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Dealing with Municipal Insolvency

This article explores South Africa's experience with municipal insolvency, including policy and legislation. It discusses the limitations of the previous legislation and the lessons learned. It also outlines the amended constitution and legislation, the new framework for intervention, and the conclusions drawn from this experience.

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Dealing with Municipal Insolvency

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  1. Dealing with Municipal Insolvency South Africa’s Experience, Policy and Legislation Matt Glasser 7 April 2004

  2. 1995-2002 • Municipalities with governance or financial failure dealt with in former sec139 of 1996 Constitution. Limitations: • only province could intervene – not national gov’t • Only where an "executive obligation" was not fulfilled. • limited to "issuing a directive to council" and/or "assuming responsibility for the obligation." • Did not inspire confidence in private sector investors. • Did not address case where council truly cannot meet its obligations.

  3. Lessons learned under old section 139 • Eight “strong” interventions • Typical problem was continuous slide into crisis, rather than some sudden shock • Financial info poor in every case, concealing problems and making them harder to resolve • Restoring financial health required tough decisions, which section 139 could not force: • Increase revenues • Decrease expenditures

  4. Amended Constitution and Legislation • Policy framework approved by Cabinet in 2000 • Constitutional Amendments in 2001 and 2003 • www.gov.za/gazette/acts/2001/a34-01.pdf • www.gov.za/gazette/acts/2003/a3-03.pdf • Implementing legislatIon now in Municipal Finance Management Act 2003 • Tools in place –will to act yet to be tested • One clear benefit – Jo’burg R 1 billion bond issue - www.joburg.org.za/2004/april/apr7_bond.stm

  5. New Framework • Province constitutionally required to intervene • Where province does not effectively intervene, Minister of Finance must do so • Clear and detailed criteria for interventions and recovery plans • Only court can stay debt payments, and only where necessary • Only court can discharge municipal obligations and only where absolutely necessary and other avenues exhausted

  6. CONCLUSIONS • UNDERLYING CHOICES • political and non-political interventions • autonomy of council vs. needs of residents vs. rights of creditors • Role of courts in triggering and supervising • Private sector role in municipal finance • How high a hurdle for a “financial emergency” • BOTTOM LINE – IT WORKED FOR LENDERS • Credible remedies • Effective remedies • WILL IT WORK FOR CITIZENS?

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