Curtly Stevens | Jun 24, 2021

Court stops reckless electricity outsourcing contract

Can a municipality under a section 139(5) intervention avoid or by-pass an Administrator, or adopt decisions, such as entering into contracts, that undermine a Financial Recovery Plan? According to the Western Cape High Court, in Executive Council of the Western Cape Province and Others v Kannaland Local Municipality and Others the answer is no. The Court stopped Kannaland Municipal Council from implementing a Public-Private Partnership (PPP) contract involving the outsourcing of electricity after the Municipality had acted unlawfully and at the detriment of its financial sustainability.

Background

Kannaland Local Municipality has been in a serious state of financial crisis since 2016. Like too many other municipalities, it is unable to meet its financial obligations. The municipality owes Eskom R12 million. In acknowledgment of this crisis, the Kannaland Municipal Council, in 2016, resolved and requested the Western Cape Provincial Executive (PE) to intervene in terms of section 139(5) of the Constitution. In 2017, the PE intervened, and appointed an Administrator in March 2018 to implement a financial recovery plan for the Municipality’s financial rehabilitation. This intervention did not involve the dissolution of Kannaland’s Municipal Council which retained the residual and executive powers only to the extent that it did not impact or relate to the Plan. The intervention was extended in 2020 until the first sitting of a new Municipal Council after the 2021 Local Government elections. In June 2020 and despite being under administration, the Municipality advertised a draft Public-Private Partnership (PPP) agreement for the provision of energy and water services. The proposed project spanning over 25 years was estimated at R735 million, which is four times Kannaland’s annual operating budget.

On 10 December 2020, the Municipal Council resolved to enter into a 25-year PPP agreement with Inovasure, in response to an unsolicited bid. The resolution was passed contrary to the Province’s and National Treasury’s recommendations, including the series of directives issued by the Administrator, who directed that the PPP process with Inovasure be suspended. The Municipal Council further resolved to terminate the provincial intervention, and the services of the Administrator, resulting in the PE seeking an interdict to stop the Council from implementing these resolutions.

Arguments of the Provincial Executive (PE)

The PE contended that the Municipality failed to comply with the provisions of the Municipal Finance Management Act of 2003 (MFMA), the National Treasury’s PPP Regulations, and the Unsolicited Bid Framework, which requires unsolicited bids to be fair, transparent, competitive and cost-effective. Inovasure, which was initially appointed to undertake a feasibility study of the project, submitted an unsolicited bid relying on the same information obtained from the feasibility study. The PE submitted that this is contrary to the MFMA, and the PPP regulations because it constituted a conflict of interest. The PE also revealed that there was no evidence that the Municipality consulted the National Energy Regulator, as required in terms of the Electricity Regulation Act. Thus, the Municipality acted unlawfully. Lastly, the PE, with support of the National Treasury, submitted that, if implemented, the proposed outsourcing project would undermine the objectives of the Financial Recovery Plan i.e. the financial rehabilitation of the Municipality.

Arguments of the Municipality

The Municipality did not dispute the facts concerning the Inovasure project but it challenged the lawfulness of the provincial intervention on two mains grounds. First, the Municipality argued that the Province failed to comply with the MFMA requirements for the development of a Financial Recovery Plan by not involving the Municipal Financial Recovery Service (a unit in National Treasury) in the development of the Plan. Second, the Municipality, citing section 139(5) of the Constitution, argued that the appointment of the Administrator was unlawful, as the Constitution only allows an Administrator to be appointed if the Municipal Council is dissolved. In short, the Municipality disputed the granting of an interim interdict contending that the Court may not order, even on an interim basis (interdict), the enforcement of an unlawful Financial Recovery Plan, and the appointment of an Administrator.

Judgment

The Court had to deal with two issues: to grant an interdict and second, to determine the lawfulness of the intervention. In this judgment (Part A), the Court only dealt with the first legal issue i.e. whether the PE complied with the requirements for an interim interdict. The PE had to prove that it had a right to intervene, even if it is open to some doubt. The PE also had to prove that it would suffer irreparable harm if the interdict was not granted.

The Court accepted that the requirements for a mandatory intervention in terms of section 139(5) of the Constitution were present in March 2017. In fact, the Court noted that the Municipality admitted that since 2017 it was unable to meet its obligations and financial commitments, resulting its request for an intervention. It further found that while great strides have been made since the appointment of the Administrator, ‘the situation in Kannaland remains dire’ and ‘the conditions for a mandatory intervention continue to exist’. The Court ruled that a mandatory intervention cannot be terminated by a municipal council, as the Municipal Council of Kannaland purported to have done. On the contrary, the Court reasoned that section 139(5) and 148(3) of the MFMA require that an ‘intervention is activated, managed and brought to an end by a Provincial Executive.’ The Court also stated that even if the lawfulness of an intervention is called into question, a municipality cannot simply ignore or by-pass a Financial Recovery Plan or decisions taken by an Administrator on the basis that it is invalid. The Court thus found the conduct displayed by Kannaland’s Municipal Council constitutes self-help and is against the rule of law. In line with established jurisprudence, the Court held that the decision to intervene is binding on Kannaland, until it is reviewed and set aside in an appropriate proceeding – an issue that will be determined in Part B.

The Court then turned to the Inovasure Project and its impact on the Municipality’s Financial Recovery Plan. It observed that the Financial Recovery Plan, since its approval in March 201, binds the Municipality in the exercise of its executive and legislative authority to the extent that it is necessary to achieve the objectives of the Plan. In other words, the Municipality had to ensure that all its decisions, including concluding contracts, do not undermine the objectives of the Plan. The decisions taken towards realising the outsourcing project did not merely undermine the Financial Plan, but was also taken in violation of a range of legal requirements. As Mangcu-Lockwood AJ observed

‘[t]he Municipality has committed itself to a path of unlawfulness by seeking to accept an unsolicited bid of this magnitude, whilst under mandatory intervention. It is exactly this kind of contract that needs to comply with the Plan, and in respect of which the Administrator was given exclusive authority’.  

This project would have had a significant impact on Kannaland’s finances, so the Court observed. Moreover, if left unabated, the Municipality’s conduct would undo the good work that was achieved through the intervention. For example, the Municipal Council resolved to amend the cost saving organisational structure established by the Administrator. It further approved the payment of funds to former employees who were not owed by the Municipality, resulting in the Municipality incurring significant costs. The Court found this to be ‘reckless disregard and failure, if not refusal, to appreciate the dire reality of the circumstances in which the Municipality finds itself’. The Court interdicted the Municipality from embarking on the outsourcing project and from making further staff appointments, until the lawfulness of the intervention is determine.

Commentary

This judgment is important for (1) the status of Financial Recovery Plans and (2) the outsourcing powers of municipalities under administration. First, it establishes that municipalities cannot simply bind themselves to long-term PPP contracts at the expense of local citizens and without proper consultation. Second, alongside the Unemployment Peoples Movement (UPM) judgment previously discussed in the Bulletin, the judgment demonstrates that a Municipal Council cannot avoid a Financial Recovery Plan, or adopt decisions that undermine the Financial Recovery Plan’s objectives. In other words, unless terminated by the relevant PE or set aside by a competent Court, the Plan, once adopted, binds the municipality. A municipal council, under a mandatory intervention, may not by-pass an Administrator, when making major decisions, such as entering into long-term PPP contracts that affect the implementation of a Financial Recovery Plan. Third, municipalities may not sideline an Administrator and the Financial Recovery Plan simply because they think the intervention is unlawful. Such an act will amount to ‘self-help’ and in the words of the Court a ‘recipe for chaos in governance.’

The Kannaland judgment does not close the door for municipalities to enter into energy outsourcing projects or any other kinds of PPPs. Rather, the judgment underscores the need for municipal councils not to resort to ‘self-help’ but follow the rule the law. Thus, the door remains open for municipalities in good financial standing to enter into PPP arrangements that benefit local communities.

 

By Curtly Stevens, Doctoral Researcher

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