The first article introduced the idea as a possible solution to municipal distress, and discussed the triggers that compel a municipality to review a service. When compelled to review a service delivery mechanism, the municipality must follow the four steps of section 78 of the Municipal Systems Act:

(1) Initial review of the current arrangement.

The municipality must focus on three areas: the municipality as the service provider (direct and indirect costs, capacity etc.), labour issues, and broad social and economic considerations.

(2)  If an external provider is considered, a further inquiry must be held.

This requires community consultation and deals with matters such as the possible service providers, developmental and labour issues. It must also include a feasibility study of issues such as value for money, the needs of the poor, transfer of risk to the provider, impact on staff, assets and liabilities etc.

If private actors or an NGO/CBO is considered, competitive bidding is required (see below). If the provider is a municipal entity, or a national or provincial organ of state, negotiations towards an agreement may commence.

(3)  Competitive bidding

The municipality’s Supply Chain Management Policy (SCMP) applies to the competitive bidding. The PPP Regulations (see below) insist that the municipality consults the National Treasury and relevant provincial treasury on the bid documentation, the evaluation of the bids, and awards made.

(4)  Negotiating a service delivery agreement.

The municipality remains responsible for the service. It must subject the provision of the externalised service to its performance management system and “monitor and assess” the implementation of the agreement. The municipality must control the tariffs (of a trading service) but the agreement may allow the provider to adjust tariffs within limits set by the municipality.

The agreement must also include provisions that ensure continuity if the service provider does not perform. Provision must also be made for the municipality to take over the service, including all assets, when the agreement terminates. Finally, the agreement must provide for dispute resolution.

The following responsibilities may be assigned to the service provider:

• developing and implementing a service delivery plan;
• operational planning, management and provision of the service;
• social and economic development related to the provision of the service;
• customer management;
• accounting, financial management, budgeting, investment and borrowing within a municipal framework; and
• collection of fees for the provider’s account.

The service delivery agreement may provide that the municipality transfers funds to the service provider to subsidise services to the poor. The municipality may also transfer or second staff to the service provider, if the staff agree, and in accordance with labour legislation.

Before concluding a service agreement, the municipality must consult the public and, once the agreement is signed, it must be made public.

Public-private partnership in terms of the MFMA
The MFMA adds further requirements if the service will be provided by a private party. The PPP Regulations define a PPP as a transaction, whereby a private party –

1. performs a municipal function and/or acquires the management or use of municipal property for its own commercial purposes;
2. assumes substantial financial, technical and operation risks; and
3. receives a benefit by way of a consideration and/or the collection of fees.

The PPP Regulations are different from the Municipal Systems Act’s requirements. The MFMA is more limited than the Systems Act because it applies only to private parties (including NGOs). At the same time, it is broader than the Municipal Systems Act because PPPs also include the outsourcing of activities that are not municipal services, but internal to the municipality’s administration, such as metering or billing.

Under the PPP Regulations, the National or Provincial Treasury may instruct the municipality to appoint a “transaction advisory” to assist with the process of externalising the service.

As with externalising a municipal service, a municipality must first conduct a feasibility study. The PPP Regulations add more detail to the feasibility study. After the study, the municipal manager must conduct a broad consultation process before the matter is submitted to the council for a decision.

If the PPP has financial implications beyond three years, section 33 of the MFMA must be complied with. This inserts further publication, community participation and intergovernmental consultation requirements, and a council resolution that the municipality will benefit financially or economically.

The PPP Agreement
The PPP Regulations determine a number of qualitative requirements for PPP agreements. They focus on –

• value for money and affordability;
• the private party’s role;
• financial management by the service provider;
• monitoring and enforcing performance;
• termination in case of failure;
• anti-corruption measures;
• the private party may not offer employment, consultancy or other contracts to municipal officials; and
• dispute resolution and periodic review for agreements longer than three years.

Other considerations
The municipality must also comply with sector legislation. For example, in respect of water, municipalities must consider the obligations imposed by the Water Services Act, such as regional efficiencies and benefits of scale, and comply with the regulations under the Water Services Act. Second, the municipality’s own internal arrangements, such as its system of delegations, committee and council cycles, internal reporting cycles etc. will apply to the preparation of the relevant council resolutions. For example, the submission of a full report to the municipal council typically travels past a number of administrative levels, at least two or three portfolio committees, and the mayoral or executive committee before it is submitted to the council.

Can a municipality be forced?
If the municipality is unwilling to externalise the service, can it be forced? Intergovernmental and political pressure, as well as financial incentives (access to conditional grants) can be used to encourage the municipality to externalise the service. Second, the Municipal Systems Act contains compulsory triggers for a review of service delivery arrangements. The provincial government could also use section 139 of the Constitution to force a municipality to externalise a service. However, this comes with considerable political and legal risks.

Concluding observations

Externalising a municipal service is complicated, time-consuming and costly. A City Manager recently referred to it as an “absolute dental operation”. This is mainly because the law favours internal service delivery mechanisms, and the regimes of the Municipal Systems Act and the MFMA overlap. Government must seriously consider simplifying the law, in particular by creating one coherent law. On the other hand, some of the substantive requirements are normal “due diligence”. Also, involving an organ of state (such as a water board or ESKOM) does not require competitive bidding which reduces the complexity. Thirdly, some of the procedures of the Municipal Systems Act and the MFMA can be collapsed into one. For example, where outsourcing through a PPP is contemplated, a single feasibility study, required by both the Municipal Systems Act and the MFMA and PPP Regulations will suffice.

A municipality in distress cannot complete these processes without support. Legal, project management, financial management, human resources and engineering expertise must be made available to support the municipality to see this process through.

Perhaps the most important question is: will this work? The reasons for a municipality’s distress, which are usually deep-seated political, governance and administrative difficulties may bedevil not only the process of externalising the service, but also prevent the municipality from effectively monitoring the implementation of the service delivery agreement. However, it is time that new approaches are found in the fight against municipal distress, and perhaps the externalisation of services is worth pursuing in certain circumstances.

 By Jaap de Visser