Presidential Review Committee on State owned entities: Department Human Settlements presentation, Adoption of report on Committee's oversight visit to Mpumalanga

Meeting report

Chairperson’s opening remarks
The Chairperson outlined that the Committee would need to adopt the Interim Report on the Rental Housing Amendment Bill [B21 – 2011]. All the parties had agreed to the redrafting of the Bill and the Committee had followed the processes in terms of the Parliamentary rules, and once the Report had been adopted, the redrafting could be started. She did not anticipate this would take too much time, because the Committee had already done extensive work on the Bill, so it should probably be completed by June 2012. It was necessary to try to implement it in time for budgeting by the provinces.

The Chairperson reminded Members that the President had appointed a task team, the Presidential Review Committee (PRC), to review the work of the state owned entities (SOEs), not only limited to state-owned commercial entities. The Department of Human Settlements also had various SOEs and it would be the task of every Committee to ensure that it engaged in the process both at Committee level as well as through the social Cluster. The deadline for dealing with the review report had now been extended to end-February, so the Department of Human Settlements (DHS or the Department) now had to present its input to the Committee which, together with the Committee’s response, in the form of a report, would be submitted to the Social Cluster for discussion.

Presidential State Owned Entities Review: Department of Human Settlements briefing
Mr Neville Chainee, Deputy Director-General, Department of Human Settlements, tendered an apology for the Director-General, who had other prior engagements. He noted the presence of officials from the SOEs under the control of the DHS. He said that he would elaborate on the processes that had taken place between the Department, the SOEs, and the Presidential State Owned Entities Review Committee, and would set out some Departmental perspectives and comments.

The DHS had six active schedule 3A State Owned Entities, which he listed as the National Home Builders Registration Council (NHBRC), the National Urban and Reconstruction Housing Agency (NURCHA), the Rural Housing Loan Fund (RHLF), the Housing Development Agency (HDA), the Social Housing Registry Authority (SHRA), and the National Housing Finance Corporation (NHFC). They were listed in schedule 3A of the Public Finance Management Act (PFMA), and were considered to be state organs, rather than State-owned companies. The Community Schemes Ombud Service was currently being established, which comprised National Treasury and other approval processes, and, once approved, it would be a schedule 3 entity. He further noted that in terms of schedule 3 of PFMA and applicable legislation, the Minister of Human Settlements was the Executive Authority for a number of processes. Where required, the DHS had to exercise certain financial control and authority, in concurrence with the Minister of Finance and/or National Treasury. Relevant legislative oversight was exercised by Parliament, through the Portfolio Committee. The entities were required to have enabling legislation. Their strategic and operational plans were consistently monitored and improved to ensure consistency with the strategic development mandates and outcomes required of the Department by government.

Mr Chainee noted that the Minister had approved the consolidation of NURCHA, RHLF and the NHFC to improve the strategic financial capabilities of the Department to meet constitutional and developmental objectives. The Department had embarked upon a process, under the operational and implementation programmes and project management, to ensure that the HDA’s operational plans were aligned to the developmental outputs and outcomes of the provinces and municipalities. The NHBRC had been requested to ensure that its regulatory and compliance mandate was improved and strengthened. The SHRA and its predecessor had been an innovator and initiator of social and rental housing provision for the poor and working families. The Community Schemes Ombud Service was, as mentioned previously, being set up to ensure and improve regulatory oversight, monitoring and management in the sectional titles sector. 

Mr Chainee noted that the Department’s plans were geared to addressing current backlogs and deficiencies of socio-economic and spatial inequality, poverty and underdevelopment. All would require public-public, private-private and public-private responses.

Mr Chainee emphasised that the SOEs within the Department were a necessity. They required planning, funding, and full implementation of efforts to respond to the structural developmental gaps, inability and deficiencies of the inherited and current economy, in order to address the backlogs in poverty, inequality, underdevelopment and unemployment. He noted that a successful developmental State would require its state entities to respond, in an efficient and effective manner, and eradicate the current human settlements backlog. It was also important that there be ongoing evaluation and re-evaluation of strategies related to state entities, to remove inefficiencies and weaknesses. The Department was also committed to ensuring that it benchmarked the performance of its entities with national, regional and international best and good practices.

At the moment, Mr Chainee said that the current activities performed by the entities aimed to be consistent with the developmental mandate of the Department and not to be in conflict with any other entity or agency. There was, however, scope for improved coordination, focus, prioritisation, resource allocation with other national, provincial and municipal entities.

Mr Samson Moraba, Chief Executive Officer, NHFC, said that the NHFC fell into the category of a Development Finance Institution (DFI). Other examples of DFIs, outside Department of Human Settlements, included the Industrial Development Corporation (IDC), Development Bank of Southern Africa (DBSA) and National Empowerment Fund (NEF). The Minister of Public Enterprises had commented on SOEs in terms of their operations, but had specifically excluded DFIs because DFIs were specialised in their nature and were actually set up to fill the gap in the market, or address market failure. It was important to note that all DFIs in the country needed to have a similar framework, even if they fell under different ministries. If they served a particular market, there should be standardisation and consistent regulation over them.

Mr Moraba noted that another point raised by the PRC was to do with coordination. It was noted that coordination was needed between the SOEs, and also between SOEs and all three spheres of government. There were about 500 SOEs and it was necessary to try to minimize duplication, particularly since similar SOEs existed at national, provincial, local level. Proper coordination was central to improving efficiency and effectiveness of SOEs.

DFIs were particularly affected by the need to ensure their financial sustainability, through a sustainable funding framework. Most of the DFIs did not receive annual allocations from government, but instead relied upon the returns from the services they discharged for their livelihood. Especially given changing circumstances, these institutions needed to ensure that they did business in efficient, effective and financially sustainable ways. That was one of the compelling reasons for the consolidation of NURCHA, NHFC and RHLF, to ensure not only economies of scale, but also to ensure financial sustainability, so that the SOEs could balance the developmental mandate imperatives against financial sustainability imperatives. That in turn spoke to the capacity and expertise that were needed in the institutions, the financial muscle needed and an indication of where consolidation was needed for effective delivery.

Mr Moraba noted that, in the future, the new DFI should be able to achieve the desired scale it desired, could be responsive to the changes in the market place, could have sufficient capacity - both human and capital - and be able to respond to developmental mandate. All of these issues had been raised at the  PRC round table discussion in November 2011.

Discussion
Mr S Mokgalapa (DA) noted that there were poor perceptions around SOEs, including accusations that they were merely “cash cows” that milked the fiscus. That was one of the aspects to be considered by the PRC. He said that the SOEs had to convince the Committee of the necessity for them to continue; many were currently fighting for survival. The Department of Human Settlements had made some compelling points in their favour, including that they could help to realise the broad and large mandate of government. However, they would have to respond to the challenges of their financial viability, the legislative mandate to which they must adhere and their general mandate. He was pleased to hear that the DHS was exercising strict financial management control and the books were run in accordance with the Public Finance Management Act.

Mr Mokgalapa said that the main bone of contention between the departments and SOEs was a possible misinterpretation of mandate. He asked how far a department could exercise oversight, or even control, over the SOEs, and how independent those SOEs could be from government. Linked to that was the issue of accountability and responsibility and monitoring of the SOEs, which did not come out clearly enough in the presentation.

Mr Mokgalapa said that the Committee had, in the past, been worried about the continuously poor workmanship on buildings, despite the fact that the NHBRC was set up to monitor and regulate compliance with building standards and requirements.

Mr Mokgalapa asked whether there were problems of capacity, a lack of required skills or problems around adherence to statutory legislation, in instances where the SOEs failed to carry out their mandates.

Mr K Sithole (IFP) asked whether the DHS had carried out exercises to ensure that municipalities were aware of the services of HDA.

Mr Sithole said he would be interested to hear of any plans and methodologies that DHS could employ to eradicate the housing backlogs.

Mr Sithole asked whether the new DFI would replace the existing entities, or whether it would constitute a totally new institution for the DHS.

Ms D Dlakude (ANC) felt that the SOEs were necessary, but said that the Committee wanted to know more about their work in every corner of the country. The Committee had realised, during its oversight visits, that these entities, especially the HAD, were not well-known in municipalities and more remote communities. She said that the NHBRC had its own fair share of challenges in the past, but hopefully was now back on track. It must fulfil its Constitutional mandate; government was spending substantial amounts on rectifying sub-standard housing, and this should not have to be repeated in the next financial years.

Mr J Matshoba (ANC) asked why NHBRC was outsourcing private companies to do the inspections when it was supposed to do the job itself.

Ms M Borman (ANC) noted that the comments about the need for coordination role were extremely important. There were several very good working entities. However, there was too much duplication, and there was a need to increase the efficiency and effectiveness of those entities.

Ms Borman asked for more clarity on the three financial entities combining to form one entity, and she asked also for clarity whether the DFI in the context of human settlements differed from the other DFIs.

Ms M Njobe (COPE) had read media reports about entities abusing and misusing their funds, noting that NHBRC was cited as one example of this. She asked what was contained in the report about financial controls and authority exercised by the Department and NHBRC, and whether there were efforts to strengthen its regulatory and compliance mandate, and what specifically would be done in this regard.

Ms P Duncan (DA) noted that there were ongoing issues and debates around public entities and Chapter 9 institutions, yet nothing seemed to change. She commented that so many “turnaround” strategies had been proposed. This meeting had spoken of the future for SOEs. However, all that would be a waste of money if the SOEs did not comply and adhere to their mandates. SOEs should be effective and efficient, and concentrate on implementation, because that was where the main problem lay; there were substantial gaps in actual delivery of houses and services to the people. She felt that instead of concentrating on consolidation of the entities, or turnaround strategies, the DHS and government should instead identify which entities were not performing and therefore should be closed down. She urged that DHS should not try to maintain non-functioning entities, but must close them down if they failed to deliver services to the people as an extension of government.

Ms N Mnisi (ANC) noted that the SOEs could play a very significant role in the country, if there was coordination between them and the three spheres of Government. This was particularly true of NHBRC. However, they should be more visible in all three provinces.

Ms J Sosibo (ANC) asked if there was any duplication in the roles of the DFIs. She also asked if there was any monitoring mechanism that had been developed by the Department to monitor the entities.

The Chairperson noted that there was a difference between a national public entity that had been established in terms of section 3A of the PFMA, and other entities like Telkom and Eskom. She did not think that government had made any mistakes in terms of transformation. However, there were challenges in amalgamating the financial institutions to become DFIs. She felt that some entities were trying to take advantage of government, by claiming that they were DFIs an needed to be autonomous, rather than being bound by regulations. She agreed that the main problem with the DFIs was that they were not visible in the provinces, were not providing  services to the people who needed them and that the interest they charged was too high. In principle, Government had agreed that it needed those institutions. The main problem was that they were stretched in being private/private institutions. Whatever they were, this should not affect government’s mandate of service delivery to the people.
 
The Chairperson noted that the purpose behind the PRC on the SOEs was to assess their current management weaknesses, to consider whether they were in fact needed, how they could be improved, and to limit any duplication. If it was agreed that there was a need for the SOEs, then there was a need then to ensure that they complied and adhered to the regulations, and were in line with the government agenda improve the lives of South Africans. If there had been market failures, then the DFIs should convince Government of where and how the market failure arose, and what steps had been taken to rescue the situation.

The Chairperson stressed that all the issues raised must be fully considered by the Department and Committee, as required by a specific directive, and fed back to the PRC, who must, in turn, advise the President to enable him to make a decision on the SOEs.

Mr Moraba responded to questions around the DFIs in general. NURCHA, NHFC and RHLF were DFIs because they were lending money to the market. This distinguished them from institutions like SHRA, which, although it also gave grants, was not actually a financial institution set up to lend money, but rather one that distributed grants. The DFIs were set up by government to support the policy and priorities of Government at that time, and for the period they were in existence. The three DFIs were doing business, but in this regard he noted that because they were so small, particularly when measured against the immense challenges of human settlements, their impact was not fully felt across the whole country. It was therefore necessary to try to create a far bigger institutions whose presence could be felt countrywide. He drew a comparison with the IDC, which could address and do anything in the industrial sector, its main area of focus, and DBSA could similarly be asked to attend to infrastructure development because it had the size, muscle and capacity to do that. The three DFIs within DHS were small, and that led to the conclusion that a different scale was needed, hence the consolidation, which had been approved by the Minister. NHFC would be at the core of the new consolidated entity, but essentially one DFI would be put in place to respond to whatever human settlement problem arose, rather than trying to specialise.

Mr Moraba also noted that the DFIs would remain classified as SOEs. However, it must be remembered that they operated in, and were bound by the regulations of the financial markets. Oversight over the new DFI would remain with DHS. He also added that one of the main challenges behind the DFIs was that they must ensure their own financial sustainability whilst also being able to led money. Government should be able to give directions as to their survival.

Mr Chainee added that in the human settlement sector two institutions relied on the Department for funding; namely, SHRA and HDA, whilst the other DFIs operated on an independent basis, with no annual allocation from the Department. The HDA and SHRA allocations from the Department would total R120 million in the next financial year, and they would explain to the Committee, in due course, how this money would be used. Of the seven SOEs, only three would receive operational funding.

Mr Chainee noted that the DHS had a Chief Directorate that was solely responsible for monitoring the reporting of the SOEs. There was a very strict management, with quarterly oversight, and attention was immediately paid to closing any gaps that might reveal themselves. The DHS had closed down three entities that were not performing in the past. In terms of accountability and monitoring, he noted that over the next three weeks the DHS and the entities would each present their strategic plans and performance plans. If those entities were not meeting their mandates, then it was within the scope of the Committee and the Minister to recall them. He also noted that Government Outcome 8 was included as a formal responsibility of each of those entities, and if this was not included in their strategic plans, those plans would not be approved.

Mr Chainee then dealt with the issues raised about the alignment of the mandates of the entities, especially NHBRC, with provinces and municipalities, and noted that the NHBRC mandate and alignment would be more fully explained to the Committee on 29 February and 13 and 14 March. After the consolidation of NURCHA, NHFC and RHLF, the Department in essence would have five SOEs reporting to it. On 14 March the Department would give a presentation on the consolidation of those three entities, which would be called the “Human Settlements DFI”. There was also consideration being given to a Human Settlements Bank.

The Chairperson thanked the Department for the presentation and responses, and noted that the Committee would now draw a document for presentation to the Cluster, with assistance from the DHS.

Interim Report on the Rental Housing Amendment Bill [B21 – 2011].
Due to shortage of time, this report was deferred for consideration in the following week.

Committee’s report on oversight visit to Mpumalanga
The Committee adopted the oversight report

The meeting was adjourned.
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