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SECTION 78(3) – A GUIDE TO THE PROCESS Understanding and using the s78(3) process to achieve meaningful results. NJRT. National Joint Response Team - DWAF, SALGA, NT and dplg. Getting value from your s78(3) process.

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SECTION 78(3) – A GUIDE TO THE PROCESSUnderstanding and using the s78(3) process to achieve meaningful results


National Joint Response Team - DWAF, SALGA, NT and dplg

Getting value from your s78(3) process

  • It is important for a WSA to “own” its s78 process so that it can guide the process to ensure that the results best suit its needs and circumstances. In order to achieve this the following may be required of the WSA:

    • Think strategically about your s78 goals

    • Reflect on s78(1) process & build on it

    • Scope your s78(3) assessment

    • Understand what is meant by an external mechanism & consider creative variations

    • Understand the s78(3) process

    • Understand the s78(3) feasibility study

    • Consider all legislative and other relevant issues when deciding on an external mechanism

    • Consider lessons from other municipalities

Before You Start

  • Give notice to the community of intention to explore external mechanisms

  • Remind yourself of the purpose of a s78 assessment:

    • It is is to place the WSA in a position to make an informed strategic decision i.r.o an appropriate service delivery mechanism (internal, external or a combination of the two)

Before You Start

  • An informed strategic decision will probably need to take into account:

    • practical & technical service delivery issues;

    • prescribed legislative criteria;

    • political aspirations of the WSA; and

    • the over-all business strategy of the WSA

  • In other words your choice of mechanism must be implemental, have political support and make good business sense

Before You Start

  • This means that the WSA has an important role to play in its s78 process, even if consultants are appointed

  • The WSA must do more than simply apply the s78 legislative criteria – it must think strategically about:

    • what it wants to achieve politically & from a strategic business perspective (goals)?

    • what it already has with which to work (and still needs) to reach its goal (status quo)?

    • what obstacles or challenges hamper achievement of the goal (challenges)?

Before You Start

  • Consider what you already know:

    • By the time that the WSA has completed the s78(1) assessment it should have a clear understanding of its goals, status quo and challenges

    • Do not view the s78(1) and s78(3) processes as a contest between internal vs external options – instead use the s78(3) process to consider whether & how an external mechanism might address concerns raised in the s78(1) process about an internal mechanism

    • Remember the mechanism chosen may be a combination of internal and external – or an external mechanism which will ultimately be converted to an internal mechanism

Before You Start

  • Understand what is meant by an external mechanism

  • Understand the s78(3) legislative criteria & process

  • Define the SCOPE of the s78(3)

    • Understanding gained from the s78(1) process should be used in scoping the s78(3) assessment

    • Proper scoping should ensure that the application of the legislative criteria provides useful results – which speak specifically to the strategic goals of the particular WSA

Before You Start

  • Consider whether other legislative processes may be relevant and whether these processes should be co-ordinated with the s78(3) process:

    • If you are considering a mechanism that involves a Public Private Partnership the MFMA s120 process will be applicable (Notice to National and Provincial Treasury; s120 feasibility study and transaction advisor)

    • If your choice of mechanism will have future budgetary implications exceeding 3 years the MFMA s33 process will be applicable

    • If your choice of mechanism is another municipality (including an LM in your area) that LM will need to comply with s80(3) of the Systems Act

What is meant by an External Mechanism?

  • External means any mechanism that is not the particular WSA municipality conducting the s78 assessment

  • LMs can be appointed as WSPs (external mechanism), or the can simply provide support services to an internal mechanism of the WSA (internal mechanism)

  • External mechanisms require a written agreement between the municipality and the external mechanism (Service Delivery Agreement)

What is meant by an External Mechanism?

  • External mechanisms listed in s76(b) of the Systems Act include:

    • a municipal entity,

    • another municipality,

    • an organ of state,

    • a CBO or NGO

    • any other institution including a privately-owned company.

  • It is useful to distinguish public and private external mechanisms as different procurement requirements apply

What is meant by an External Mechanism?

External mechanisms

  • Municipal Entity

  • Another municipality

  • Organ of state (including a traditional authority)

  • CBO

  • NGO

  • Any other institution or entity legally competent to operate a business activity

Service Delivery Agreements must be entered into

Competitive tendering

Overview of the s78(3) Process

  • Give notice to local community [s78(3)(a)]

  • ASSESS each s76(b) external mechanism (municipality, municipal entity, NGO, CBO, organ of state or private sector operator) against:

    • S78(3)(b) criteria [s78(3)(b)]

    • Other relevant factors

  • Conduct or commission FEASIBILITY STUDY of preferred mechanism/s [s78(3)(c)]

Legislative Criteria for Assessment of External Mechanisms

  • In terms of s78(3)(b) the assessment of each external mechanism must take into account:

    • Direct and indirect costs and benefits [s78(3)(b)(i)]

    • Capacity and potential future capacity of prospective service providers [s78(3)(b)(ii)]

    • The likely impact on development, job creation and employment patterns [s78(3)(b)(iv)]

    • The views of the local community and organised labour [s78(3)(b)(iii) & (v)]

  • If there is no prospective delivery mechanism with the skills, expertise and resources necessary for the provision of the service for any category of delivery mechanisms identified in section 76(b), the assessment may state that there are no potential mechanisms in that category & provide reasons for this conclusion

Other Non-Legislative Criteria for Assessment of External Mechanisms

  • Although not legislatively required, the assessment should also take into account:

    • The WSAs political, business & service delivery needs and challenges

    • Regulatory requirements of different external options

    • Issues relating to the required SDA:

      • Output specifications (what is it that you want the service provider to do?)

      • Risk Transfer (financial/operational/political/etc)

      • Contract Structure

      • Structure of relationship with service provider

      • Term of contract (relative to risk transfer)

The Feasibility Study – Testing Preferred External Mechanism

  • Following the assessment of all possible external mechanisms against the s78(3)(b) criteria, the WSA should consider selecting preferred external options for the s78(3)(c) feasibility study

  • This selection of preferred mechanism is another opportunity for the WSA to guide the s78 process towards achieving the WSA’s strategic goals

  • The preferred options must be tested by means of the s78(3)(c) feasibility study

The Feasibility Study – Legislative Criteria:

  • A s78(3) feasibility study must in terms of s78(3)(c):

    • Identify the municipal service for which the external mechanism is being considered [s78(3)(c)(i)]

    • Indicate the number of years for which the municipal service might be provided by the external mechanism [s78(3)(c)(ii)]

    • Consider the projected outputs which might be expected from providing the service through an external mechanism [s78(3)(c)(iii)]

The Feasibility Study – Legislative Criteria:

  • A s78(3) feasibility study must in terms of s78(3)(c):

    • Assess how the preferred mechanism will

      • Provide Value for money [s78(3)(c)(iv)(aa)]

      • Address the needs of the poor [s78(3)(c)(iv)(bb)]

      • Be affordable [s78(3)(c)(iv)(cc)]

      • Transfer risk [s78(3)(c)(iv)(dd)]

    • Consider the projected impact on the WSAs:

      • staff, assets and liabilities [s78(3)(c)(v)]

      • IDP [s78(3)(c)(vi)]

      • Budget (impact on revenue, expenditure, borrowing, debt and tariffs) [s78(3)(c)(vii)]

The Feasibility Study – “Value for Money”

  • Assessing VALUE FOR MONEY requires a comparison between doing a project “internally” and doing it through an “external” service provider looking at cost, price, quality, quantity and risk transfer

  • A project provides VALUE FOR MONEY if there is a net benefit to the municipality of doing the project through a so-called external mechanism

The Feasibility Study – “Affordability”:

  • Even if a project provides value for money, it still needs to be affordable for a municipality given its budget

  • For it to be affordable there must be adequate budgetary provision made for the project

  • If a project is not affordable, it undermines a municipality’s ability to deliver other services and should not be pursued, even if there is value for money

The Feasibility Study – “Risk Transfer”:

  • RISK indicates a possibility that an event may not occur as planned when the parties agreed to do the project.

  • There are risks in every project and these must be identified and allocated between the parties

  • The s78(3) feasibility study considers whether the transfer of technical, operational and financial risk from the WSA to the external service provider is appropriate

Legislatively prescribed things to consider when choosing your mechanisms

  • After having completed your s78(3) process, s78(4) requires that the municipality must decide on an appropriate internal or external mechanism, taking into account that s73 prescribes that municipal services must:

    • Be equitable & accessible

    • Be provided in a manner that is conducive to the prudent, economic, efficient & effective use of available resources & the improvement of standards of quality

    • Be financially sustainable

    • Be environmentally sustainable

    • Be regularly reviewed with a view to upgrading, extension & improvement

What to think about when considering external mechanisms

  • Other factors that may be considered when deciding on an appropriate mechanism include:

    • Potential viable variations of the external service delivery mechanisms identified in section 76(b) of the Systems Act

    • Potential combinations of internal and external service delivery mechanisms

    • Affordability – matching needs (service levels) against revenue (tariffs collected and grant funding)

    • Securing and allocating grant funding – MIG for capital expenditure for poor

    • Formula for allocating equitable share to WSP to provide free basic services

What to think about when considering external mechanisms

  • Other factors that may be considered when deciding on an appropriate mechanism include:

    • Responsibility of WSP to collect water revenue

    • Consolidated invoice or separate invoices

    • By-laws in place to allow revenue collection and credit control

    • Can you ring-fence the service?

    • What is the administrative capacity within your municipality to monitor performance of the WSP?

    • Are significant support services necessary for the proper functioning of the service being undertaken by the WSP?

What to think about when considering external mechanisms

  • Other factors that may be considered when deciding on an appropriate mechanism include:

    • Can the external mechanism be used to build your WSA or WSP capacity?

    • What is the level of bureaucracy within your municipality? Is it/will it impede impeding service delivery?

    • Long term impact of institutional reform – DWAF Strategic Framework for Water Services talks about regionalisation of public sector water service providers?

    • Consultation with the national departments (DPLG/DWAF/NT) through the process mitigates risk of them no supporting your deal

    • Capacity of potential service providers to meet your specific needs?

Council decision required for an external service delivery mechanism

  • The “municipality” must, following the s78(3) process choose an appropriate mechanism [s78(4)]

  • The MUNICIPAL COUNCIL must make any decision to enter into a service delivery agreement with an external mechanism as the power to make this decision may NOT be delegated by the Council [s59(a)]

The Chris Hani Experience- Mechanism Chosen

  • Chris Hani DM has decided to use a combination of internal and external mechanisms

    • The four LMs in the west of CHDM will act as external WSPs (External Mechanism)

  • CHDM will act as internal WSP in the remainder of its area, with support services being provided to CHDM in terms of SSAs with the four eastern LMs

  • CHDM is looking at using this service delivery mechanism model for approximately 3-5 years

The Chris Hani Experience- Challenges Encountered

  • A shortage of management capacity within the CHDM area

  • Limited participation of key councillors and officials

  • Limited “ownership” of process by CHDM (difficulty in conveying political & strategic business aspirations)

  • Initial confusion around whether LM WSPs are internal or external mechanism

  • Uncertainty regarding the s80 feasibility study required from the LMs

The Chris Hani Experience- Key Lessons

  • The s78 process is a matter of selecting an appropriate service delivery mechanisms by balancing political aspirations with good business practice (within the constraints of municipal legislation)

  • Political aspirations of the municipality are key - Councilors should be actively involved in the s78 process & their views on how the service should be provided should be canvassed

  • Practicalities regarding implementation & the business-sense of the decision are key – the views of officials should be canvassed

  • Understanding the meaning and implications of all the legislative criteria is key

  • Remember that a short / medium-term mechanism can be used to carry you to your long-term goal


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