Landmark SCA ruling opens door for Nelson Mandela Bay to reclaim millions in wasteful expenditure

WRITTEN BY: ESTELLE ELLIS

Municipal officials can be liable to pay back the money if they were responsible for the unauthorised, irregular, and wasteful expenditure, the Supreme Court of Appeal (SCA) in South Africa ruled in November.

In a single metro, such as the Nelson Mandela Bay Municipality, and for a single project – the multibillion Integrated Public Transport System (IPTS) – this ruling has opened the door for multimillion-rand claims to be recovered from municipal officials.

Lawyers have previously argued that the municipalities can only act against officials if it can be proven that the entity itself had suffered damages.

But this, SCA judge Ashton Schippers ruled last week, is not what the law intended.

Schippers wrote in the reasons for dismissing an appeal by several former senior officials from the metro that Section 32 of the Municipal Finance Management Act makes it clear that the law was intended to create personal liability on the part of municipal officials in particular circumstances.

“The meaning conveyed by the wording of Section 32 is clear and unambiguous. Liability arises as soon as an official intentionally or negligently incurs unauthorised, irregular, and fruitless and wasteful expenditure: [It] is not conditional upon a municipality sustaining loss or damage,” Schippers said.

He said this interpretation of the law gives effect to the intention of parliament: to secure sound and sustainable management of the fiscal and financial affairs of municipalities, by holding political office bearers and municipal officials personally liable for the intentional or negligent incurrence of the defined expenditure.

“This construction [of the law] is not unconscionable and produces no absurdity. The construction that the defendants [all municipal officials involved in an unlawful contract in the Nelson Mandela Bay metro] contend for – that a municipality can recover unauthorised, irregular, fruitless and wasteful expenditure only if it has suffered loss or damage – renders s32 [Section 32] meaningless,” Schippers added.

Waste of taxpayers’ money

Schippers partially dismissed the appeal by the officials before the court, bringing to an end litigation that was brought against senior city officials by the Nelson Mandela Bay Metro in 2016.

It is one of many cases that arose from the creation and establishment of the metro’s ITPS, with a R2-billion grant from National Treasury. The whole project has been mired in controversy, mismanagement and criminality from the start.

It was investigated by Treasury, former national director of public prosecutions advocate Vusi Pikoli and forensic auditors Deloitte all making damning findings about the way taxpayers’ money was spent. Several municipal officials and business people are currently on trial for racketeering and fraud relating to the use of these funds.

Farhaad Fakir is one of the accused and his company Erastyle, trading as Stratcomm, was one of the firms involved in the case that was before the SCA. The company was given a R6-million contract that later increased to almost R7 million. It was not disputed during litigation that the contract was awarded without a tender process being followed or supply chain management regulations followed.

Fakir has, along with others, also been charged criminally for racketeering and fraud relating to the IPTS funds (both this and other contracts). This trial is still ongoing.

Erastyle’s contract was to provide communications and a marketing strategy for the IPTS. The appointment was made by deviation as another company called Distinctive was already appointed to do this work. The trial court heard that the acting city manager at the time, the late Mamisa Chabula-Nxiweni, was warned not to do this but it was pushed through when the city manager was away.

The officials who were ordered to pay back the money are:

Former city manager advocate Mpilo Mbambisa; former executive director for public health and acting city manager, the late Mamisa Chabula-Nxiweni; former project manager for the ITPS Mhleli Tshamase; the former chief financial officer Trevor Harper; the former chief operating officer Mzwake Clay; the former head of communications Roland Williams; and the former executive director for infrastructure and engineering Walter Shaidi.

There were several claims against the officials and Schippers ordered that they pay back the metro as follows:

Mbambisa, Tshamase, Clay and Shaidi are to pay back R5.2 million to the municipality as well as interest and the cost of the drawn-out legal battle.
The company in question Erastyle, Mbambisa, Tshamase, Clay, Shaidi and Williams were ordered to pay back R1.39 million to the metro as well as interest and legal costs.
Judgment in the amount of R984 197 was granted against Mbambisa, Tshamase, Clay, Shaidi and the estate of Chabula-Nxiweni.

Unlawful cost increases
The municipality’s case was that approving the appointment of Erastyle was a violation of the constitution and the supply chain management policy. Further decisions to approve the R6-million payment, lift the cap on payments to Erastyle and a decision to increase the contract value from R6 million to R6.9 million were unlawful and invalid.

The court heard that in December 2013, Treasury had paid an amount of about R2.1 billion to the municipality. The investigation by Deloitte, which commenced in February 2014, was aimed at establishing the amounts of money transferred to about 300 key suppliers involved in the IPTS project and to locate the documents supporting those payments.

The investigation revealed that invoices had been overinflated.

Former city manager, now city manager in the Tshwane Metro, Johann Mettler, testified in the trial court in 2016 that he submitted a report to Treasury concerning wasteful, irregular and unauthorised expenditure, as he was obliged to do under the Municipal Finance Management Act.

Before his appointment, no such report had been submitted to Treasury. The court also heard from a former acting chief financial officer that after the city manager had initially turned down a request for Erastyle to be appointed, but then further “legal advice” was obtained that it would be legal to appoint the company.

None of the former officials chose to testify before the trial court.