Department of Human Settlements 2010/11 Annual Report: recommendations by Auditor-General & Financial and Fiscal Commission

Meeting report

Office of Auditor-General presentation on Department of Human Settlements 2010/11 Audit Report
Mr Andries Sekgetho, Senior Manager in the Office of the Auditor-General, discussed the audit report of the National Department of Human Settlements (NDHS) for the financial year ended 31 March 2011. He noted an audit report focussed on and consisted of an audit opinion, matters highlighted, predetermined objectives, compliance matters, internal controls and other investigations pertaining to the financial statements. Audit opinions ranged from unqualified or unmodified, which was ideal, to unmodified with emphasis of matter, to qualified, which was bad, to a disclaimer which was worse, and lastly, an adverse opinion, which was the worst opinion a department could receive.

The NDHS had received an unqualified opinion with other matters since the financial years 2007/08. Emphasis of matters existed to draw users’ attention to a matter in the financial statements which was of such importance that it was fundamental to the understanding of the financial statements. The Emphasis of Matters raised by the report centred on the following four matters:
▪ There was significant uncertainty due to litigation against the NDHS for R4 920 000. This issue was highlighted as the outcome was unknown.
▪ The restatement of corresponding figures: Prior year figures (R264 119 000) were corrected in current year financial statements.
▪ Irregular expenditure of R12,1 million was incurred. The majority was related to expenditure incurred in contravention of the Preferential Procurement Policy Framework Act (PPPFA) and Public Finance Management Act (PFMA). The AG highlighted it as it was material and significant to users.
▪ Material under spending by the NDHS. The Rural Household Infrastructure Grant did not spend 38.4% of its allocation of R100 million. It was highlighted as it was in the public interest, a service delivery matter.

The AG also expressed an opinion on the entity’s predetermined objectives, because it dealt with the matters of service delivery and output, but it was not specifically audited. It was a learning curve for both parties because as the AG began to understand what kind of information Parliament was looking for, the audit and reporting process of the AG was becoming increasingly detailed. When auditing on predetermined objectives, the AG looked at compliance. It looked at the strategic plan and checked whether it conformed to the SMART principle (Specific, Measurable, Attainable, Realistic, Timebound) as required by National Treasury Regulations in the Performance Management Framework. It looked at the usefulness of the information. Was it useful, measurable and consistent? The information in the NDHS Annual Report was not always useful or reliable.

Regarding compliance, the NDHS did not comply with the PFMA because it incurred irregular expenditure. It had to prevent it. It transgressed National Treasury Regulations as well as other legislation.

On Internal Control procedures, the AG issued a dashboard of faces to indicate how a department was doing regarding leadership, financial and performance management and governance.

Regarding Emphasis of Matters, the AG recommended that the Department had to implement a review process to ensure compliance with laws and regulations in the preparation of financial statements. The department had to strengthen controls to prevent, detect and adequately disclose irregular expenditure. It also recommended adequate planning and project management to ensure that allocated funds are spent appropriately and timely in order to achieve objectives.

The AG highlighted a number of instances where the NDHS contravened prescripts of the PFMA and the Division of Revenue Act (DoRA) (see presentation for details).

To improve compliance the AG’s Report recommended the implementation of an adequate review process of financial statements, prior to submission for audit to ensure compliance.

The AG also recommended a system to ensure that the department procured goods and services in a transparent, cost effective and efficient manner. Compliance to laws and regulations had to be adhered to during procurement in order to prevent irregular expenditure such as a signed off checklist indicating steps followed prior to approval for payment.

The AG felt that action needed to be taken against officials that did not pay accounts within 30 days as the processes were in place and just required adherence thereto.

Risk management processes needed to ensure compliance with required laws and regulations.

There was a lack of financial leadership, a lack of internal controls and management did not review and monitor compliance to laws and regulations before submitting statements within the NDHS.

Other matters were:
▪ The NDHS had developed an action plan to address all audit findings. This action plan was monitored regularly at audit steering committee and feedback was provided at audit committee meetings. The Office of the AG deemed the plan to be adequate. Its result would be open to be assessed once it had been implemented.
▪ The department had affected material adjustments to its disclosures in the financial statements (irregular expenditure and lease commitments).
▪ Vacancies in key management positions were filled during the period under review (Compliance officer, Chief Information Officer and CFO)
▪ Proper planning was required to ensure adequate implementation of the Sanitation function in order to ensure service delivery. (Note the allocation increase in the Medium Term Expenditure Framework).
▪ There would be an audit opinion of predetermined objectives in audit reports in the future. To support it, the department had to make sure that its systems, procedures and policies were adequate.
▪ The goal was to achieve an unqualified audit opinion without matters, so that the focus could move towards the auditing of predetermined objectives and service delivery items.

Mr Sekgetho distributed a document dealing with emerging risks in the field.

Discussion
Mr A Steyn (DA) asked what unaudited supplementary schedules were.

Mr Sekgetho replied that sometimes after the AG had audited a set of financial statements submitted by a department, the Accounting Officer would decide to publish more detailed information and narratives about the financial statements that would not been audited by the AG. The AG then pointed out that those were unaudited supplementary schedules in order to cover itself, because if any information in there proved to be incorrect, the AG would not be held responsible.

In reply to Mr Steyn asking what happened when departments did not disclose their irregular expenditure at all, Mr Sekgetho said that it then became a qualification.

Mr Steyn asked what if the AG was not aware of it because the department did not disclose it at all.

Mr Sekgetho replied that the AG would pick up the discrepancy during its auditing process. It would inform the department about the discrepancy. If the department adjusted its statements to the findings of the AG, the matter would be resolved and it would become an emphasis of matter. If the department upheld its own figures and did not adjust its statements, which now differed from the findings of the AG, it would result in a qualified audit opinion for the department.

The Chairperson asked for an explanation of the transfer of grants under the Division of Revenue Act (DoRA).

Mr Sekgetho replied that the Rural Household Infrastructure Grant was a new grant, a Schedule 7 grant in terms of Section 10 of DoRA. There were certain legislative requirements that the accounting officer had to comply with. He had to file a certificate with National Treasury to confirm that he had adequate control and managements systems in place to administer the funds. The department had not completed and submit the certification to National Treasury as required by the legislation.

The Chairperson asked if the accounting officers were not aware of the legally required procedure. There would always be new grants because Parliament was always improving.

Ms M Borman (ANC) said that accounting officers in that situation should be sufficiently qualified to be on top of even new legislation.

Mr Steyn asked whether, in Mr Sekgetho’s opinion, non-compliance to DoRA pointed towards the ignorance of the accounting officers.

Mr Sekgetho replied that the Chairperson asked what had been expected and was not done. The accounting officer had a responsibility to respond. It was a new grant issued for the first time during the 2010/11 financial year. It was disclosed in the MTEF. Regarding the ignorance of the accounting officers, he was not allowed to make statements like that. According to DORA, there had to be a certificate. When he conducted his investigations and procedures, he found that the certificate had not been completed and submitted to National Treasury. He reported on it.

Mr Sekgetho said that he had found a document about emerging risks which may have an impact on the audit reports of departments in future. He had circulated it to members so they could inform themselves on it. It dealt with the library books that had been legislated to be maintained and accounted for by specifically departments in the financial records. It dealt with graph statements on what was effective or not.

The Chairperson commented that clean audits were good. This was a requirement, but it did not mean that a department had performed. Parliament was interested in outputs, service delivery and value for money. The Committee understood what the limits of the AG’s scope was and the Committee knew what to do.

Ms Borman said that Mr Sekgetho had spoken a lot about measurability. The Committee had been raising it with the NDHS, but the message did not get through. If things were not quantified, they were not measurable. This hampered oversight. How could the Committee get the NDHS into a better way of reporting?

Ms Borman said that she had a concern about the vacancy issue. If there were vacancies, the department was not delivering. The Annual Report reported on p220 that the vacancy rate, in her opinion, was high. With the turnaround strategy, there was a moratorium on the filling of vacant posts. It was already halfway through the term and the reports to the Committee were still the same. When the AG audited a department, did it look at the vacancy rate? In the Annual Report, many references were made to incomplete work and goals that had not been achieved, for example reports that were not completed on time, or that were sitting in the DG’s office. The Annual Report was the only way to gage how things were going in the department. The Committee wanted to be in a position to detect problems in the department early on. The Committee would engage with the NDHS the following day.

Mr Steyn said the position of CFO had been filled a week before. For the financial year under review, there had been no CFO, only an acting one. It was nine months into the new financial year and the department had only just filled the post. It was not an achievement. Irregular expenditure was not prevented.

Mr Sekgetho replied that the AG did audit for compliance with Public Service Regulations in terms of Human Resources Management. The AG did apply Material and Significance Framework. It had to look at an entity and based on its structure, it had to determine a baseline for that entity. If he found non-compliance or financial misstatement, he had to compare his findings with the baseline reading in order to determine whether there was significant deviation.

Regarding vacancies, the AG did highlight the high vacancy rate to the accounting officer but it only went into the Management Report which was an internal document. It was not significant enough for the AG to make it into the Audit Report.

Mr Sekgetho replied, on the matter of the CFO, it was true that it was nine months into the financial year. The department was doing something about it. The position was filled with a permanent appointee. Going forward the steps that had been taken would ensure better audit outcomes.

Mr Steyn said that without taking away the credit of the unqualified report, with all these compliance findings, should the report not be qualified? The issues were serious. Had matters of emphasis from previous years been addressed or were they still present in the current AG Report? Unless targets were measureable, it was not clear whether the money had been spent efficiently.

Ms N Mnisi (ANC) said that the department had an unqualified audit opinion, but there were ongoing problems like irregular expenditure. Did it affect the opinion?

Mr Sekgetho replied that irregular expenditure meant that the correct processes were not followed in procuring in some instances. It was a compliance issue. There were no monies unaccounted for. The opinion was on the financial statements, which were in order. The report highlighted irregular expenditure and non-compliance, which gave rise to the emphasis of matters.

Mr Sekgetho said that, with regard to Mr Steyn’s question on compliance matters, he had touched on it in discussing the compliance framework where all matters concerning compliance were looked at, from strategic planning, performance management, expenditure management, procurement management to the audit committee and the internal audit function. The issues had been highlighted to management in the Management Report. Management acted upon the report. From this report, the AG took the findings that it deemed significant enough to be elevated to the audit report.

Currently the Public Audit Act only made provision for the auditing of financial statements for compliance to procedures, regulations and legislation. It highlighted only the financial report. However from current working papers and debates the AG was moving towards a situation where its auditing scope would broaden.

Mr Steyn said he had suggested to Treasury that all accounting officers were put through a course to make them aware of the legal requirements from all the legislation governing financial governance and accountability that applied to them.

Mr Steyn said that the Committee was aware that senior employees in the NDHS signed performance agreements. Was checking the performance agreement part of the auditing process? Was checking performance against the agreement, and expressing an opinion about on it, part of the auditing process? If it not, why not, and should it not be part of the auditing process?

Mr Sekgetho replied that currently the scope of the audit of the AG was focused on the PFMA and compliance to it. He would like to report on outputs, but it fell beyond the current scope of the audit. The AG currently did not report on predetermined objectives yet.

Mr Steyn said that there was R20 million+ that was owed to the NDHS for a few years by a developer. To date the money had not been recovered. Whose duty was it to recoup the money, the national accounting officer of the NDHS, or the provincial accounting officer of the province in which it happened?

Mr Sekgetho replied regarding money to be recouped, each entity was responsible for recouping its own money. The NDHS had a national accounting officer. Provincial accounting officers operated independently. The national department acted as a conduit and the only leverage that it had over provincial departments was that it could redirect money. To aid the process, the national department had the Special Investigating Unit (SIU) investigate complaints and coordinate the flow of money to ensure the desired outcomes.

The Chairperson asked whether, if there was a perception that the province had spent money irregularly, the national department could approach the SIU.

Mr Sekgetho confirmed that the NDHS had the SIU Unit investigate alleged corruption and deal with the fraud hotlines and to coordinate that area of operations.

The Chairperson asked how it linked to the provincial level.

Mr Sekgetho replied that he did not know which SIU was approached, the national SIU or the SIU dealing with the NDHS.

Mr Steyn explained that a developer defrauded the provincial government. The court passed a judgment that the developer had to reimburse the department with R20 million. After several years, the money had not been paid. Whose responsibility was it to recoup the money? If the provincial DG took his own time to get the money back, was there no responsibility on the side of the national department (who disbursed the money in the first place) to get the money back?

Mr Sekgetho replied that provinces operated autonomously. The national department was not involved in appointing the service provider, or how the money was spent.

The Chairperson told Mr Sekhetho that this was his interpretation. She did not believe that this was the meaning of concurrent function. Once central government in the form of National Treasury had given a province funds for a project, it was accountable for the funds. Autonomy did not exist. The Constitution talks about concurrent function and working cooperatively. There was a provision of intergovernmental cooperation. She cautioned Mr Sekgetho to shy away from propagating the autonomous idea. She said that the Constitution talked about a concurrent function of government institutions. If the meaning was unclear, Cyril Ramaphosa, and other negotiators and compilers of the Constitution, had to come and explain what it meant, because it was abused in some instances.

Mr Sekgetho replied that the DG of the department would have to answer the question.

Mr Steyn asked if the AG audited for actual performance against performance agreements.

Mr Sekgetho replied that legislation limited the extent and scope of the audit process. The audit process looked at whether there existed a performance agreement and whether it had been signed. It further dealt with whether a performance assessment had been done. It did not deal with the result of the performance assessment or any action that needed to be taken, depending on the result. The performance was not measured against performance agreements. There were cases where performance agreements had not been signed, but this was not significant enough for the AG to elevate it and put it in the audit report.

Ms Borman said that the Mr Sekgetho spoke about financial regressions. She asked him to elaborate.

Mr Sekgetho replied that the audit opinion of the NDHS had remained unchanged. The regressions occurred in other departments and entities.

The Chairperson thanked Mr Sekgetho. The Portfolio Committee would work with him regularly, as he was the representative of the Office of the AG deployed to work with the NDHS.

Financial and Fiscal Commission (FFC) on Department of Human Settlements 2010/11 Annual Report
Mr Bongani Khumalo, FFC Chairperson, welcomed the interaction to focus on issues relevant to the Commission. It would have been good to speak to the NDHS before its presentation. Each member of his delegation delivered a part of the presentation. The first presenter was the researcher, who introduced the FFC and highlighted selected aspects of the NDHS Annual Report. The FFC had been established in terms of Section 220 of the Constitution and the FFC Act (2003) as amended. It made recommendations on the equitable division of nationally raised revenue among and between the three spheres of government and on any other fiscal matters. The criteria which the FFC had to use in making the recommendations could be found in Section 214(2) of the Constitution.

The presentation highlighted selected NDHS strategic objectives for 2010/11. Firstly, on its target to deliver housing units per annum, actual delivery was 121 879 units. This information was obtained from the website and was not reported in the Annual Report.

Secondly, it aimed to facilitate 80 000 affordable social and rental units over the 2010/11 MTEF. The target had not been specified per annum. It was difficult to determine the progress under this objective, because the NDHS system did not differentiate between units under construction, completed and handed out to beneficiaries.

Thirdly, in terms of access to basic services, it aimed to roll out its Free Basic Sanitation Strategy (FBSS) to 30% of municipalities. It aimed to serve 7 418 households through Accelerated Community Infrastructure Programme (ACIP) and 11 000 households through Rural Household Infrastructure Programme (RHIP). The FBSS rolled out to 63% of municipalities. 8 426 households were served through ACIP and 5 580 through RHIP.

The FFC pointed out that the NDHS had spent 98.8% of its allocated budget. Funds were reallocated away from some provinces (Free State: 20%, KZN: 2.9% and North West 7.8%). The Rural Household Infrastructure Grant under spent by R38 386 000 or 38.4 % (as noted in the AG Report p 140). There was a violation of the Division of Revenue Act (DoRA). The Accounting Officer did not complete the Compliance Certificate and submit it to the National Treasury as required by S10(1)(a) of DoRA 2010 by 15 April 2011 in respect of the Rural Household Infrastructure Grant (as noted in the AG Report p 141).

Progress on past FFC recommendations
The process of accreditation of municipalities was very slow and to date no municipality had achieved Level 3 accreditation. Only six metros had been given Level 2 accreditation. 18 municipalities in total had been accredited and it had not changed since the 2009/10 FY.

Government had to consider the funding implications of policy changes for example higher building standards and densification.

The FFC had recommended relaxation and flexibility on:
- eligibility criteria for accessing the Social Housing Restructuring Conditional Grant to allow projects falling outside the zones to access funding,
- the number of Designated Restructuring Zones (DRZs) to respond to excess demand for rental housing,
- the minimum unit size for redevelopments of existing buildings.

The FFC had recommended a process of data collection to determine homelessness. There had been no progress in this regard.

The qualifying income bands had to be reviewed to ensure that individuals were not unfairly excluded from benefiting from the subsidy. There had been no progress in this regard.

Land use was key in addressing many of the challenges indicated by the NDHS. The City Efficiency Costing Model had shown that a sprawling city was more costly and less green than a compact city. Government had to pursue development of a spatially compact form of city by developing appropriate policies and financing instruments.

Climate change was a threat to human settlements. Electricity and water costs increased as cities adapted to changed climates. There was competition for the resources of municipalities between the provision of essential services and catering for climate change consequences. Government had to allow municipalities to develop their own climate change mitigation strategies as part of the IDP process and it had to reward actions that were environmentally efficient.

FCC public hearings on Housing Finance: The first Public Hearing would happen on 13 and 14 of October 2011. It would cover the nature and extent of demand for land and housing in South Africa, sustainability, finance, policy and the legislative environment. The FFC discussion document would form the basis of the discussion. All stakeholders were expected to present views on aspect of the topic as well as recommendations on how to address such challenges. The debates would feed into the development and firming of a comprehensive problem statement from which the FFC would undertake further research work and make recommendations.

The built environment-related grants had an urban focus and ignored rural challenges. The reporting format of the NDHS made it difficult to track progress. There was a need to fast-track the accreditation process of municipalities. There was a need to rationalise and change the approach in the management of grants for the built environment. The NDHS had to assist struggling provinces with capacity development. A monitoring system was needed to verify the delivery of housing projects in the different provinces. Objectives needed to be measurable and clearly defined; for example, housing policies aimed to promote densities.

Mr Khumalo said that the fiscal framework was tight and still under threat. The FFC predicted three scenarios if the economy recovered from the global recession. The first was business as usual, the second was moderate impact and the third was worst case scenario. The worst case scenario was more and more looking like the plausible one. This economy might only recover post 2015. The FFC had already exhausted the surpluses that were there. One needed to get ones priorities right and spend money where it needed to be spent. Government’s intention was to protect the vulnerable members of society.

Discussion
Mr A Figlan (DA) asked how the communication between the NDHS and the FFC was. Why was there not a good relationship?

Mr R Bhoola (MF) thanked the FFC for the information. Evaluation of service delivery should not be based on promulgation of pieces of legislation, but on success of delivery. How did the FFC see the various departments aligning to its requests? It was one thing to identify the problem, and another one rectifying it.

Mr Steyn confirmed that the FFC made recommendations, but the Departments were under no obligation to implement them. He understood from the presentation that the FFC made recommendations to Treasury. Treasury in turn interacted with the different departments on the recommendations, but not to the satisfaction of the FFC. In this case the NDHS was not party to the discussion in terms of the response to the recommendations. To him it did not make sense. Why did the FFC go to all the trouble, but the department affected did not participate in the response to the recommendations?

Mr Steyn said that one of the recurring issues for the Committee was measurable objectives. He should have put it to the AG, because there were Treasury Regulations now that gave guidelines as to what had to be contained in the Annual Report. Measurable objectives were part of the guidelines. How did the NDHS manage to spend almost 99% of the budget, but only deliver 65% of the target?

Ms Borman thanked the FFC for the presentation and the information. Would this information be part of the public hearings? She could gage that a lot of work had been done. She was concerned also that all this work had been done, but the FFC did not meet with Department.

Mr Khumalo replied that the recommendations were made to Parliament, but it identified the departments on which they impacted. The DGs of those departments received the recommendations and it was sent to the Minister involved. The Minister of Finance also received it, because he would coordinate the response to those recommendations, on behalf of Government. In most cases the FFC received responses it was not happy with. It was up to Parliament to convince Government, if the recommendations were sound enough, to implement the FFC recommendations. The Minister was required to explain why he has not implemented certain recommendations. The FFC had no powers to enforce the implementation of its recommendations.

The FFC realised that it was getting very shallow responses. It then had frank discussion with National Treasury, the Finance Committees and at the Budget Council and the Budget Forums. It said that it needed to interact with the departments impacted upon. It started a process. Once the recommendations had been tabled in Parliament, it opened up a discussion forum to which the FFC invited all the departments that were impacted upon, including Treasury and the provincial treasuries, to explain the recommendations and intent of the FFC, so that they could respond. Some departments responded and some did not. Some sent junior officials who had no authority to enforce decisions or speak on behalf of the department. The invitation was always directed at senior management, DGs and DDGs. The FFC had to second guess whether government’s response was government’s response or National Treasury’s response, because Treasury would prepare something and present it to Cabinet and Cabinet might agree and that would end the discussion. This resulted in the FFC not meeting with the NDHS, which was a pity. The NDHS might have had answers to share, but the FFC would not know what their thinking was.

It was important that the relationship between the Departments and the FFC be strengthened. Recommendations were made to Parliament to assist Parliament to process what Government tabled around these issues.

Mr Bhoola said that there were tremendous challenges with regards to rental housing in various areas. The problems in this regard were listed. There was a lack of information. It was an ongoing problem. What were the FFC’s views on how these matters would be rectified?

Mr Steyn asked if a senior official violated DoRA Regulations were there no penalties?

Mr Khumalo replied that in many instances, legislation was violated. There were clear penalties. Implementation was not strict. Government was starting to look at consequences for non-compliance. The FFC was reviewing DoRA with Treasury and would make recommendations regarding penalties.

Ms Tania Ajam, FFC Commissioner, replied that the FFC had a project to assess this situation and make recommendations. The Committee would know that there was a difference between a violation of the DoRA, which was unlawful, and something that was criminal in nature, but the PFMA did list the fiduciary responsibilities for an accounting officer. The penalty would not be in the domain of criminal legislation, but more in the domain of how the executive authority managed the accounting officers involved. For example, would the accounting officers still get performance bonuses. It was an area that needed to be looked at more systematically. The FFC would come to this Committee and all the other committees which oversaw conditional grants to share the findings.

Mr Steyn said that the presentation mentioned raising the income band. It was a sensitive issue. He agreed with it, but asked whether the FFC had thought about unintended consequences? What were they?

Mr Steyn said that the presentation referred to the inefficient use of land in urban areas. If density was omitted, what other inefficiencies were there?

Mr Mkhulisi Ncube, Programme Manager, FFC, said that in its model, the FFC that divided the cost of inefficient land use into three categories: recurrent cost, capital cost and environmental cost. When one pursued a compact city model, one would save on the recurrent cost to the tune of 14%. There were savings on the capital cost as well and on the environmental front, one could lessen the carbon footprint by 22%. The FFC thus concluded that the sprawling city was in different respects more expensive than a compact city and recommended that the government actively pursue the compact city model.

The Chairperson asked how this model linked with the inclusionary policy. Was there any linkage?

Mr Figlan noted that the department was building houses, but it was not integrating the people. He did not hear anything about integration in the discussions about human settlements.

Mr Mkhulisi Ncube, Programme Manager, FFC, replied that it promoted inclusivity.

Mr Steyn asked for access to the analysis and models used. He noted that somewhere mention was made of a minimum sized unit for social and rental housing. Did the FFC have a specific figure in mind that was currently not part of the legislation?

The FFC Researcher elaborated on one of its recommendations relating to the size of rental and social housing. The question was which minimum size the FFC recommended. The FFC had identified the challenges that the sector was facing and one of these was the minimum requirement regarding size. There was a rule that said that one could not go under a certain size. When interacting with the Social Housing Institutions (SHI), this was identified as a challenge especially when the SHI were refurbishing social housing that had been built a long time ago. The FFC recommended that the minimum requirement had to stay in place for new developments, but there was no obligation on SHIs to increase the size of social housing it was merely refurbishing. The minimum requirement could be left open or ignored in this case. This could accelerate the delivery in this sector.

Ms Borman commented on land use that densification had been the policy for a long time (Breaking New Ground in 2004). The process was moving too slowly. There was still delivery on the ground not implementing these principles. It had to be related to costs. If one built up (multi-story) the costs went up, but if the infrastructure, like plumbing and electricity piping, were combined, was it really more expensive?

Ms Ajam replied that everybody agreed with decentralisation and densification, but it was not implemented in practice. The first reason for that was cost. As one went denser, construction became more expensive. Land in the CBD was more expensive than on the periphery. The FFC thus asked whether grants were structured to support or undermine densification. This was why the FFC embarked on research to look at the fiscal cost of bad land use. The FFC brought the fiscal aspect to the table. The grants funded the top structure, but unless it also funded good land, it would always force poorer municipalities to develop on the peripheries, instead of addressing the inequalities of apartheid spatial planning. With new developments, were there fiscal incentives to develop closer to the city and in the CBDs, rather than on the periphery?

Most departments looked at their budgets in isolation instead of looking at the overall picture and assessing the cost to Government. The FFC was saying that if density could increase, the country could save 1.2% of GDP in the long run, although it would have to spend in the shorter term. Currently, Government had to budget generously for transport subsidies, but if government spent more on well located land now, those transport subsidies could be cut by years four or five in the financial planning cycle. Transport subsidies would not be needed to the same extent, as workers would live closer to their places of work. The FFC thus advocated a global view of the budgeting process as well as synchronising the budget. It advocated, instead of a three year budget perspective, a longer term budget perspective.

Ms Borman said that the transfer of funds not used in the provinces, caused damage on the ground for the people working in the departments. The provinces to where funds went, did not necessarily spend their whole budgets, such as Limpopo and the Eastern Cape. What were the criteria? Supposedly it was because they were delivering.

Mr Khumalo replied that the FFC initiated the idea that money could be shifted between provinces and projects, to where it was needed. Nobody was punished for not spending. The money allocated to any province or project still belonged to it, although it had been temporarily shifted to another project.

Ms Borman said that there were huge amounts of litter contaminated water in and around informal settlements. Could this not be turned into a job creation project? It would have to be properly managed. The FFC was correct with the things that it said.

Mr Khumalo replied on the question of linking funding instruments, like the Local Government Equitable Share, the Municipal Infrastructure Grant and the Housing Grant: don’t put them in one pot. If backlogs were identified, one could not allow one to move ahead of the other. These problems had been addressed by the urban dimension of the Municipal Infrastructure Grant. There were situations in the past where houses had been erected, without any infrastructure or vice versa. The problem was being resolved currently.

Mr Figlan said that the NDHS had a target of 220 000 units. Why did it not reach the target?

Mr Bhoola was glad about the facilitation of affordable housing. Did the information presented here deviate from the strategic plan? Monies had been moved from one province to another. Was there money meant for particular purposes which had been overlooked? Would the grants be used to achieve the desired outcome?

Mr Khumalo said broadly speaking no, but 65% delivery was a deviation. The FFC did not have the opportunity to speak to the Department. The Department had to be transparent and it was not.

Mr Khumalo replied on the issue of outcomes, it would have been good to discuss this while the AG was here. Performance and outcomes was a new development in auditing. The NDHS had 99% expenditure with only 65% outcomes.

 If it did not spend the money, it had to explain why it did not spend the money, but there was no way of determining whether the money had been spent efficiently. A new process was underway to get an agreement on how these issues should be reported on. It became difficult to set high targets without considering the environment in which the department was operating.

Ms Ajam replied that what made it difficult for the NDHS was that it worked with sector targets. The problem was that the provincial departments could set their own budgets. There was a whole plethora of institutions as well as local government which fed into the assembly line of delivering housing units, which all set their own budgets. Budget setting was decentralised and fragmented. This was why there was a disjuncture between the expectation of 220 000 units and the actual delivery of ±121 000. More and stronger leadership was needed from the Department in order to ensure more alignment across the entire sector.

Ms D Dlakude (ANC) asked about the strategic objectives of the department, it did not report in its Annual Report how many units had been delivered and it did not differentiate how many units were under construction, completed and handed over. Why? Was it because the output did not correspond with the budget?

Mr Tebogo Makube, Programme Manager: Fiscal Policy, replied that this breakdown would be found in the system itself. The transfer mechanism for funding worked like this. The grant was managed by the national department and transferred to the province, from where it was transferred to the local government. This process took time. The municipalities had to find the land and zone it for residential use, and procure for services. If that process was not linked to the financial system and transfer mechanism, there would be the problem as currently demonstrated with the 99% spending and the 65% delivery. There had to be a linkage between the funding, the transfer mechanism and the actual delivery. The financial systems and reporting processes of municipalities were different from those of the national departments, but delivery happened at municipal level.

The Chairperson asked why parties could not agree that all these things went back to planning. One planned projects before committing resources to projects.

Mr Makube replied that the other issue that would assist this situation was project management systems. The Department said that it had developed a system, but he knew about other departments that had systems that showed how many units of infrastructure were planned over the medium term and a breakdown of those units into stages of development and completion. Without such a system, it was difficult to give answers. With the system it would be possible to do risk management and analysis to see whether the numbers aimed for were realistic or not. The system needed to be transparent to all the stakeholders.

The FFC had made recommendations on rental housing, because it found that norms and standards were not understood regarding square meters. This needed to be clearly understood in order to manage the cost. All stakeholders had to be able to agree that to build 60m² in Limpopo would cost X amount, taking all costs into consideration, as opposed to the cost in Gauteng. Without agreement on measurable costing per m² it was impossible to know what was reasonable in terms of adjusting subsidies. Which indicators were used? Some people were taken out of the salary bands who qualified for housing. The FCC needed to understand which costing methodologies were used.

Ms Ajam added that what was needed were proper monitoring and evaluation systems supported by proper planning. Housing was an easy field to do monitoring and evaluation on, because there was a tangible, measurable product. There were private sector benchmarks and the processes of delivery were standardised, compared to for example health or social development. Quality needed to be looked at because if government provided poor quality houses initially, it would have to spend more money later on to repair the houses. Where these houses are built had to be looked at: rural versus urban as well as physical location.

Mr Khumalo said regarding hearings, he wanted to pick up on some of the questions that there were resolutions on. There were still challenges on which resolutions would be sought. Some of the questions raised here would be discussed.

Mr Khumalo said that all the stakeholders would discuss the issues at the public hearings and would be able to identify where the bottlenecks were and resolve them.

Mr Bhoola asked whether the FFC would be represented at COP17. It might assist with first-hand knowledge to implement international bylaws dealing with climate change.

The Chairperson asked whether the FFC would be represented at the public hearings on the 25 October 2011 on the proposed amendments to Rental Housing Act.

Mr Khumalo replied that the FFC had not received an invitation thus far to COP17. The FFC had had discussions with different players that were directly involved. Thus far it had not received an invitation to the public hearings on 25 October 2011 on the proposed amendments to Rental Housing Act. The FFC would welcome invitations to both events.

The Chairperson said on the issue of accreditation, that the Committee had observed that the Department was trying a lot, from a report presented to the Committee as well as on oversight visits to the provinces, but it was not convinced by what happened on the ground. The mandate had been given by the President to accredit municipalities, but the Committee was not convinced that there was a serious attempt to do it. The Committee had to push for it. The scenario on the ground was not good.

The Chairperson said department could try, but the problem was with the municipalities. The position of the Committee was that the 18 municipalities that had received accreditation had to be assessed for performance first, before accrediting any additional municipalities.

Mr Khumalo replied that there was progress although it was not happening at the pace it was supposed to. One of the issues, brought to the attention of the FFC by local government, was that the accreditation process ignored the fiscal implications of the process. One of the issues the FFC raised in its DoRA submission for 2012, was that one had to be mindful not to create unfunded mandates for local government. The process had no fiscal accompaniment. The process of accreditation was not funded. The Department had to calculate the fiscal implications, the FFC then had to make recommendations to National Treasury and the Minister of Finance. The FFC had not yet had the discussion with NDHS about what the fiscal implications of accreditation were going to be.

Mr Khumalo said that the FFC have identified municipalities which spent money to build their own capacities to become accredited. There were disincentives, because there were more responsibilities, but the budget remained the same. The FFC recommended that municipalities had to be capacitated before given full accreditation, because of the unfunded mandate.

The Chairperson said that the Committee had to engage SALGA. It could not allow money to be spent without delivery. There was no need to rush accreditation.

Ms Borman said that perhaps SALGA could come to the committee because of the USDG and the accreditation and it could be arranged for municipalities to be directly accountable to the Portfolio Committee on Human Settlements.

The Chairperson thanked the FFC for its worthwhile presentation. Many issues had been discussed by the Committee before. There were many deviations and violations of which the AG had identified some. She expressed the hope that the challenges would be overcome over time. The FFC had raised many interesting issues. She asked where it took its issues. The portfolio committees needed to discuss these and do their own research. The Committee appreciated the input. The Committee was committed to work closely with Chapter 9 institutions.

The meeting was adjourned.