Servcon on its 2010/11 Annual Report; Social Housing Act Regulations; Rental Housing Act Amendments

Meeting report

Mr Neville Chainee, Deputy Director-General, NDHS, noted an apology from the NDHS Director-General who was unable to attend the meeting as he was busy with the Western Cape Province.

Presentation on the Social Housing Act No 16 of 2008: Regulations
Mr Khwezi Ngwenya, Legal Advisor: National Department of Human Settlements (NDHS) presented changes made to the draft Social Housing Act Regulations as per discussions with the Committee. The redrafting process of the Regulations also incorporated comments made by the South African Housing Cooperatives Association during a consultation meeting. The changes made to the draft Regulations were presented as track changes to first version of draft Social Housing Act (SHA) Regulations. A number of the changes involved the repositioning of certain clauses and not necessarily changes to the content of the Regulations. The changes were:

Chapter 1: Definitions
The following definition was inserted as per the Committee’s recommendations to provide a definition for: “occupancy agreement”: means an agreement between a housing co-operative and a member in terms of the Co-operatives Act, 2005 (Act No. 14 of 2005);

Chapter 2: Applications, qualifying criteria, accreditation
A new sub-clause 2(d)(iii) was inserted to separate the criteria for property and tenant management.

A new sub-clause 3(1)(a) (b)(c) was inserted to clarify the three main categories of social housing institutions that the Regulatory Authority shall consider accrediting which were corporate entities that conduct its affairs on a non-profit basis, municipal entities; and housing co-operatives.

Sub-clause 3(3)(a) and (b) were amended in line with the new Companies Act 2008.

A new provision under sub-clause 4(c) was inserted to include Municipal Owned Entities to read “Applicants that are Municipal Entities must not distribute any profits to members and such profits must be used to advance social housing”

The remainder of clause 3 consolidated the qualifying criteria for accreditation.

Chapter 3: Compliance Monitoring
Under “Reporting Requirements” sub-clause (6)(1) was inserted. This read “Social housing institutions must on a quarterly basis being June, September, December March, report to the Regulatory Authority where the information as contemplated in regulation (3) must be provided”. Sub-clause 6(2)(b) was also inserted to require that Social Housing Institutions (SHIs) provide a South African Revenue Service tax certificate of good standing on an annual basis and within three months of the financial year.

New sub-clauses 9(1) and (2) were inserted to provide for regular building condition inspections and Tenancy audits by the Regulatory Authority.

Chapter 4: Code of conduct
Certain provisions that did not relate to the “Code of Conduct” in the first draft were moved to other chapters so that Chapter 4 dealt exclusively with code of conduct.

Chapter 5: Investment Criteria
Under “Land Service Criteria” the term “a long lease” in sub-clause 19(1)(a) was replaced with “a minimum lease period of 30 years”

Under “Housing Design Criteria”, sub-clause 20(8) was amended to include housing co-operatives” to read “Tenure is to be rental to be held in perpetuity as such and shared deferred ownership in the case of co operative housing”.

Similarly, under the heading “End User Agreement”, sub-clause 22(1) was amended to include housing co-operative by inserting the word “membership” so as to read “The social housing institution must have a lease/membership agreement that complies with legislation and the Housing Code in all respects”. The word “levies” was inserted to the new heading “Rentals/Levies and Tenure Costs” so as to incorporate terminology applicable to housing co-operatives. Accordingly, and where applicable, clauses under this heading were amended to include the word “levies”.

Sub-clause 23(4) was amended to read “Households earning more than R 7,500 per month are not eligible other than if it is amended in the Housing Code” so as to provide for amendments that might be made to the Housing Code.

Under the heading “Building / Property Maintenance” sub-clause 28(3) was inserted to require that SHIs insure their housing stock.

Annexure
The title of the form in the Annexure was changed to read “Application for accreditation”. Other changes were made to accommodate co-operatives and ensure that that the form was more user-friendly.

Discussion
Mr Steyn (DA) said that the definition of “occupancy agreement” limited the agreement to one between a member of a co-operative and a housing co-operative. Would not any other agreement between a housing institution and an occupant also constitute an “occupancy agreement”?

Ms Zohra Ebrahim, Chairperson, Social Housing Regulatory Authority (SHRA), replied that Mr Steyn was perhaps speaking of a “rental agreement” as opposed to “occupancy agreement”.

Mr Ephraim Lusenga, Compliance Manager, SHRA, added that the reason it was necessary to define “occupancy agreement”, and leave “lease agreement” out, was because “lease agreement” was already defined in the SHA. Therefore if reference needed to be made to a definition of “lease agreement” it could be found in the SHA.

Ms Ebrahim added that “occupancy agreement” was slightly different to “lease agreement” in that the rights associated with each were slightly different. A distinction therefore had to be made between the two by providing separate definitions for each.

Mr Steyn referred to sub-clause 5(f)(i) under Chapter 2 which stated that in order to comply with the criteria of good governance, the applicant must arrange for “a legal compliance report that indicates how the social housing institution (SHIs) complies with all legal, statutory and contractual requirements” and asked who would be responsible for the format of the legal compliance report. Would each institution provide its own or would there be a statutory form required by SHRA?

Ms Gaffee Vengadajellum, Regulations Manager, SHRA, replied that there would be a standard set of forms that the SHIs would be required to complete.

The Chairperson referred to changes made to sub-clause 23(4) and asked if the NDHS saw a reason to amend the Housing Act.

Mr Chainee replied that the Housing Act would have to be amended, particularly with regard to income categories because this was a fluid issue. The NDHS had said it would take this matter up with the National Treasury and make an appropriate recommendation to the Committee.

Mr K Sithole (IFP) referred to sub-clause 25(1) which stated that “The social housing institution must be registered as a legal entity in the form of a company, trust or co-operative under the respective legislation” and asked if there was a limit as to how many subsidiary companies could register under an SHI.

Mr Chainee replied that there was no limitation on the number of subsidiary companies that could register under an SHI but that the point was that they all had to comply with the Regulations and applicable legislation.

Mr Steyn said that sub-clause 28(3) requiring SHIs to insure their stock should possibly state more specifically what the insurance would cover (such as insurance for the replacement of a house should it burn down).

Mr Ngwenya agreed.

Mr Steyn suggested that the term “low to medium income households” in sub-clause 31(d) make reference to the specific household income classifications in sub-clause 23 (3).

Mr Ngwenya agreed and said this would be done.

Mr Steyn suggested that the provision be made in the Regulations for the Annexure to be amended from time to time

Mr Chainnee agreed that this could be done.

Presentation on the Amendments to the Rental Housing Act No. 50 of 1999
Mr Chainee stated that the purpose of the presentation on the Amendments to the Rental Housing Act (RHA) was merely to introduce the Committee to amendments. The NDHS would talk the Committee through the specific amendments in due course

Mr Ngwenya presented the proposed amendments to the Rental Housing Act which addressed various implementation, legal and administrative issues experienced by the Rental Housing Tribunal (RHT) and provinces since the inception of the Act; made the establishment of the Rental Housing Tribunals in every province mandatory; and further sought to empower the Tribunals to rescind any of its rulings. The Bill was published in the Government Gazette for public comment on 23 July 2010. The closing date for the submission of comments was 31 August 2010. Parallel to this process, the draft Bill was distributed to relevant stakeholders, institutions and government departments. Written and verbal comments were received in this regard. For purposes of enriching the above-mentioned public participation and comment process, the Department conducted Information Sessions on the Bill in the nine provinces. The Bill was finalised in consultation with the National Economic and Labour Council (NEDLAC).

Amendments were made to Section 6 to ensure that it would apply to all provinces in the Republic of South Africa and to ensure uniformity of processes and procedures for the Rental Housing Tribunals. Amendments made to section 7 so as to make the establishment of Rental Housing Tribunals compulsory in every province. Some of the provinces had to date failed to establish the Rental Housing Tribunal despite a dire need thereof. Amendments to Section 9 dealt with the composition of the Rental Housing Tribunal members whereby one and not more than two shall be a person who is legally qualified. Secondly, changes were made to ensure that any member may not be appointed for more than two consecutive terms.

Section 9 was being amended to allow the Tribunal to rescind any of its rulings. The general rule was that the same authority which introduces anything may also abolish it, and usually in the same manner. However, provision should be made in a case where the original authority was not able to attend a decision to rescind a judgment.

Given the high volume of cases received by the Tribunal, the legislation was being amended so that only a minimum of three RHT members needed to be present at a sitting in order to make a decision, and not all of the members. Members would then be able to process more cases.

Discussion
Mr Sithole asked if there was any provision for legal action to be taken against provinces that had failed to establish RHTs.

Mr Ngwenya replied that amendments were being made so as to make it compulsory for provinces to establish RHTs

Ms M Njobe (Cope) said she was not sure why not more than two members of a RHT should be legally qualified.

Mr Ngwenya replied that the original intention was to prevent a situation whereby there were too many lawyers on the Tribunal as lawyers were known for arguing amongst themselves over the interpretation of the law and that this might impede quick resolution of disputes

Mr Steyn said he was happy with the amendments which were long overdue. However, if there was a move to reduce the number of tribunal members that needed to be present when making a decision (thus allowing the tribunal to split up into smaller groups and process more disputes), surely there could not be more sub-groups formed than legal personnel on the Tribunal as each sub-group would need to have at least one legally qualified person present at meetings. We may not want to limit this to two.

Mr Ngwenya noted and agreed with Mr Steyn’s comment.

Ms Njobe asked if the RHT’s ability to rescind any of its rulings would not interfere with the establishment of “uniformity of processes and procedures”.

Mr Ngwenya said that the purpose of the amendments was to establish uniformity across provinces. A set of national Regulations would be drawn up in due course

Mr Steyn asked if there was an existing provision in the RHA for appeal applications that could be “beefed up” so as to allow for the rescission of judgements.

Mr Ngwenya replied that it was sometimes more practical for a judgement to be rescinded as opposed to going though the protracted appeal process, especially where technical issues cropped up.

Mr Steyn said that while he supported the creation of an RHT in every province, some more thought would have to be given to the matter as there were significant financial implications associated with this.

Mr Chainee said that an issue that would have to be dealt with in the regulations to the Act was the fact municipalities, provinces and the nation, had different regulatory rental frameworks. Rental ceilings and the role of the state in rental subsidies was part of a bigger discussion that needed to take place, especially in the light of widespread poverty. The Department’s view was that the issue of rental subsidies needed to be reviewed if South Africa was to have an inclusive and successful rental and social housing programme.
 
Servcon Housing Solutions Annual Report for 2010/11: presentation
Mr Lindikhaya Mpambani, Chief Executive Officer, Servcon, explained that Servcon had stopped operations in September 2009 as it was closing down. Since the cessation of operations, “quality control activities” had been undertaken up until August 2010. To date most of the operations related to the portfolio management of Servcon’s Original Mandate.

Servcon received an unqualified audit opinion. The three items raised in Servcon’s management letter would be resolved by the end of the current financial period. There were two matters of emphasis. The first was the interest payable to SARS. Servcon was engaging with the SARS Commissioner to waive the interest and was hopeful that once it confirmed the payment date to SARS it would be given a reprieve on interest. The second related to Servcon as a going concern. Servcon was busy finalising its closure and the auditors needed to draw this fact to the attention of the users of the Financial Statements.

Over a period of 14 years, 33 276 properties were satisfactorily resolved/normalized, leaving 34 to be finalized. Should properties remain outstanding at the time of Servcon’s closure, they would be transferred to the National Human Settlements Department for management at that level.

Servcon reported a loss of R104.1 million for the financial year.

Mr Mpambani detailed the status of Servcon’s closure. In April, Servcon transferred all pieces of land that were bought on behalf of the Free State Government to the Housing Development Agency (HDA). Servcon remained in possession of other land parcels and three buildings which would be transferred to the HDA once it had settled its liabilities. Servcon still had less than 300 title deeds, as of March 2011, that need to be handed over to the beneficiaries and was waiting for the conveyancers to complete the process. Once Servcon’s liabilities were settled it would then follow the Public Finance Management Act guidelines to de-list the entity from National Treasury. It would then apply to the court (through the Minister) to have the company liquidated.

Discussion
Mr A Figlin (DA) asked what Servcon was doing about the houses that had been “right-sized”. Were the people who had had their houses right-sized given title deeds?

Mr Mpambani replied that people who had their houses right-sized were given title deeds at the time that they were removed from their houses. They were also given subsidy houses by the government.

Mr Sithole said he was concerned about the continual evictions of people in Thokoza in Gauteng.

Mr Mpambani replied that these were the evictions of people whose houses were never part of the portfolio of Servcon or people who had taken the houses back by force. An example of what might have happened is that a person might have become employed in the year 2000 and so would have started paying money to the bank. Then, when the houses were rehabilitated, because this person was a good client of the bank, the house would have been removed from Servcon’s portfolio. This person’s house would therefore not be part of the 12 000 houses outstanding that were paid for by the government and so, if it happened that the paying client then lost his job in 2007, and was no longer able to pay the bank, he would face eviction. Quite a number of people were facing this type of situation.

Ms A Mashishi (ANC) asked about the provinces that were left out of the “Outstanding Portfolios” table on slide 9.

Mr Mpambani replied that the properties listed on the table were only those that were outstanding. If a province was missing from the table it was because there were no outstanding portfolios in the province.

Ms D Dlakude (ANC) wanted to know the reasons for Servcon’s closure and liquidation.

Mr Mpambani replied that Servcon was established for a specific reason and the Minister made a decision in 2004 to terminate the programme.

Ms Dlakude asked how long it took for title deeds to be handed over to the beneficiaries.

Ms Dlakude asked why a number of land parcels were still in Servcon’s possession. Considering that there was a need for land for human settlement development, why had these not been transferred to the HDA.

Mr Steyn said he remembered very clearly that, in 2009, during a presentation such as the one today, the Committee came to the conclusion that Servcon was bankrupt. Soon thereafter, the Minister gave an instruction that Servcon cease to exist. Mr Steyn could not understand why, at this point, Servcon was still operating, and operating at a loss at that. Servcon said that its assets exceeded its liabilities. This may be true but only because it was listing properties on its income statement that had not in fact been transferred into Servcon’s name. This made the books look good but the fact of the matter was that a loss of R104.1 million was reported for the year.

Mr Mpambani replied that these assets were reflected in the financial statement because money from the coffers of Servcon had been used to pay Transnet for the properties. The properties had not been transferred into Servcon’s name because Servcon was trying to avoid the duplication of transfer fees and duties and so would transfer the properties directly to the HDA instead.

Mr Steyn said that there was approximately R92 million outstanding from the Department of Public Works (DPW) for work done that was not reported in the current Annual Report. He did not think that Servcon had been paid for this. What happened to this money? Was it part of the money that had been written off? Why was it being written off? What about the R12 million owed by the Gauteng Housing Department? These were the kinds of things that Servcon should have applied its mind to during the year, to get the money for work that Servcon said it had done. Mr Steyn said that as a public representative, he would have expected to see a director who was earning R2.9 million a year to have recovered this money.

Mr Mpambani replied that Servcon had been in the process of declaring a dispute with the DPW for the outstanding money owed. On the advice of their legal advisor, the process was going to take a long time and so it was decided that Servcon would put this on hold. The money from Gauteng Housing Department had been paid to Servcon. This had been used to pay off some of Servcon’s liabilities.

Mr Chainee added that, in the process of closing down, a number of legal, institutional and compliance issue had to be dealt with by Servcon. A couple of issues had come up that the NDHS, as a responsible department, had had to deal with. One such issue was the issue of tax liability which stood at R57 million at one point. NDHS had had to renegotiate the interest on this. It had had to find money to pay for this tax liability and the interest on the tax liability. Notwithstanding the write off of the amount owed by the DPW, there was still an obligation for Servcon to pay the service providers. At the last count this amount was approximately R17 million. These were the issues that the NDHS had to deal with as a consequence of the closure of Servcon over a number of years. They had come to the fore only in the last two years as a result of the closure. There had also been the issue of staffing which had been dealt to the extent that only five staff members now remained at Servcon. Servcon and the NDHS had dealt with the properties purchased, and were now having to manage the conditions attached to the agreements. For example, Servcon had assumed that properties were in its name and could be transferred to the HDA when in fact they sat with Transnet. There were therefore certain outstanding liabilities in relation to Transnet which had still had to be dealt with. These were just some of the implications of the winding down and closure of Servcon which had to be dealt with in a responsible way.

Mr Steyn said that approximately one year ago, the NDHS had given the Committee a “winding down” report on Servcon and had provided specific dates for the closure of Servcon. It would have been helpful for Servcon to have given the Committee a sense of what those dates were and where it currently stood. Mr Steyn said that at that stage he certainly did not expect that Servcon would be coming before the Committee with another annual report. He could also not understand why the issue of the tax liability had not been resolved.

Mr Morris Mngomezulu, NDHS Acting Chief Director replied that the “winding down report” raised by Mr Steyn had been the plan going forward. At the time that this plan was drafted, the NDHS had not anticipated certain issues that would arise, such as the complications that arose in the transferring of land parcels to the HDA. Regulations stipulated that Servcon needed permission from the National Treasury to do these transfers, but that Treasury would not allow Servcon to dispose of any assets whilst there was a tax liability. Mr Mngomezulu had said to this Committee in the last meeting, that when NDHS had thought it had dealt with the tax liability issue, SARS came back to them to say that it had miscalculated the amount. NDHS and Servcon were dealing with a new tax liability. It would be unfair to blame Servcon for the mistake made by SARS. Money needed to be found to pay for the tax liability and it was only once this had been done that the properties and land parcels could be transferred to HDA. NDHS was in a “Catch 22”: it could direct Servcon to sell all of the properties and obtain the money to pay off the tax liability but this would be defeating the original purpose for acquiring the land parcels in the first place. This was the reason why Servcon and NDHS were trying to find money for the tax liability.

Mr Steyn replied that the Department was being disingenuous. Everything that had just been said by Mr Mngomezulu and Mr Chainee, the Committee already knew two years ago, perhaps with the exception of the miscalculated SARS amount. To sit and say that Servcon and NDHS should now look at selling the properties, whilst the Department of Human Settlements was looking for well-located land, was disingenuous. Why did Servcon not pursue the money owed by DPW as this would more than cover Servcon’s tax liability? DPW had R500 billion to spend on properties. Why could it not pay the R92 million owed to Servcon? The Committee had not heard why this amount was simply being written off.

Mr Chainee replied that there were three externalities that came to the fore that the NDHS and Servcon were not aware of when the original closing down plan was drawn up. The first was the addition SARS tax liability. The second issue which had a material impact on the plans was the amount owed by DPW. The third issue was the issue with Transnet. These had substantial financial implications. What needed to be understood was that it would look very disingenuous of NDHS and Servcon if it now had to sell properties to solve these issues. On the issue of DPW, it had to be asked if the NDHS as a government department wanted to be seen taking on another government department as this would be the consequence of pursuing the money owed by DPW.

Mr Mpambani replied that Servcon had tried to pursue the money and had even gone so far as to serve DPW with notice that it would be taking DPW to court over the money. However, on the basis of legal advice received by Servcon, it had decided to put the matter on hold as the departments would not like to be seen to be fighting with each other in court over service delivery agreements.

Mr Chainee added that the essence of the problem was that there had been a dispute between DPW and Servcon around the value of the work that was done. Servcon had invoiced the DPW for an amount of R99 million which the DPW disputed, claiming that the value of the work done was only R7 million, which it paid. The balance of the outstanding amount therefore came to R92 million. The issue here was that, if there was such a discrepancy, irrespective of what happened now, the NDHS would have to support Servcon going to court. It was not in the custom of government for departments to take each other to court. Irrespective of where the money came from, it was a debt in the book of Servcon. If DPW paid the money to Servcon, it would come out of state coffers anyway. The reality was that NDHS would be able to put forward a full closure report to the Director-General and the Minister to consider this issue who would bring it back to the Committee.

The Chairperson said that they needed to ensur that there was closure on this matter, no matter what route was taken.

Mr Steyn was extremely concerned that, in the previous year’s Annual Report (2009/10), the five or six directors of Servcon were still earning on average R2 million a year. For an entity that was winding down and that was not entering into any new contracts this was ridiculous.

Mr Mpambani replied that most of Servcon’s activities since 2006 involved the normalisation and regulation of properties. He explained to the new members that Servcon had a number of complaints from people who had applied for a particular house that someone else was if fact occupying. Situations often arose whereby one person was a title holder for a house, another person was an approved subsidy beneficiary for the same house and yet another person actually occupied that same house. This caused a lot of distress. And Servcon needed to know who actually applied for houses, and who on the waiting list was actually occupying houses. If a person who was still on the waiting list for a house was in fact already occupying a house, why should he be given another house? Of all those cases, Servcon dealt with more than 300 000 properties and provided a report to Gauteng and Eastern Cape provinces. When Servcon ceased operations, this meant that it stopped going out into the field and doing verification and research et cetera. Already Servcon had gone through a lot of work. Having gone through all this work, Servcon needed to verify and reconcile all the information it had collected and report it to the various provinces. Servcon requested permission for assistance from directors to go out and verify its work. They had been paid the rates that were set by the Department of Public Service and Administration, which was why they were so high. Servcon had requested quotations from individuals to do this work and some of them had come in at around R10 million which Servcon thought was too much.

Mr Steyn replied that he was still not happy. Based on the 2011 Annual Report, it seemed as if very little had been done in 2010/11 financial year. Looking at the table of “Outstanding Portfolios” on slide 9 of the presentation and page 6 of the Annual Report, only 27 properties had been resolved. Mr Mpambani had just stated that Servcon itself did not go out and do verification or research anymore. Mr Steyn did not understand what had taken Servcon’s staff two years to get to a point where it had still not shut down. He had expected Servcon to have shut down a long time ago. There were a number of properties that still needed to be transferred, presumably this would happen once it moved to HDA. Mr Steyn could not believe that a director of an entity that was busy winding down was taking home R2.9 million a year. If he was not mistaken, this was more than the President of South Africa took home a year. How did Mr Mpambani justify taking home R2.9 million a year from an entity that was busy winding down?

Mr Mpambani replied that when he said that Servcon had “ceased operations” he meant that Servcon had stopped going out into the field to look for information. Verifying and confirming the work that had been done in the various provinces had been carried out. If Servcon had used a service provider it would have cost Servcon about R10 million and so it had asked to use Servcon directors and staff to do this.

The Chairperson asked what staff members were still employed by Servcon.

Mr Mpambani replied that five people remained at Servcon. Himself, Michael Rakgogo, the company’s legal advisor, the company secretary and the executive manager who was responsible for the management of Servcon’s entire portfolio.

The Chairperson asked Mr Mpambani if there had been any comments made by the Standing Committee on Public Accounts (SCOPA) that he wished to share with the Committee.

Mr Mpambani replied that there was nothing he wished to share.

The Chairperson said that the Committee would be looking into the 2010/11 Annual Report of Servcon again and would submit further questions to Servcon and the NDHS in writing by Monday 31 November 2011.
 
The meeting was adjourned.