MFM BILL Chapters 10 and 11

1. MFM BILLChapters 10 and 11 External Mechanisms & Municipal Entities

2. Items for discussion • Chapters 10 and 11: External mechanisms and Municipal Entities • Specific clauses • s31 on LT contracts • s39A on project viability monitoring • s39 on increases by bulk suppliers • Chapters 14, 15 and 16 • Constitutional amendment process

3. Recent process with NT, DPLG, SALGA • Three meetings over holiday period: • 2 December • 13 December • 8 January • Legal memorandum by Ashira consultants • Agreement that not all forms of entity permitted by Systems Act are useful or wise

4. Process for final approval of MFM Bill • Complete discussions this week on new clauses stated in previous slide • Legal refinement and edit by Gerrit Grove • Submission of legal final draft on 28 Jan • Final consideration and approval 13 March • Constitutional amendment • Harmonisation of Systems and MFM Bill

5. Review of Service Delivery Mechanisms • Internal Mechanisms • Departments, • business units, • Other • External Mechanisms • See next slide • Internal Service Districts • Multi-Jurisdictional Service Districts

6. External Mechanisms for Service Delivery • Municipal entity • See next slide • Other municipality • Organ of state • CBO or NGO • Other institution, entity, or person

7. Review of Municipal Entities • Companies • Private companies • Public companies • Section 21 companies • Co-operatives • Trusts • Funds • Other corporate entity • Close corporations • Other national or provincial legislation • Service utilities

8. Public Private Partnerships & Municipal Systems Act • MSA: external mechanisms can only be used via “service delivery agreement” • This would therefore include: • Management agreements • Franchises • Concessions • Leases • Build-operate-transfer schemes All of these can all be done without sharing ownership of an entity.

9. Municipal/Corporate entities • Are we not making a BIG deal? • THREE key issues to sort out 1. What purpose? • Do we want municipalities to embark on business ventures (for non-municipal services)? • Why is a separate juristic entity needed? 2. What vehicles do we allow for? • Companies, trusts, co-operatives, service utilities etc 3. What ownership structure? • Sole ownership or joint • private or public (munis only or other organs of state)

10. Ownership of Entity • No shared ownership with private sector • Municipality cannot be a minority shareholder when private sector is majority shareholder • Hoops for shared ownership with other organs of state • Organs in national and provincial sphere • Pre-feasibility and Feasibility by municipality • Budget approval by both muni and organ of state • Approval by NT to ensure all budget approvals secured • Few or no hoops on wholly-owned entities • Municipality can dissolve these, if need be

11. Types of municipal entities • Common viewpoint of DPLG and NT • Trusts, co-operatives, other corporate entities are not appropriate • Companies - section 21 and public companies not appropriate, but private companies are • Service utility • is a service utility not akin to internal mechanism? • Do we need a “Companies Act” for public entities?

12. Approach • All current structures allowed for a reasonable time (max 5 years) [s 86(2)] • Major review of Chap. 10 &11 in 2006 • In the meantime, if a corporate entity is required and • it is not solely owned (inc if private sector has share); or • it is not of the allowed type; or • it is not for a municipal service Then NT can allow, subject to a prescribed framework

13. Promoting Accountability in Establishment • Council must approve • Use of external mechanism [s 80 & 80A] • Service delivery agreement with mechanism [s 81] • Multi-year business plan of a muni entity [s 118B] • Entity must annually prepare • Budget [s 117A] • Multi-year business plan [s 118, 118B]

14. Promoting Accountability in Operations • Role of municipality [ss 92-93] • Requires balance between control and independence, requires clear channels of communication [s 92(f)] • Role of entity and Board [s 96] • majority of Bd must be independent • Entity financial management [s 102 et seq.] • Twice yearly performance review for all external mechanisms [s 81(2)(e)] • Annual financial statements of entity [s 126] • Council and auditor review [s 126, 127] • Approved w/ muni financial statements [ s 129]

15. Other issues • Role of CEO as AO, and board as accounting authority?

16. Promoting Accountability in special situations • Approval by council for capital asset disposal [s 94] and for debts • Impending financial problems [ s111] • Irregular, fruitless and wasteful expenditure [s 112] • Interventions [s 92A(1)(d),(2) or s 93(1)(c),(2)]

17. Form of Entity - Issues • Private companies • “private” in terms of Companies Act means shares are not available to general public • may be most appropriate of the existing ‘juristic persons’, but • are inherently imperfect because structured for commercial trade • Even with wholly owned entities, there are conflicts between director and municipality • With shared ownership, systemic conflicts are unavoidable

18. Form of Entity – issues cont’d • Cooperatives • primarily for agriculture • Business trusts • used for same purposes as companies, but • with fewer governance rules • Funds • for pensions and medical aid schemes OK • in terms of existing legislation • “Other corporate entities” • close corporations, which are inappropriate, or • New creatures of national or provincial legislation

19. Form of Entity – issues cont’d • Public companies • “public” means that anyone can own shares • harder to retain ownership control • Widely distributed share ownership is undesirable • Section 21 companies • Often used for non-profit municipal activities and/or economic development • Sometimes ‘members’ have been appointed individually • No real ‘owners’ • Winding-down problem with assets • Powers similar to those a municipality already has

20. Use of Entities - Issues • MFM Bill prohibits: • municipalities creating entities which are not ‘municipal entities’ in terms of the definition • Municipal entities only for municipal services • Systems Act: • Authorises many forms of ‘municipal entities’ • Need to amend if any of these forms are deemed inappropriate • Rules do not vary if the entity is intended to be ‘profitable’ vs. being subsidised

21. A bespoke municipal entity? • “Service utilities” • may ultimately be the best form, where a municipality wants a separate legal entity; • The term is a blank slate - can be custom crafted for municipal purposes, but • careful consideration should be given to governance, transparency and accountability rules • creditors or investors will not deal with unknown legal entity

22. Other issues • Mid-year estimates and reports