Portfolio Committee on Justice and Constitutional

Development

Constitution of the RSA Third Amendment Bill5 September 2002

National TreasuryDept of Provincial & Local Government

THE BILL AND ITS CLAUSES

History• Intervention clauses tabled last year

– part of a package of constitutional amendments considered by Portfolio Committee

– were not adopted, but referred back for additional consultation

• Extensive consultations / research thereafter:– Case studies on interventions 1995-2000– Minister of Finance consultations with Committee

Chair– Two LG MinMECs, two Budget Councils– Extensive policy development with NT/DPLG

Current amendments• Four amendments contained in Bill

• Clause 1 deals with preventing the splitting of mixed financial bills– Motivated by NT

• Clause 2 deals with changes to NCOP procedure for oversight over s100 interventions– Motivated by NT/DPLG

Current amendments (continued)

• Clause 3 deals with change of name of NP to Limpopo– Motivated by NP government

– Not dealt with by this presentation

• Clause 4 deals with provincial interventions– would be compulsory in financial crisis

– NCOP oversight changed as with sec 100

– motivated by NT/DPLG

Clause 1• Section 76(4)(b) of Constitution has two

parliamentary paths for financial legislation in Chapter 13

• Legislation in terms of Ch. 13 is sec 75 bill for clauses that do not affect provincial financial interest – lesser role for NCOP

• Clauses that affect provincial financial interest are however sec 76(1) process– NCOP has strong role after NA approves bill

Clause 1 (continued)• JTM views require splitting of finance bills:

– ruled that PFMA (Act 1 of 1999, as amended by Act 29 of 1999) be split in two bills

• Most financial legislation falls in this category, making parliamentary procedure cumbersome

• Proposed amendment introduces more flexibility allowing Minister of Finance to go for two options

Clause 1 (continued)• If financial bill in terms of Chap. 13 has even one

provision affecting interests of provincial sphere, it will not be dealt with as a s76(1) bill procedure– Strengthens role of NCOP– Makes process less cumbersome by avoiding

splitting of Bills• Minister could still choose to split bill and allow

passage of bill as s75 bill, and then introduce a second bill as s76(1) bill as an amendment

• Approach allows for both options, does not rule out current procedure

Clause 2 & part of clause 4

• Clause 2 and second part of clause 4– Changes to sections 100(2) and 139(2) – allow NCOP more flexibility in strong interventions, where

province assumes responsibility

• Current:– NCOP has only 30 days to respond, and – One time review obligatory

• Proposed:– More time for NCOP to review: from 30 to 180 days– Instead of one time, rather regular & discretionary review

• Clause 4 also makes Min for PLG approval more realistic, from 14 to 40 days

Substantive clause 4 changes

• 139(1) split into (1) and (1A):– Current:

• s139(1) applies to failure to fulfil an executive obligation only

• Budget, taxes and tariffs are legislative powers

– Proposed:• (1)(a) -- add obligations in terms of Constitution • (1)(b) -- add budget and revenue-raising powers • (1)(c) -- add other obligations specified by Act of

Parliament

• intervention under 139(1) is discretionary – Scope extended so province MAY intervene

Clause 4 (continued)• New section 139 (1B)

– Makes provincial intervention compulsory in the event of financial crisis in a municipality

– Mandates recovery plan and its implementation in a financial crisis

• New section 139 (1C) – Makes section 100 national buttress available if

MEC does not act in terms of (1B)

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

Financial Problems in Context

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

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

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

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

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

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?

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

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

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

Kinds of financial problems

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

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)

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

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

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

Why a recovery plan?

Two Objectives

CredibilityFinancial sector should see municipalities as reasonable credit risks, and therefore make credit available for infrastructure

FunctionalityThe option chosen must work – it must be able to restore financial health to troubled municipalities

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

What is needed for functionality?

2. Early and sustained support to resolve financial problems

3. Capture and build on experience

4. Revenue and expenditure control, when council does not act responsibly

5. Protection from creditors while restructuring, when necessary

6. Writing off debt, when absolutely necessary