Update

KNYSNA NEWS - At the beginning of September, Knysna Acting Municipal Manager (AMM) Dr Louis Scheepers issued a press release regarding irregular expenditure by Knysna Municipality after an accusation levelled by the Knysna Ratepayers' Association. The press release was a summary of his report to Council on 27 August.

In its letter to the municipality the KRA had requested the municipal council to “rescind its decision made in May to illegally write off R93-million worth of irregular expenditure and refer it to the appropriate municipal committee for investigation”. 

Council subsequently reversed the decision on 27 August, and referred the case to the Municipal Public Accounts Committee (MPAC).

Piggy-back contracts
The irregular expenditure pertains to so-called piggy-back contracts stipulated in Regulation 32 of the Municipal Finance Management Act (MFMA). Such contracts deviate from a competitive bidding process and merely relies on a tender process from another municipality.

Former AMM Dr Michele Gratz made the recommendation to Council in May to write off the irregular expenditure. To date, some two weeks after Knysna-Plett Herald (KPH) asked her to explain why she recommended that Council write off the irregular expenditure, she had not clarified her reasons for doing so. (See the complete list of questions to Gratz below.)

At the Council meeting on 27 August, Scheepers said the findings of the Auditor General (AG) in relation to Regulation 32 are not peculiar to Knysna Municipality, and that save for two municipalities in the Western Cape, all other municipalities in the province – even those who received so-called clean audits – had similar findings by the AG's office as a result of its interpretation of Regulation 32. 

Both the KRA and community organisation Knysna United responded to the AMM's report to Council.

'Misleading report'
The KRA last week called the report by Scheepers "misleading and deeply concerning’’ and said he omitted vital information about the audit finding from his report to Council by not divulging that a cost-saving analysis was never done on the prepaid water-meter tender. 

"Although Dr Scheepers conceded that the municipality could not lawfully write off the irregular expenditure prior to an investigation by MPAC, he prejudged the outcome of the investigation and concluded that:

“i) no political office bearer, the accounting officer or another official knowingly, deliberately or negligently incurred the irregular expenditure; and

"ii) the municipality received value for money, even though the expenditure was irregular.”
The KRA said from the outset the heading of the municipal report, "Neither official or political office bearer to pay back money’’, prejudges the outcome of the pending MPAC investigation. 

"Dr Scheepers misleadingly refers to ‘alleged irregular expenditure’, whereas it is not in dispute that Knysna Municipality incurred irregular expenditure of more than R93-million and that it unlawfully wrote off the expenditure in May.

"As Dr Scheepers is fully aware of the forensic investigation into the water meter contracts, it is highly inappropriate for him, as accounting officer, to prejudge the forensic investigation as well as the MPAC investigation,’’ the KRA stated.

'Wrongs don't make a right'
In its response to the statement that other municipalities acted in the same way, the KRA said, “In relying on the fact that almost all the municipalities in the Western Cape incurred irregular expenditure in connection with piggy-back contracts, the AMM forgets that two wrongs have never made a right.’’

According to Scheepers, the AG's office based its findings on the interpretation of two prior court rulings. He said the Provincial Treasury’s (PT) did not agree with the findings of the Auditor General’s annual audit ending 30 June 2019 "insofar as it relates to the legal force of the Blue Nightingale and Kwaduzuka judgements which the AG relies upon in their findings".

Scheepers held that the court decisions by the Kwazulu-Natal (KZN) and Eastern Cape divisions of the High Court do not have the "force of law’’ in the Western Cape.

He added that the “PT further in their written responses to the AG categorically states that there has been a lack of regulations or further directives from National Treasury on how Regulation 32 must be applied in practice, very much leaving municipalities to their own devices on how this must be applied.

“Having considered all the issues, it could very well be argued that taking into account the written representations of PT, an investigation by a committee of council into whether any political office bearer, accounting officer or official knowingly, deliberately or negligently incurred the irregular expenditure is not necessitated,” he said.

'Rule of law prevails'
The KRA however refuted the claim that the KZN and Eastern Cape divisions of the High Court do not have the "force of law’’ in the Western Cape. “South Africa is a unitary state and a constitutional democracy in which the rule of law prevails. This implies inter alia that everyone, including organs of state, is subject to the same laws and to the jurisdiction of the courts,” it explained. (See sidebar below.)

In concluding his report to Council, Scheepers conceded that Council must comply with the legislative provisions that a committee of Council investigates, even if the circumstances dictate or warrant otherwise. 

“In this case, the committee can only come to the conclusion that (1) no political office bearer, the accounting officer or another official knowingly, deliberately or negligently incurred the irregular expenditure; and (2) the municipality received value for money even though the expenditure was irregular."

Scheepers said even if the municipality would not be able to recover any monies from any political office bearer, the accounting officer or any other official, it nevertheless has to comply with the prescripts of the MFMA, Council must refer the matters to MPAC, and only after receiving the recommendation from MPAC can Council decide to write off the expenditure.

'Conflict of interest'
According to the KRA, Gratz’s recommendation that the irregular expenditure be written off was motivated by a report from the CFO, Mbulelo Memani, but it added, "Mr Memani has a glaring conflict of interest, as he is the subject of a forensic investigation in respect of a R43-million piggy-back contract for water meters."

On 1 September, Reverend Ralph Stander of Knysna United also responded to the prepaid water-meter tender in the wake or Scheepers’ report to Council on the irregular expenditure. 

“In the response the municipality says that they don't see anything wrong with the tender and suggested that the AG doesn't know what they are talking about. The municipality also says they don't see that any money could be recovered, that in spite of any efforts to recover the money. The AMM also suggests that taking the matter to MPAC is academic/technical and would result in MPAC condoning the illegal decisions of Council,” Stander wrote.

'Factually flawed'
“We believe all the input and advice of the AMM is factually flawed and are intended to cover up the corruption, illegal and irregular expenditure at Knysna Municipality. Knysna United believes Knysna and the people of Knysna deserve better and calls on MPAC to do its mandatory duty to keep the Council accountable. We also call on all the higher authorities to call Knysna Municipality to order,” his statement read.

The above statements by Knysna United were sent for comment to the municipality, whose spokesperson Christopher Bezuidenhoudt responded as follows: “We have no further comment on this matter. Council referred this matter to the Municipal Public Accounts Committee.” In its statement the KRA also said Council seems to be treating its appearance before the MPAC as a mere technicality and warned against this view. 

"DA councillors [Luzuko] Tyokolo and [Michelle] Wasserman referred to the MPAC referral as a 'box-ticking' exercise. Fortunately, executive mayor Ricky van Aswegen corrected them, stressing the important role that MPAC plays in ensuring good governance.

"KRA strongly disagrees with any suggestion that failure to refer the matter to MPAC was merely a technicality. We shall request an opportunity to address MPAC to ensure that MPAC is apprised of all the facts and that the investigation is not treated as a minor compliance exercise; and we will ask MPAC to await the outcome of the financial misconduct investigation into the CFO before it makes a recommendation to Council,” it said.

Auditor General decision

According to the KRA, until the Auditor General intervened, following two high court decisions from KZN and the Eastern Cape, piggy-back contracts, which deviate from a competitive bidding process and rely on a tender process from another municipality, had been widely abused nationwide. Knysna is no exception.

Knysna Acting Municipal Manager Dr Louis Scheepers and the Western Cape Provincial Treasury disagreed with the AG that the two high court judgements from other provinces were binding in the Western Cape Province and the rest of South Africa.

South Africa is a unitary state and a constitutional democracy in which the rule of law prevails. This implies inter alia that everyone, including organs of state, is subject to the same laws and to the jurisdiction of the courts. As we do not have a codified legal system, our law has more than one source, namely legislation, case law (which is derived from decisions of our courts), common law etc.

Courts apply the law and in so doing take into account previous judgements in similar cases. Previous judicial decisions therefore constitute law, which is authoritative and binding on everyone, including organs of state. The reason for this lies in the system of judicial precedent, also called the doctrine of stare decisis.

At present the two high court cases from KZN and the Eastern Cape are the only cases that have ruled on the interpretation of Regulation 32. Until such time as there is a conflicting judgement in the Western Cape, or the cases are overruled by a higher court, each and every municipality is bound to follow the interpretation of the two cases.

From the above it is therefore clear that the AG is correct in considering that the two cases have the force of law and the municipality and Provincial Treasury are wrong.
National Treasury, which issued guidelines following the High Court cases in MFMA Circular No 96, also considers the judgements binding.

In addition to its incorrect interpretation of the regulations, the AG found that the municipality failed to comply with Regulation 32(1)(c), in that there was no form of analysis to determine the cost-saving benefits or discounts that will be achieved following the piggy-back process.

The expenditure would therefore have been irregular in any event, regardless of the two High Court cases. The AG has recommended an investigation by management into all contracts where prescribed requirements were not met. Provincial Treasury has agreed with this recommendation.

Questions to Dr Michelle Gratz on irregular expenditure

On 18 August Gratz, via her legal counsel Sohn and Associates, in a response to the KRA request to rescind the decision in May this year for Council to write off irregular expenditure, denied any wrongdoing by herself or Council.

KPH subsequently sent a request to Gratz and her counsel to explain if, in the wake of Council reversing the May decision regarding the irregular expenditure, they still felt that no wrongdoing and/or nothing unlawful had taken place.

Gratz was also asked if she believes Council was correct in reversing its decision to write off the said irregular expenditure and to elaborate on her view.

And finally, to explain why she suggested to Council to write off this large sum of money in May before the matter had been investigated by MPAC and in contravention of the MFMA.

To date, KPH has not received any response to the questions posed to her.