Select Committee on Security and Constitutional Affairs - National Council of Provinces

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

2. Overview of Bill • amends section 76 of the Constitution to avoid the splitting of legislation • revises section 139, which deals with provincial interv’ns 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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.

11. 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.

12. 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

13. 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.

14. 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

15. 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

17. Background

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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?

24. 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

25. 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

26. 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

27. Kinds of financial problems

28. 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

29. 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)

30. 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

31. 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

32. 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

33. Why a recovery plan?

34. 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

35. 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

36. 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