corporate commercial ENSight | 15 November 2017

Playing with fire – understanding future financial commitments

by Lwando Xaso and Alexandra Wood
Section 66 of the South African Public Finance Management Act, 1999 (“PFMA”) places certain restrictions on the powers of national and provincial public entities, government departments and constitutional institutions (“public institutions”) in regard to specified transactions, namely borrowing, the issue of guarantees, indemnities and security, and entering into transactions that bind or may bind that public institution or the revenue fund to any other so-called future financial commitment (“section 66 transactions”). 

A public institution may enter into a section 66 transaction only through the person(s) approved (for each category of public institution) in terms of section 66 of the PFMA. In addition, in the case of certain categories of public entity, section 66(3) requires that approval to conduct section 66 activities be authorised by the Minister of Finance and published in the Government Gazette.

Where there is a failure to comply with these requirements, the section 66 transaction is not binding on the state or the affected public institution. Notably, because section 68 of the PFMA expressly provides that a transaction that does not meet the requirements of section 66 is not binding on the state or the public institution in question, there is no duty on the public institution to have the non-compliant transaction set aside by a court – it can merely cease to perform and, when challenged, claim not to be bound, by virtue of section 68. In addition, the defence of estoppel will not succeed against a public institution, because the validity of a section 66 transaction depends on actual compliance with statutory prescripts. It is therefore imperative that private sector parties understand when section 66 of the PFMA is triggered. 

Until the 2016 High Court decision in Waymark Infotech (Pty) Ltd v Road Traffic Management Corporation, what constitutes a future financial commitment, and consequently when section 66 of the PFMA is triggered, has been a matter of debate. 

In the Waymark case, Waymark Infotech Pty Ltd (“Waymark”) and the Road Traffic Management Corporation (“RTMC”) concluded a service level agreement (“SLA”) pursuant to a tender process, in terms of which Waymark was to render certain services, including the replacement of an integrated enterprise resource planning system, for RTMC for a contract price of approximately ZAR33-million, the payment of which was to be made on completion of certain milestones. 

Waymark alleged that during the course of the SLA, after Waymark had commenced with delivery of the services, but before these could be completed, RTMC suspended the provision and completion of such services until further notice. Waymark launched court proceedings against RTMC on the grounds that the suspension of services amounted to an unlawful termination of the SLA; alternatively, a repudiation thereof. RTMC raised a special plea, which turned on the interpretation of section 66(3)(c) of the PFMA. 

RTMC, a national public entity listed in schedule 3A to the PFMA, pleaded that the SLA committed RTMC to a future financial commitment and, as such, would only have been binding on RTMC if the SLA had been concluded through the Minister of Finance, as prescribed by section 66(3)(c) of the PFMA. 

Waymark’s counter-argument was that the type of future financial commitments contemplated by section 66 are not those contained in the SLA, therefore section 66 did not apply. Section 66, according to Waymark, seeks to regulate those future financial commitments that are “fiscally exceptional” and not those contemplated by ordinary contracts, such as an ordinary procurement contract. In support thereof, Waymark’s counsel referred to City of Cape Town v Sanral, in which it was argued, but not settled by the court, that the meaning of any “future financial commitment” in section 66(3) of the PFMA “cannot mean every transaction that commits the entity to make payment in future”, but that “there must be something ‘fiscally exceptional’ about the financial commitment in order to trigger section 66(3) approval”. 

The court in the Waymark case held that on a proper interpretation of the words used in section 66(3), it is clear that any type of future financial commitment is contemplated, as well as the entering into of any other transaction that binds or may bind that institution to future expenditure. The court, having regard to the purpose of the PFMA (which is to regulate public financial management) and the context of section 66, held that a future financial commitment must refer to an undertaking to commit expenditure in future, for which a budget has not yet been approved. On this basis, the court found that, although the funds for the project had been allocated for the 2008/2009 financial year, there was no indication that there was a similar allocation for the subsequent financial years (and indeed there could not have been, since the budgets of public institutions are approved annually for one year). As such, the funds for the subsequent financial years had not been approved in terms of a budget. Therefore, the court held that the SLA was not binding on RTMC as it did not comply with the requirements of section 66(3) of the PFMA. The prior approval of the Minister of Finance would have been required to render the SLA lawful.

In light of the court’s reasoning in the Waymark case, section 66 is applicable to all contracts concluded with a public institution, regardless of the nature of such contracts, where those contracts commit the institution or the revenue fund to expenditure for which a budget has not yet been approved. The trigger for the application of section 66 will, therefore, turn on whether the future financial commitment is one for which the public entity or department has an approved budget allocation. 

This article was reviewed by Pippa Reyburn, a director in ENSafrica’s corporate commercial department.

Alexandra Wood is a candidate attorney in ENSafrica’s corporate commercial department.


 

Lwando Xaso

corporate commercial | senior associate
lxaso@ENSafrica.com
cell: +27 82 310 4277

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