Section 32(2) of the MFMA requires every municipality to recover money from a political office bearer, accounting office or municipal official who deliberately or negligently caused the municipality to incur fruitless and wasteful expenditure. The only exception to this rule is if a council, upon recommendation from its committee, resolves that the expenditure is irrecoverable and must be written off. In pursuant to this provision, the Nelson Mandela Bay Metropolitan Municipality (NMB) (the Metro) approached the High Court to recover fruitless and wasteful expenditure to the tune of R 11 300 000, 00 from its former Executive Director responsible for human settlements, Lindile Antonio Petuna (Mr Petuna).

Background

Mr Petuna was employed by the Metro as the Executive Director for Human Settlements directly accountable to the Municipal Manager. In February of 2015 and in his capacity as the Executive Director, he made a recommendation to the Executive Mayor and the Municipal Council of NMB for the purchase of a piece of land for R 14 385 741, 00. The land was earmarked for the development of low cost housing. The Municipality acted on the basis of his recommendation. After the conclusion of the sale, it was established that the piece of land could not be developed for the intended purposes, and that its market value was merely R 3 000 000.00. Therefore, the Metro incurred fruitless and wasteful expenditure which, as stated above, the MFMA requires that it recover.

Arguments of the Metro

NMB submitted that, when the recommendation to purchase the land was made, Mr Petuna stated that 9,6 hectares of this land was “developable in the immediate term while 17, 55 hectares in the future equating to a potential of 27, 55 hectares in total”. The Metro further submitted that Mr Petuna “knew or ought to have known that th[is] representation was false or open to question, because an earlier biophysical feasibility report [it had] commissioned [in 2013] …had reached the conclusion that only, 5,08 hectares of the property was suitable for human settlements development”. NMB revealed that Mr Petuna failed to disclose the contents of this report to the Mayor and councillors, thereby preventing them from making an informed decision. He also did not reveal that there was alternative suitable land for the proposed development project relative to the piece of land in question.

The Metro also submitted that Mr Petuna recommended that the Municipality purchase the piece of land for R14 385 741, 00 when he “knew or ought to have known” that the seller had bought the piece of land for R 2 350 000, 00 in 2013 and by February 2015, the market value of the land was around 3 million. The Municipality argued that Mr Petuna “knew or ought to have known that the Executive Mayor and councillors would in all probability approve his directorate’s recommendation, as being the considered view of the responsible officials in the Human Settlements Directorate”.

Lastly, the Metro argued that the action (recommendation) of Mr Petunia, whether intentional or out of negligence, caused it to incur fruitless and wasteful expenditure” for two reasons. First, the piece of land is unsuitable for human settlements and second, the market value of land was R 3 million in contrast to the R14 385 741, 00 it paid. Thus, the Metro contended that it incurred fruitless and wasteful expenditure amounting to R 11 300 000, 00, which it must recover from Mr Petuna. Alternatively, the Metro claimed contractual damages from Mr Petuna for failing to abide by his contract of employment.

Arguments of the respondent

Mr Petunia refused personal liability for the fruitless and wasteful expenditure on several grounds.  First, he stated that since he was no longer an official of the Metro, section 32(2) of the MFMA, which requires a municipality to recover fruitless and wasteful expenditure from a municipal official, is no longer applicable to him.

He also explained that during his term of employment there was a partnership between the Eastern Cape Provincial Government’s Department of Human Settlements (ECDHS) and the Metro which involved the purchase of land for the development of low cost housing. He further stated that this housing project before the Court was initiated by ECDHS which had already earmarked the piece of land for the project and obtained a valuation of the land.  Hence, it was argued that he “had no knowledge of the market value of the property and had relied on the valuation report furnished by the ECDHS”.

Lastly, he claimed that the “purchase price negotiations were undertaken by the City Manager who took the decision on the price”. He further stated that the Council of NMB and its other relevant structures “were not bound by [his] …recommendation” since they could approve or reject it. Thus, he argued that he was not personally liable for the fruitless and wasteful expenditure since he did not make the final decision to purchase the land at the recommended price.

Decision of the court

The Court had to decide whether Mr Petuna was personally liable for the fruitless and wasteful expenditure of R 11 300 000, 00. The Court disagreed with Mr Petuna’s argument that section 32 of the MFMA does not apply to him. The Court stated that the Metro’s cause of action is premised on Mr Petuna’s conduct in relation to the period when he was still employed by the Metro. The Court further stated that the termination of Mr Petunia’s employment ‘does not vitiate the operation of the section against [him] relating to the time he was the employee of the [Metro]’. Thus, the Court found that section 32(2) was applicable.

It is without doubt that the piece of land was not suitable for the intended use i.e. low cost housing. For this reason, the Court reasoned that its ‘purchase was made in vain and would have been avoided had reasonable care been exercised’. Thus, indeed buying a piece of land with a market value of R3 million, for over R14 million amounted to fruitless and wasteful expenditure.

The Court dismissed Mr Petuna’s argument that he was not responsible for this fruitless and wasteful expenditure. The Court found this denial ‘nothing short of a desperate and unintelligent attempt to evade the consequences of the breach of his duty of trust, good faith and further his duty to prevent irregular, fruitless and wasteful expenditure’. The Court stated that had Mr Petuna ‘exercised reasonable care and performed his duties to the [Metro] in good faith and in accordance with the terms of his employment contract, his recommendation would have been that Council not purchase the property in the circumstances’.

In conclusion, the Court ruled that Mr Petuna was liable to pay to the Metro R11 300 000, 00 and applicable interest from the date of demand until the date of payment.

Commentary

Many municipalities spend resources purchasing goods and services at inflated prices. It is also common for some of the purchased goods and/or services to be of substandard quality or, even worse, they cannot be used for the purpose intended. This comes at a cost for the municipality and at the detriment of service delivery. Such expenditure is fruitless and wasteful and must be avoided.  When it does happen, the law requires that municipalities recover fruitless and wasteful expenditure.

Recovering fruitless and wasteful expenditure is a very important step in ensuring accountability in local government and ensuring that resources go where they are supposed to go, i.e. service delivery. Unfortunately, the record of municipalities in recovering fruitless and wasteful expenditure is not good. This judgment shows that it can be done, and that it must be done. Importantly, the Court made it clear that municipalities may pursue both current and former municipal officials whose decisions or lack thereof, whether intentional or out of negligence, resulted in a municipality incurring fruitless and wasteful expenditure.

A judgment, such as the one discussed above, does not automatically result in the money being paid back. But, with this judgment in hand, the Metro can collect the debt by, for example, attaching assets and/or income. Furthermore, this judgment is aside from any criminal proceedings that may be instituted against Mr Petuna for any criminal offences that may have been committed in the context of this sale.

By Tinashe Carlton Chigwata