCOP review of
  interventions in provinces, aligns criteria with
  section 139 on intervention in local sphere.
• changes the name of Northern Province, as it
  appears in the Constitution, to Limpopo.

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Section 76

• An ordinary Bill, with provisions that affect the
  financial interests of provinces and provisions
  that do not affect provinces, has to be split
  into
• a section 75 Bill (not affecting provinces) and
• A section 76 Bill (affecting provinces).
• Sections 75 and 76 provide for different
  procedures
• PFMA had to be artificially split into 2 bills in
  1998/99
• Splitting legislation in this way causes
  practical problems and defeats clarity.
• Clause 1 of this Third Constitutional Amendment
  Bill amends section 76 provide more flexibility,
  and allows both options (splitting or not
  splitting Bills)
• Not splitting a Bill with financial implications
  allows for a more rigorous NCOP process

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Section 139

• 139(1) discretionary intervention in executive
  matters
• Note that this subsection is limited to executive
  obligations
• Municipal budget taxes are legislative matters,
  so cannot intervene if municpality fails to adopt
  budget
• add executive obligations in terms of
  Constitution
• add provincial power to dissolve the municipal
  council in exceptional circumstances

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Section 139 (continued)

• 139(2) NCOP and Ministerial review of 139(1)
  interventions
• Submit notice, rather than table notice, as w/
  sec 100
• Minister PLG can end intervention for 28 days
  rather than 14
• NCOP has more flexibility, can end intervention
  within 180 days (rather than current 30)
• If NCOP or Minister dissapproves, intervention
  ends
• As w/ sec 100, NCOP to review intervention
  regularly, and recommendations may be made,
  rather than must be made

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Section 139 (continued)

• 139(3) notice when dissolving council in terms
  of subsection 139(1)
• Notice to Minister and NCOP
• Dissolution takes place 14 days after receipt of
  notice if neither NCOP nor Minister sets aside

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Section 139 (continued)

• 139(4) budget or revenue raising measures
• Budget and revenue measures are legislative, not
  executive
• If municipal council cannot or will not adopt
  these legislative measures, MEC can take
  appropriate steps, including dissolution of
  council
• Administrator is appointed until new council is
  elected
• MEC can approve temporary budget or revenue
  raising measures to provide for continued
  functioning of municipality

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Section 139 (continued)

• 139(5) crisis in financial affairs
• MEC must impose a recovery plan
• If council does not adopt legislative measures to
  implement the plan, MEC must dissolve council
• Appoint an administrator
• MEC approves temporary budget and revenue
  measures
• If council is not dissolved, MEC must assume
  responsibility for recovery plan, to the extent
  the council cannot or does not

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Section 139 (continued)

• 139(6) notice when intervening in terms of
  subsections 139(4) or (5)
• Notice to Minister and NCOP within 7 days
• Neither NCOP nor Minister can set aside
• 139(7) if provincial exec does not act in terms
  of 139(4) or (5), national exec must do so
• 139(8) national legislation may regulate
  implementation of section 139

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Policy behind 139(4) and (5)

• July 2000 "Policy Framework for Municipal
  Borrowing and Financial Emergencies
• Government's overall strategy in dealing with
  municipal financial problems
• comprehensive approach to resolving financial
  crises in municipalities.
• Financial recovery usually requires adoption or
  modification of
• municipal budgets,
• taxes and
• tariffs,
• These are legislative matters.

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Policy (continued)

• There have been cases in practice where a
  Municipal Council cannot or will not act
• Residents do not get service delivery
• Municipality cannot pay workers or buy supplies
• a few, conspicuous failures have harmed the
  reputation of the entire local government sphere
• This creates barriers for responsible
  municipalities seeking private sector investment
• as deliberations and consultations on amendments
  to section 139 unfolded, it became clear that a
  more general reworking of the section 139 was
  needed.

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Policy (continued)

• must address both legislative and executive
  responsibilities of Councils
• national and provincial government must do more
  capacity building, monitoring and support --
  preventing local problems is easier and more
  effective than fixing them.
• Revised section 139 provides a comprehensive
  scheme it preserves the role of municipal
  Council, while assuring residents and
  stakeholders that serious or prolonged failures
  will be dealt with

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Policy objectives

• Under the Constitution, municipalities have
  primary responsibility for providing services to
  citizens, for local social and economic
  development, and for promoting a safe and healthy
  environment.
• Revised section 139 will give investors
  confidence to lend to municipalities
• It will improve governance in the local sphere,
  helping more South Africans gain access to
  affordable and quality services.

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Section 100

• Changes the title to National intervention in
  provincial administration, rather than National
  supervision
• Changes the word order of Constitution and
  legislation to align with the amended section
  139.
• Requires submission of written notice, rather
  than tabling of notice, since NCOP may be in
  recess
• Gives NCOP 180 days to approve or disapprove,
  rather than 30 days
• Requires NCOP to review intervention regularly,
  but recommendations may be made, rather than
  must be made

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Conclusion

• Amendments to sec 139 will empower MECs to deal
  effectively with any crises that do occur
• This protects service delivery
• This is also key to making reasonably priced
  credit available

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(No Transcript)
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Background
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Intergovernmental System

• Three distinct spheres
• No interference under normal circumstances
• Normal support, capacity-building, monitoring
  activities
• Council oversight per sec 154
• Province monitoring, support and capacity
  building per sec 155(6)
• Intervention when there are failures
• By province in terms of sec 139
• Withholding by national government in terms of
  sec 216

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Accountability

• Must deal with small problems while they are
  small
• Manager must know when there is a problem
• Mgr/Mayor must report to council when there is a
  material problem
• Failure to do so makes Mayor personally liable in
  Hungary!
• Council/mayor must act
• Province must act
• National government can only withhold in terms of
  s216 - no direct intervention

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Support and Capacity Building

• Government is developing intensive programmes for
  
• general capacity-building and
• financial management.
• Significant budget allocations in 2002/03 Budget
  over R500 million
• Annexure / Appendices to 2002 Division of Revenue
  Act outline these programmes

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Monitoring Responsibility

• Monitoring is VERY IMPORTANT
• Monitoring allows for corrective steps
• Provincial monitoring is necessary
• National Treasury monitoring also necessary to
  enforce treasury norms and standards under
  Constitution s 216
• More importantly, Council must monitor
• routine monthly reporting system

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Intervention is a last resort

• when total failure
• undermines governance and service delivery to the
  community
• hurts creditworthiness of financially sound
  municipalities
• Per Constitution sec. 155(6) emphasis on
  monitoring, support, and building capacity
• Worst of all is when no one acts

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Who acts in a failure?

• Does muni manager act when there is non-payment
  or under-collection?
• Does Council act?
• Does MEC for LG act?
• How do they act?
• Failure to act causes a BIGGER CRISIS later
• How can we compel Council to act?
• How can we compel MEC to act?

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Financial crisis

• Not an ordinary financial problem
• Really serious, and really rare cases
• Only 4 of 843 municipalities over 5 years were
  possible cases.
• Councils feuding and not meeting
• Salaries and benefits not paid to workers
• Allegations of corruption
• Service delivery collapsing
• LG autonomy must be balanced against rights of
  community

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Moral Hazard

• When systems and incentives promote the wrong
  behaviour
• Examples
• Reckless bank lending because of guarantees
• Suppliers assuming national/province will pay
• Incentives that cause any party to take on more
  risk than they would have
• Our system promotes equitable approaches
• Funding up-front through Div of Revenue Act
• All players must then act responsibly, and not
  assume bad behaviour will secure more grants

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Other factors to consider

• Benefits of borrowing
• cheaper funds
• less over-collateralisation (ties up money)
• more access for more munis
• takes pressure off infrastructure grants
• Threat of strong intervention makes own-action
  likely earlier
• Chaotic court action by least patient creditors

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Kinds of financial problems

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Financial problems in munis

• Non-payment
• Big suppliers Eskom/ Water Boards
• Statutory SARS or Auditor-General
• Workers salaries
• Contributions to medical/pension funds
• Small business suppliers
• lenders
• Failure to collect budgeted revenue
• Collapse in services to residents

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Kinds of financial problems

• Inadequate revenue base
• must be fixed through equitable share
• Sudden economic shifts
• may require changes in spending, and assistance
  from provincial and national
• Financial mismanagement
• most common, must be fixed at the source
• Focus of section 139 (1B)

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Lessons from case studies

• Eight strong 139 interventions
• Long, slow slide is more problematic than sudden
  shock
• Poor financial information / systems
• Conceal problems
• Make them hard to resolve
• Restoring balance between revenue and expenditure
  required
• Increase revenue collection where possible
• Decrease expenditure where necessary
• Section 139 has rarely been effective

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Lessons from JHB, Welkom

• Section 139 was not used
• Where council takes ownership, turn-around is
  possible
• Council / officials may be in denial
• These are important success stories
• Again, restoring balance was the key
• Increase revenue collection where possible
• Decrease expenditure where necessary

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Lessons from international experience

• New York
• Too much reliance on short term debt
• Mandatory controls and restructuring debt
• Washington DC
• Poor financial systems
• Flight to suburbs because of service collapse
• Control Board and operational improvements
• Hungary bankruptcy law
• Argentine / Brazil bail-outs
• IMF sovereign debt issues

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Why a recovery plan?

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Two Objectives

• Credibility
• Financial sector should see municipalities as
  reasonable credit risks, and therefore make
  credit available for infrastructure
• Functionality
• The option chosen must work it must be able
  to restore financial health to troubled
  municipalities

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What is needed for credibility?

• 1. A process perceived as predictable and prompt
• 2. Recovery plan perceived as fair and realistic
• 3. Implementation of revenue and expenditure
  control when necessary

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What is needed for functionality?

• Early and sustained support to resolve financial
  problems
• Capture and build on experience
• Revenue and expenditure control, when council
  does not act responsibly
• Protection from creditors while restructuring,
  when necessary
• Writing off debt, when absolutely necessary