Externalising services in distressed municipalities – a new solution to a persistent problem? Part 1
The traditional response, in the form of interventions under section 139 of the Constitution, has proven to be largely ineffective.
What if a different approach would be used? Could externalising municipal services be a solution? When a municipal service is in crisis, could the approach be to -
- separate the service authority and service provider roles with respect to that service;
- bring in another organ of state (such as a water board or ESKOM) or a private service provider who becomes the service provider role in terms of an agreement with the municipality; and
- make sure the municipality retains the service authority role?
Separating the service authority and service provider roles
The “authority” role refers to the statutory responsibility for the function. This is the responsibility for adopting policy and by-laws, planning to ensure that the function is undertaken effectively, monitoring of execution, control of funds, and (in some cases ultimately) ownership of assets. A municipality performing the authority role takes full responsibility for exercising the powers necessary to fulfil the function.
The municipality must at all times retain the service authority role. This is to enable cross-subsidisation, to enable the municipality to exercise oversight over the provision of the service, and to take remedial action where necessary.
The “service provider” role is concerned with delivery (to end-users where applicable) and implementation. The service provider is accountable to the municipality for the exercise of responsibilities defined in a service delivery agreement (SLA). It is essential that the SLA distributes risks (of non-payment, and other external factors) fairly between the service provider and the municipality.
Various service provider roles can be distinguished, namely -
- Service contract – the service provider becomes responsible to manage an aspect of a service for a fee.
- Management contract – the service provides becomes responsible for the overall management, but without the responsibility to finance operating, maintenance, repair or capital costs.
- Lease - service provider is responsible for the overall management of a municipal service, and the council’s operating assets are leased to the contractor, generally without any responsibility on the part of the private operator for capital investment.
- Build/operate/transfer – the service provider undertakes to design, build, manage, operate, maintain, and repair, at its own expense, a facility to be used for the delivery of a municipal service. The council becomes the owner of the facility at the end of the contract.
- Concession – the service provider undertakes the management, operation, repair, maintenance, replacement, design, construction, and financing of a municipal service facility or system. The service provider often assumes responsibility for managing, operating, repairing, and maintenance of related existing facilities. The contractor collects and retains all service tariffs, assumes the collection risk, and pays the council a concession fee (sometimes including a component that varies with revenue).
In most municipalities, service delivery functions are located in line departments. The law requires municipalities to carefully consider the advantages and disadvantages of various service delivery modalities, in particular those that involve third parties, such as other organs of state or private service providers. It prescribes procedural and substantive requirements. These also apply when a municipality externalises one or more services as part of an intervention to rescue service delivery. Municipalities in distress are not exempt from the law.
What follows is an outline of the requirements. They are mostly (but not exclusively) contained in the Municipal Systems Act, the Municipal Finance Management Act 56 of 2003 (MFMA) and the Municipal Public-Private Partnership Regulations GNR 309 Government Gazette 27431, 1 April 2005 (PPP Regulations).
Requirements for municipal service partnerships
A municipality may not “just” decide to externalise a municipal service or function to a third party. The decision making is tightly regulated, and this begins with the Municipal Systems Act.
The Municipal Systems Act provides a list of service delivery mechanisms, which are categorised either as internal or external. Internal mechanisms include a department or other administrative unit within the municipality’s administration, a business unit under the control of the council, any other component of its administration. The external mechanisms include a municipal entity, another municipality, an organ of state (such as ESKOM or a water board), a traditional authority, another legal entity (i.e. private actor), or an NGO/CBO.
The key issue with the external options is whether or not competitive bidding should be followed when appointing a service provider. In short, involving another municipality, organ of state or traditional authority does not require competitive bidding, but involving a private actor or NGO/CBO does.
The requirements outlined here apply to “municipal services” which is broadly defined in the Municipal Systems Act. For example, it does not matter whether the service is a trading service (i.e. charged to households) or not. The service must fall in one of the functional areas listed in Schedule 4B and 5B of the Constitution, and must be directed to the public. Services or functions confined to the internal administration of a municipality are thus exempt from the inquiry in terms of the Municipal Systems Act.
Triggers – when a municipality must revisit its service delivery arrangements
The Municipal Systems Act lists six circumstances that trigger the municipality to review a service delivery mechanism.
| (1) Internally provided service If a service is currently being provided internally, the review must be conducted when the service is to be significantly upgraded or improved. A review must also follow when a performance evaluation done in terms of the municipality’s performance management system requires such a review. Finally, the review is necessary when the municipality is restructured or reorganised. |
(2) Community request |
| (3) Externally provided service If a service is currently being provided externally, the review procedure must be conducted when required as a result of a performance evaluation. It must also be conducted when the service delivery agreement is due to expire or be terminated, or when an existing municipal service or part of that municipal service is to be significantly upgraded, extended or improved outside of what is contained in the service delivery agreement. |
(4) New service When it has been decided that a new municipal service is to be provided, a review of the appropriate method of delivery should be conducted. However, there is also caselaw suggests that it is not applicable to a decision about whether or not to start providing a municipal service. |
| (5) A section 139 intervention A review must be conducted when it is required by an intervention in terms of section 139 of the Constitution. |
(6) Required by the IDP A review of the municipality’s integrated development plan (IDP) may require a review of the delivery mechanism of one or more services. |
In the context of the issue at hand, namely a municipality in distress, the most relevant triggers are the review following a performance evaluation under (1) and the review triggered by a section 139 intervention under (5).
Once the review is triggered, the Municipal Systems Act and the MFMA prescribe a detailed process. This will be outlined in the second article in this series.
