1. Portfolio Com on Finance
13 February 2002
Mun Finance Management Bill
Ismail Momoniat National Treasury

2. Constitutional Basis for MFM Bill
Three spheres of government
spheres distinctive, interdependent, interrelated
no encroachment on geog, func, inst integrity
Spheres have different functions
Policy, assist and support role of national govt
Monitoring, assist and support role of provinces
Intervention role of provinces (s139)
Section 216 (1)
Treasury within finance area - monitoring, stopping funds
Prescribe measures to ensure transparency and expenditure control in each sphere of govt
uniform treasury norms and standards
Section 215 on budget formats, effective fin mgt
Other chapter 13 legislation

3. Intergovernmental Fiscal Review
Tabled in Parliament in 2001
Public Hearings in October 2001
Municipal Chapters:
Chapter Transformation challenges
Chapter Overview of municipal budgets
Chapter Transfers to LG
Chapter Capital Investment in LG

4. Seven Fiscal Principles
Accountability & autonomy
Spheres govern in own right
Avoid perverse incentives
Interdependence & co-op governance
National norms and standards
Good governance
Political policy & outcomes
Admin operationalisation & outputs

5. Principles (Ctd) Redistribution Broaden access to services
All spheres, but esp national
Wider tax base
Cuts across boundaries
Contains local burden
Broaden access to services
Affordable
Appropriate level of service
Alternative delivery mechanisms
Leverage private investment

6. Principles (Ctd) Revenue sharing and fiscal capacity
Determine own budgets
No operational deficits
Simple comprehensive grants
Comprehensive vertical division
Fiscal efficiency
Accurate targeting
Lower cost
Private provision

7. MFMB Consultative Process
PFMA covers municipal finances 1997/8
Local Govt Transition Act 1996
LG White Paper published 1998
Borrowing Framework
Regulatory Framework developed 1998/99
NT, DPLG, SALGA, DBSA, banks, etc.
Policy Framework approved by Cab July 2000
Cabinet approves Bill for publication – July 2000
section 154(2) of Constitution
11 provincial country-wide workshops –co-hosted by SALGA – Sept / Oct (over 500 participants)
Second Cabinet approval- August 2001
Consultation with PLG, SALGA and FFC (s9(1) Systems Act)
Bill tabled in Parliament - Jan 2002

8. MFM Bill and PFMA MFM Bill is the PFMA for LG
Modernise financial management in LG
Specificity of local govt
Role of political head and official
Mayor/Exco resp for policy and outcomes
Mun mnger resp for implementation & outputs
Enable managers to manage
but make them more accountable
Governance over entities
Borrowing Powers

9. MFM Bill Differences with PFMA
More detail on budget process
Unlike national and provincial sphere, constitution does not say that a muni:
Must deposit all funds into a revenue fund
Can only spend funds by appropriating (money bill)
Municipal managers have unlimited virement in line-item budgets
Executive and Legislative power vests in Council
No separation of powers
Financial Emergencies
Municipalities raise between 60% to 99% of revenue
Borrowing leverages avail resources

10. Municipal Differences with Provinces
Two tiers in one sphere outside metros
Estimate municipal budgets at R62 bn
Two-thirds business activity (water, elect)
One-third public goods
Provincial budgets R125 bn and 96% public goods
Municipalities raise 60 to 99% of own revenue
Property taxes
User charges (electricity, water)
RSC levy
Provinces raise 4% of own revenue
Municipalities could handle 2 to 4 times current debt levels

11. Differences: LG and other spheres
Parliament/prov legislature meets often
Council meets 4 to 12 times a year
Parl/prov legislature separates exec/legis
Council has both exec and legis power
MPs and MPLs are full-time
Councillors are part-time, only certain execs f/t
National/prov govt has several acct officers
Municipality has one acct officer (mun mnger)
Different committee structure

12. Underlying Challenges for LG
Local Govt an emerging sphere
Governance framework needs to develop
Process to assess audit reports: no public accounts committee
Councillors on procurement, tribunal committees
Councillors on boards of entities
Council involved in employment of officials in many cases
Budget process and formats in dinosaur age
No link between planning (IDP) and budget
Power and Function of municipalities
To be clarified between the two tiers
Confusion about how to redistribute
No recourse in event of defaults
Pre-1996 system was of three tiers, guarantees

13. Thinner and more strategic budget formats Deepen budget process
Key Budget Reforms
Three year budgets
Thinner and more strategic budget formats
Deepen budget process
Tabling of draft budget 4 months before
Closing gap between budgets and plans
Accounting reforms (GAMAP)
Timely submission of fin statements

14. Municipal Borrowing Market
No net new lending from private sector
only exception is INCA
Flat in last 4 years between R11 and R12 billion
DBSA loans grew from R5.6 bn to R8.1 bn
30% of all outstanding mun debt
similar lending profile to INCA, mainly metros
Undesirable change in profile of debt
decrease in securities, increase in loans
Potential debt servicing can be much higher
Capital budget R13.7 bn, so R5 to R7bn pa debt service is reasonable
Foregone investments!

15. How to Stimulate Mun. Borrowing?
Lender perspective
No certainty of payment or process to recover funds
Section 139 intervention slow and uncertain
Municipality perspective
How can it reschedule payments if in real trouble?
How to protect essential assets?
One rotten apple affects all the others
no credit or high risk premium or excessive collateral required

16. Many reasons for financial troubles
JHB: lack of financial information, bad structure
Welkom: council ultimately engaged in solution
Butterworth: protracted political/managerial problems
Noupoort: council unable to meet due to resignations and illness
Ogies: serial interventions, confused finances
Stilfontein: chronic fiscal imbalance
Tweeling: council did not meet for 2 years
Warrenton: financial mismgt, salaries not paid

17. What happens when there are defaults?
End-game scenario
Trade-off between sovereignty and potential benefits for healthy municipalities
Apolitical process to ensure lenders protection
Comfort for municipality
Court-triggered process (objective test)
Appointment of administrator
Recovery plan
Council must “own” recovery plan
But recovery specialist can impose budget

18. Key Audit Reforms Current provisions are inadequate
What happens after fin statements are audited?
Consolidated financial statements required
Council discusses report
No prior consideration before plenary
Party-political approach to audit report
Should we not create public accounts committees in each Council?
Two weeks of hearings

19. MFM Bill – Chapter 1 Definitions, Objects, Applicability
Financial year
Governing board or body
Irregular expenditure
Long term debt
Debt instruments
Overspending
Unauthorised expenditure
Vote
All municipalities and entities

20. MFM Bill – Chapter 2 Supervision over financial management Delegations
Promote this Act
Enforce compliance
Budget and financial monitoring
Uniform norms and standards
Assist in building capacity
Review system and internal control
Delegations
National depts
Provincial depts
Municipal manager
Accounting authority of entity

21. MFM Bill - Chapter 3 Bank accounts and intergovernmental relations
Control of bank accounts
Withdrawals
Cash management and regulations
Disposal of capital assets – minimum services
Acquisition and disposal of minority interests in Co.

22. MFM Bill – Chapter 4 Budgets, annual appropriations Contents of budget
Budget process
Draft budget 4 months
Publication for public comment
Reporting on budget
Approvals and failure to approve
Mec to direct approval
Copies for planning purposes
Adjustments budget
Reporting on state of budget
Unauthorised and irregular expenditure
Assignment of new functions
Financial implications of assignment

23. MFM Bill - Chapter 5 Basic borrowing rules:
no guarantees by national or provincial
guarantees by municipal treated as debt
long term debt for Plant, property, equip
short term debt for cash flow management
pledges of assets and revenues OK, but Council to apply its mind

24. MFM Bill - Chapter 5 (cont’d)
Borrowing - own budget
Short term (bridging) and long term (capital)
Conditions for borrowing (rand denominated, council resolution)
Security (income, assets, protection of minimum essential assets)
Provisions on budget for repayments
Disclosure and accuracy of information

25. MFM Bill – Chapter 6 Councillor responsible for financial matters
Section 42 of Structures Act
Executive or non executive system
Duties of councillors
Exercise general political control
May not interfere in financial management responsibility assigned to MM or CFO
Delegations to other councillors
Issue – Implementation of the Code of Conduct

26. MFM Bill – Chapter 7 Duties of Municipal Officials
MM is accounting officer
Fiduciary duties
Exercise care to protect assets and records
Fidelity, honesty, integrity and best interest of muni
Prevent prejudice to financial interest of muni
Use information to benefit of muni
Develop a system to evaluate major capital projects prior to final decision
Keep proper records, Collect all monies due
Report councillor interference to MEC for LG
Report misuse of funds to AG
Report all irregular expenditure to SAPS
Report on establishing entities

27. MFM Bill – Chapter 7 cont. MM duties – budget control
Spending according to budget
Revenue and expenditure properly monitored
Reduce spending to revenue
Report to council (10 days after month end)
Under-collection of revenue, shortfalls on revenue, overspending of budget
Intergovernmental transfers
Delegations to other officials
Duties of other officials

28. MFM Bill – Chapter 8 Establishment of Budget and Treasury office
CFO designed by MM
Staff allocated by MM
Other persons contracted for the work of the office
Appointment of CFO
Role of CFO
Perform budget, accounting, analysis, financial reporting, cash management, debt management, financial management, other functions delegated by MM
Delegation of functions

29. MFM Bill - Chapter 9 Establishment of Entities, list of entities
Financial duties of municipalities
Service delivery agreements with entities
Disposal of assets by entities
Governance issues
governing boards or bodies
Members of boards or bodies
Selection process
Fiduciary duties of boards or bodies
Compensation for serving on boards
Meetings of governing boards or bodies
Accounting authorities, duties, information
Delegations
Business plans, expenditure and borrowing

30. MFM Bill - Chapter 9 (cont)
Entities
Alternative service delivery mechanism
Builds on and gives effect to Systems Act
External mechanism
Governance framework
Issue requires a more robust establishment and governance framework

31. MFM Bill – Chapter 10 Municipality Financial reporting and auditing
Preparation of annual reports and financial statements
Auditing of financial statements
Tabling of reports
Sole ownership control and other Entities
Preparation and auditing of F/S of entities
Submission of annual reports
General meetings
Open to public
Submission to provincial legislatures
Consequence of non- compliance

32. MFM Bill – Chapter 10 Continued
Assessment of AG queries
Audit requirements
Withholding of funds
Appointment of auditors
Discharge of auditors
Duties and powers of auditors
Reports of auditors
Investigation and special audits by AG
Accountability of municipal entities

33. MFM Bill - Chapter 11 Key to credit access
If investors perceive lending to municipalities as risky, they respond by:
not lending at all, or
charging high risk premium
requiring excessive collateral
Must balance creditor protection with citizen and service protection

34. Chapter 11 (continued) In a financial emergency:
citizens suffer loss of services
creditors suffer non-payment
other municipalities suffer by association
Chapter 11 provides a mechanism for resolving financial crises.
Governance crises may take longer to resolve, are outside the MFM Bill

35. Intervention Two types of failures S 139 only deals with Exec failures
financial
governance
S 139 only deals with Exec failures
extend to deal with failure to pass a budget
political intervention
Financial Emergency
need for non-political intervention
not National Treasury
not even National Government

36. Routine Recovery Routine Capacity building Financial Recovery
Monitoring
BREAKDOWN
Support
Governance
Recovery
Instructions

37. Recovery Plan, MFMB S100(2) Establishment of MFEA within DPLG
Neutral, professional, independent
Declaration of financial emergency
Creditor, MECs, Ministers, labour, muni can apply
Financial recovery specialist appointed
Recovery plan developed through consultation
Plan does not displace Council, sets limits
If Council adopts budget within limits, it sets priorities
Sec 100(2) with teeth, or without teeth?
Application for extraordinary relief in rare cases
Suspension of obligations
Termination of obligations in whole or part

38. MFM Bill – Chapter 12 General Treasury matters Regulations, guidelines
Internal controls, cash management, entities, fiscal and tariff powers, procurement, transfer of assets, alienation , disposal of assets, audit committees, internal audit, costing, information disclosure, prospectus on borrowing, etc.
Audit committees
Publishing of regulations

39. MFM Bill – Chapter 13 Financial misconduct
Misconduct by Muni Officials
Misconduct by Accounting authorities of entities
Disciplinary proceedings
Offences
Penalties
Regulation of procedures

40. MFM Bill – Chapter 14 Miscellaneous Exemptions Transitional provisions
Repeal and amendments
LGTA,
Accountants Act,
Promotion of local government affairs Act,
Schedule one of Systems Act, code of conduct
Issue: identify other legislation for amendment or repeal
Short title and commencement

41. Other challenges Link to Structures and Systems Act
Who sets/regulates tariffs?
Issues on procurement for PPPs
Clarity on financial emergencies
Need for constitutional amendment