MFM BILLChapters 10 and 11

External Mechanisms

&

Municipal Entities

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

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

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

Review of Service Delivery Mechanisms

• Internal Mechanisms– Departments, – business units, – Other

• External Mechanisms– See next slide

• Internal Service Districts• Multi-Jurisdictional Service Districts

External Mechanisms for Service Delivery

• Municipal entity– See next slide

• Other municipality

• Organ of state

• CBO or NGO

• Other institution, entity, or person

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

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.

Municipal/Corporate entities

• Are we not making a BIG deal?

• THREE key issues to sort out1. 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)

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

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?

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

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]

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]

Other issues

• Role of CEO as AO, and board as accounting authority?

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)]

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

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

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

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

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

Other issues

• Mid-year estimates and reports