MIIU Comments on the MSA Amendment Bill

Addition of definition of "Multi - jurisdictional service utility" and associated changes to the definition of "municipal entity" and Section 87

We welcome the inclusion of this provision which gives clarity on the form and content of establishment of this very useful mechanism. The MIIU strongly supports the concept of shared ownership of municipal entities by more than one municipality. The idea of a "multi-jurisdictional municipal service district" was an innovative element of the original MSA. The fine-tuning of the MJMSD concept to produce the "multi-jurisdictional service utility" described in this section seems fully consistent with international best practices. Such entities are used in many countries to improve and extend municipal service delivery.

Substitution of MSA Sect. 9 and Sect. 10

These substitutions are a welcome addition because of the impact of additional powers and functions on municipal budgets, cashflows and capacity to perform existing powers and functions. We would however suggest, that an addition to Sect. 9 (5) and Sect. 10 be made which requires that the Memorandum referred to, also indicates the likely impact on the credit rating of that municipality, where that municipality has obtained an independent rating already. The importance of this inclusion lies in the fact that while government may consider the factors outlined to be sufficient for its own purposes of conferring additional powers and functions on a municipality, these factors would be insufficient to take account of any impact on external parties with material interests in a municipality. Often, such external parties can have a very substantial impact on the financial health of a municipality, which uses market-based instruments for finance.

Substitution for MSA Sect. 74 (1) and implications for Sect. 83A
The reference to the MFM Act and its Regulations is welcomed in this instance primarily because the MFM Bill as it now stands requires that tariff interventions take account of existing long term contracts. The Minister is aware of our concerns regarding the uncertainty created by sweeping discretionary powers on matters of materiality such as tariffs. A requirement to take account of existing contract implications is a welcome step towards providing clarity on precisely how these discretionary powers would be exercised.

However, Sect. 94(1)(c) remains unchanged. MIIUís report on this issue was submitted to DPLG on 12 December 2000, our survey of private sector views on this section, and our standing commitment to participate in the Minister's task team set up to study this issue appear not to have convinced our colleagues in DPLG sufficiently to warrant changes to the MSA. Overwhelmingly, representatives of banks, operating companies, consulting firms, etc., have told us that the wording in the MSA would kill private sector interest in long-term concession deals. Even DBSA and Rand Water strongly agreed with this assessment and went on record to that effect in MIIU's written report. The bankers we talked to said they would not put money into long-term concessions as long as 94(1)(c) was not amended. Since 1999, no long-term concession for essential services (like water and sanitation) has been completed in SA. None are currently in preparation. Even if it is governmentís intention to discourage such forms of private partnership, it should also be considered that for a very substantial portion of long-term capital required to meet backlogs and emerging needs, municipalities are going to have to raise their capital in the markets.

Capping of tariff increases is done in many other countries. But it is normally done according to formulas, or other "due process" mechanisms, so everyone knows what to expect, when capping will be done, etc. The problem with 94(1)(c) is the uncertainty about how and when regulations will be done. The private sector is comfortable with such regulation as long as they think it is reasonable, fair, transparent, and certain. In 94(1)(c), it is the vagueness and lack of clarity about how the capping will be done that is the problem.

Amendments to MSA Sect. 78
Sect. 78(3)(c) calls for feasibility study assessments with regard to "value for money" and "affordability." These are important terms that are not defined in the amended MSA. We suggest use of the definitions developed by National Treasury's PPP Unit. For example, value for money is defined in terms of net benefits with regard to "cost, price, quality, quantity, or risk transfer, or a combination thereof" (Glossary on PPP Unit's Website).

An additional point for your consideration may be the following: Sect. 78(3)©(viii) requires a look at the advantages and disadvantages of internal versus external mechanisms, but internal mechanisms are not required to be subjected to the same sorts of tests as external mechanisms e.g. Those described in Sect.78 (3) © (x). Given that consideration of external mechanisms follows internal mechanisms, and that it is in the municipalityís interests to have a sound basis upon which to make such choices, it is suggested that the provisions pertaining to the feasibility in Sect. 78 (3) © also be applied to Sect. 78 (1).

Besides the need to be able to compare "apples with apples" , the sequential review process for MSPs that is required by Sect. 78 of the MSA is cumbersome and probably unnecessary. This section requires that "internal" options be evaluated first, before the consideration of "external" options can proceed. It is of course impossible to fully evaluate internal options in any meaningful way without considering external ones. This section of the MSA has greatly increased the costs and complexity of MSP development. And because so many trigger events exist for this kind of sequential review, municipalities must undertake this costly and complex process far more often than is warranted by the size and impact of the projects involved. In addition, we have seen several cases where political interests have tried to force a Sect. 78 review after an MSP arrangement has been established, as a way to prematurely terminate the agreement. If a long-term contract falls into jeopardy because a critic can force a Sect. 78 review at virtually any time, the private sector will quickly lose interest in such deals.

Substitution of MSA Sect. 80
This new Sect. 80(1)(aA) makes clear that not only may public-public service delivery contracts (with other municipalities or national or provincial organs of state) be awarded without competition, but even the new Sect. 78(3)(c) feasibility study assessments (e.g., value for money and affordability) need not be carried out prior to the award of such contracts. Instead, the revised Sect. 80(4)) focuses on the implications of the agreement for the "organ of state," rather than costs and benefits for the municipality. In addition, the "organ of state" must "conduct or commission" such a review, thereby undermining the objectivity of the feasibility process. In addition to being inconsistent with international best practice, by not competing out such contracts, or at the very least subjecting the proposed agreement to a market test means that municipalities have very little idea if they are entering into market-competitive agreements. It would be optimal to be seeking the best possible solution for a municipality, not just a solution that is better than the status quo. By not even doing a value-for-money assessment, municipal officials have no sense of the benefits. We therefore propose that a market test be done which would benchmark the proposed solution for factors in Sect. (78) (3) © (x).

Related to this, would be the question of what drives and/or informs decisions of the decision-making authorities of these other public organs. Sect. 12 (3) as amended appears to be very onerous and likely to be time-consuming. Perhaps it would be more appropriate that such approvals referred to, are only required from that organís decision-makers. In addition, provisions of Sect. 12 (4) would be covered in the external feasibility anyway, as well as in Sect. 12 (5) and Sect. 80A.

Insertion of MSA Sect. 80A
This new section requires that service delivery agreements contain certain kinds of terms and conditions. Among other things, the agreements must "identify specific outputs for each year of the agreement" (80A(2)(b). This is impractical with any kind of contract longer than five years, such as long-term concessions or Build-Operate-Transfer (BOT) arrangements. Such contracts typically identify outputs for the first five years, and include mechanisms for periodic planning processes (usually at five-year intervals) to establish new outputs throughout the contract term. It is impossible to "identify specific outputs" for year #30 of a long-term concession at the time of contract signing.

We would also like to suggest that a further clause is added to Sect. 80A(2), which sets outs the requirement that the rights and obligations of parties regarding MAGA be explicitly identified in the Service Delivery Agreement. Aside from improving confidence from a risk point of view, this helps to make dispute resolution clauses more meaningful.

Insertion of Sect. 81A

The requirements of this section seem to contradict the assessment of capacity as a determining factor in Sect.78 (c)(xi). If indeed it is the municipal managerís responsibility to enforce, monitor and report on the SDA provisions, and if necessary to establish the capacity to do so, then this should not be a determining factor in the decision to enter such an agreement, but rather a requirement of doing so, as set out in Sect. 81A.

Amendments to MSA Sect. 83
Sect. 83(1)(b) appears to prohibit municipalitiesí consideration of unsolicited proposals from potential private sector service providers, by requiring that "all prospective service providers have equal and simultaneous access to information relevant to the bidding process." This requirement seems inconsistent with unsolicited proposals that involve innovative solutions to municipal service delivery problems proposed by a single "prospective service provider." If this interpretation is correct, then the section is inconsistent with international best practice. Many countries, including South Africa (Dept. of Transportation) have developed procedures for considering such proposals, including the use of "market tests" to ensure competitive pricing. Genuine innovations proposed by private companies are recognised worldwide as something to be encouraged and considered using transparent and accountable procurement procedures. Reference in this section to Chapter 10 of the Municipal Finance Management Act provides no clarity on this issue.

The MIIU has developed recommended regulations for unsolicited proposals, based on international best practice, and submitted these to DPLG for consideration. However, these regulations do not appear in these amendments. We would suggest that unsolicited bids be explicitly provided for, either in Sect. 83, or as a matter to be Regulated in Sect. 86A. There is some urgency to this, as there are at present no specific rules that can be applied to dealing with unsolicited proposals. Even eThekwini has fallen foul of a due process, evident in the recent cancellation of a property management proposal which was initially accepted on an unsolicited basis.

Insertion of MSA Chapter 8A
This new chapter makes clear that municipalities may not jointly own companies with private sector companies, even if the municipality exercises ownership-control over the company. This is inconsistent with international best practice. Gradually divesting government interests in a company can be an effective way of privatising non-essential enterprises. In addition, it is quite common internationally for a government entity to hold a "golden share" in a privatised company that is otherwise under the ownership-control of a private company. The "golden share" allows the government partner to exercise control over narrow, but important, aspects of the privatised company's operation (labour relations, environmental protection, etc.). By flatly prohibiting any joint public-private ownership of companies that provide municipal services, the amended MSA will rule out one more option for improving service delivery.

This chapter also prohibits municipalities from establishing trusts, cooperatives, and other variations of subsidiary corporate entities. In keeping with best international practice, we support access by municipal officials to a large variety of subsidiary organisational types, including trusts and cooperatives. These kinds of subsidiaries are used all over the world to improve service delivery efficiency and general municipal operations. We believe that with proper disclosure and oversight, such entities can be valuable tools for SA municipalities and should not be prohibited outright.

Query: Transitional Provisions (p. 33)
These transitional provisions require that, if a municipality holds any interest in a private company not permitted by the new provisions of the MSA, the municipality must "dispose of its interest or otherwise rectify the matter as soon as may be reasonable in the circumstance." For municipalities like Johannesburg, which own shares in companies co-owned by private companies, the guidance in this section is not clear. If private partners are aware that the city must divest itself of these shares, the price for the share is likely to be low. What time period for divestiture would be reasonable under such circumstances?