MFMA Asset Transfer Regulations National Treasury 17 January 2008

1. MFMAAsset Transfer RegulationsNational Treasury17 January 2008

2. MFMA - ASSET TRANSFER OVERVIEW OF THE PRESENTATION • To provide a summary of progress • To provide an update of the draft Regulations following initial comment • To provide a summary of the process

3. Project Plan & ToR Jul 2006 Inception Report Aug 2006 International Research Sep/Oct 2006 Principles and Issues Nov/Dec 2006 Draft Framework Jan/Feb 2007 Consultation Jan/Feb 2007 Second draft Mar/Apr 2007 Internal consultation May/Jun 2007 Third draft Jul/Aug 2007 Public consultation Sep/Oct/Nov 2007 Public comment Nov/Dec 2007 Parliament Dec/Jan 2008 Final Promulgation Feb 2008 MFMA - ASSET TRANSFER PROCESS TO DEVELOP THE DRAFT REGULATIONS

4. MFMA - ASSET TRANSFER SUMMARY OF PROGRESS • NT circulated draft Regulations for comment in January and February 2007 • NT subsequently met with all stakeholders to discuss any comments • Comments of all stakeholders were considered, and another draft was developed in April • April 2007 issued an exemption notice which provided a general exemption to all municipalities in terms of s 177(3) of the MFMA – relating to asset transfers involved in electricity distribution • Following further discussion a third draft was prepared for formal public consultation • Approved by Ministers of Finance and Provincial and Local Government

5. MFMA - ASSET TRANSFER BACKGROUND TO THE REGULATIONS • The MFMA has identified the need to provide a framework through regulations, for the transfer of capital assets to another municipality, municipal entity or to a national or provincial organ of state (MFMA s14 & 90) • The MFMA also allows for regulations to be made for the safeguarding of the financial affairs of municipalities and entities when assets, liabilities or staff are transferred or in terms of the alienation, letting or disposal of assets (MFMA s168)

6. MFMA - ASSET TRANSFER APPLICATION OF THE REGULATIONS • Applies to all municipalities and municipal entities • Applies to transfers and disposals of all municipal capital assets as well as hiring out arrangements • Does not apply to PPPs, certain assets generally regarded as investments, or certain transactions involving transfer of land to beneficiaries of that land

7. MFMA - ASSET TRANSFER GOVERNING PRINCIPLES • Valuation: a value must be attached to the transfer or disposal of a capital asset so that no party is prejudiced in terms of the transfer • Continuity of service: when a capital asset used in a municipal service is transferred, the service must continue without interruption • Risk transfer: when a capital asset is transferred, the risk attached to that asset must also be transferred • Asset preservation: indiscriminate or unsustainable transfers that undermine the ability of a municipality or municipal entity to provide or expand services should not be considered

8. MFMA - ASSET TRANSFER DEFINITION - ASSETS CATEGORISATION OF ASSETS • Municipal capital assets are effectively a very large subset of all municipal assets • Municipalities must decide whether the capital asset they intend to transfer or dispose is a high value capital asset • All capital assets, whether high value or not, will be regarded as either exempted or non-exempted • Subsidiary assets are assets that are linked to capital assets – a municipality does not need to consider these assets as high value or otherwise, as they may be either • However depending on the nature of the asset, they will be either regarded as exempted or non-exempted

9. MFMA - ASSET TRANSFER ASSETS EXEMPTED AND NON-EXEMPTED ASSETS • Before considering the transfer or disposal of any capital asset, a municipality must first ask itself if the circumstances of the transfer exempt it from s14 or 90 • In other words, did the transfer result from any of the following: • An MSA Ch8 review of service delivery mechanisms when an organ of state is preferred • A reorganisation of powers and functions between a municipality and its entity/ies • Adjustment of municipal powers and functions or boundaries through legislation • Transfer of municipal land to a national or provincial organ of state for housing for the poor in terms of nat or prov housing policy

10. MFMA - ASSET TRANSFER ASSETS EXEMPTED AND NON-EXEMPTED ASSETS • If the answer to that question is NO, then the asset is regarded as NON-EXEMPT, meaning Chapter 2 of the Regulations apply • If the answer to that question is YES, then the asset is regarded as EXEMPT, meaning Chapter 3 of the Regulations apply

11. MFMA - ASSET TRANSFER ASSETS VALUATION OF ASSETS • Depreciated replacement cost: the cost to replace the asset less depreciation to take account of age and condition of the asset • Fair market value: the value agreed between a knowledgeable and willing buyer and seller • Historical cost, with adjustments: the original purchase price less any adjustments for depreciation and impairment • Asset preservation: the amount that could be obtained from the transfer less costs

12. MFMA - ASSET TRANSFER OTHER DEFINITIONS TRANSFER, DISPOSAL AND RIGHT OR USE • Transfer: where ownership of the asset is transferred as a result of sale of similar transaction • Disposal: refers to a process when ownership is lost other than through a transfer, for instance when as asset is demolished, dismantled or destroyed • Right to use, control or manage: may include a lease, letting or hiring out arrangement where ownership is not lost or transferred

13. MFMA - ASSET TRANSFER OTHER DEFINITIONS FUNCTIONS VS SERVICE • Power or function: any activity that a municipality or municipal entity is legally allowed to perform • Municipal service: is a function that is considered to be a service which is done for the benefit of the community • Commercial service: is a service that is rendered by a private sector party or organ of state on a commercial basis

14. MFMA - ASSET TRANSFER OTHER DEFINITIONS PARTIES TO A TRANSACTION • Organ of state: is a national, provincial or local government department of entity • Private sector party: is a person who is not an organ of state, for instance an individual or a private or public company • Service provider: is an organ of state or private sector party who is appointed to perform a municipal or commercial service

15. MFMA - ASSET TRANSFER CONTENT OF REGULATIONS • Chapter 1 – Definitions and governing principles • Chapter 2 – Non-exempted capital assets • Public participation needed • Assets needed to render minimum services • Conditional approvals • To be in accordance with disposal management system • Compensation • Competitive bidding • Discharge of borrowings • Transfer agreements

16. MFMA - ASSET TRANSFER CONTENT OF REGULATIONS • Chapter 3 – Exempted capital assets • Circumstances where considered exempt • Identification of exempted assets • Assets needed to render minimum services • Special conditions • Transfer of borrowings • Transfer of staff • Compensation, valuations, transfer agreements • Due diligence • Delegations • Entities

17. MFMA - ASSET TRANSFER CONTENT OF REGULATIONS • Chapter 4 – Rights to use, control or manage • Public participation required for assets > R10m • Other considerations • To be in accordance with disposal management system • Transfer concerning municipal functions • Continuation of municipal services • Contract agreements • Chapter 5 – General matters • Encumbrances, rights and servitudes • Exemptions

19. MFMA - ASSET TRANSFER CHAPTER 2 - NON EXEMPT CAPITAL ASSETS • This Chapter prescribes requirements for the transfer or disposal of assets not exempt from s14(2) & 90(2) • This includes all transfers resulting from anything outside of those listed in Chapter 3 • It is applicable when the transfer is the result of an ordinary commercial transaction through a competitive bidding process • e.g. sale of a tractor no longer required by the municipality to an individual • This Chapter does not apply to PPPs or certain housing transactions

20. MFMA - ASSET TRANSFER TRANSFER OR DISPOSAL OF NON EXEMPT CAPITAL ASSETS • Is the asset considered to be high value? • If it is, a public participation process must be authorised by the council and an information statement must be prepared • Will the asset be needed to provide a minimum service? • Whether high value or not, before making a decision, council must consider a range of factors such as compensation, risk, credit ratings, impact of further borrowings, strategic & economic impacts • Council may only then approve in principle of the transfer or disposal • Once approved, the asset must be transferred or disposed in the appropriate manner • Depending on the circumstances, council may be able to negotiate directly with selected bidder • It must then consider agreed compensation, and finalise and publish transfer documentation

21. DECISION TREE – CAPITAL ASSETS NOT EXEMPTED • Is the asset considered high value? If so consider public participation process • Is the asset needed for a minimum level of basic services? If not, decide whether to approve in principle (if so, don’t transfer) • Undertake regulation 7 considerations • Must the transfer be done in accordance with SCM policy? If not decide whether to undertake competitive bidding • Consider compensation • Finalise and publish transfer agreement

22. MFMA - ASSET TRANSFER CHAPTER 3 - EXEMPT CAPITAL ASSETS • This Chapter prescribes requirements for the transfer of assets to an organ of state in terms of exemptions contained in s14(2) & 90(2) • Competitive bidding here is not relevant, as the transfer is guided by the MFMA or other legislation such as the MSA or Municipal Structures Act • In these transactions, assets needed for the minimum level of basic services are not excluded • e.g. outsourcing of water services by a municipality to a municipal service utility • This Chapter is not relevant to PPPs or certain housing transactions

23. MFMA - ASSET TRANSFER TRANSFER OF EXEMPT CAPITAL ASSETS • Will the asset be needed to provide a minimum service? • Depending on the nature of the transfer, and if required to provide such a service, the municipality must first: • Satisfy itself that the transferee can adequately safeguard & maintain the asset • Consider imposition of conditions – ownership to revert back if service can’t continue, further transfers not allowed • If the transfer results from a review of service delivery mechanisms under Ch8 of MSA, the municipality: • Must review feasibility studies • Consider impact of transfer on cash flow and financial position • When an entire function is transferred, ie: a water services function, as different to individual assets: • All capital and subsidiary assets must also be ring-fenced & transferred • This may include staff

24. DECISION TREE – CAPITAL ASSETS EXEMPTED • Identify all assets including staff to be transferred • Is the asset needed for a minimum level of basic services? If so, ensure that organ of state can safeguard & maintain & impose conditions ie: ownership to revert back on non-performance etc • Is the transfer an initiative of the municipality? If so, ensure continuity of service, where a service transfer subsidiary assets, consider feasibility study to appoint provider, examine costs and impact on credit rating etc • Otherwise decide on compensation to be paid • Organ of state to undertake due diligence • Finalise and publish transfer agreement

25. MFMA - ASSET TRANSFER CHAPTER 4 - TRANSFER OF A RIGHT TO USE, CONTROL OR MANAGE • Does the asset have a value > R10 million? • If it does, a public participation process and information statement similar to that required for transfer or disposal of non-exempt assets must be authorised • Will the asset be needed to provide a minimum service? • A similar process which requires a number of additional considerations must be undertaken if it is • Such a transfer of a right to use should not be granted: • For an indefinite or undetermined period • For a period that exceeds the usefulness of the asset • Such transfer may not confer on a person: • An option to buy the asset • The power to use the asset as if that person owned it • In the above instances, Chapter 2 (transfer or disposal of non-exempt assets) will apply

26. DECISION TREE – GRANTING OF RIGHTS TO USE • Is the proposal considered long term-high value? If so consider public participation process • Is the asset needed for a minimum level of basic services? If not, decide whether to approve (if so, impose regulation 44 conditions) • Undertake regulation 36 & 41(4) considerations • Must the transfer be done in accordance with SCM policy? If not decide whether to undertake competitive bidding • Consider compensation • Finalise and publish transfer agreement

27. MFMA - ASSET TRANSFER CHAPTER 5 – GENERAL MATTERS EXEMPTIONS These regulations do not apply to – • Municipal securities or guarantees provided to a lender for collateral against its borrowings • Transfers of money owed by consumers to a collection agent • Cash or investments made in terms of the Investment Regulations • Municipal security deposits required for goods and services • Prepayments in terms of short term insurance or similar related service • Transfer of non-exempted capital assets in terms of PPP agreements • Housing on municipal land for the poor to beneficiaries of such housing

28. MFMA - ASSET TRANSFER KEY ISSUES • The Regulations are crafted to ensure that assets, in particular those needed for minimum basic services, are only transferred after due consideration and only after consulting the community • All transfers must be transparent, fair and reasonable and council must be accountable for its decisions • The Regulations maintain consistency with other LG legislation i.e. MSA, and where practical use the existing feasibility frameworks on which to take decisions

29. MFMA - ASSET TRANSFER WAY FORWARD • Finalise consultation and consider all comments – end January 2008 • Conclude and finalise drafts February 2008 • Targeting February 2008 to issue final regulations

30. Thank you & Discussion