National Home Builders Registration Council annual performance report

Human Settlements, Water and Sanitation

15 November 2012
Chairperson: Ms B Dambuza (ANC)
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Meeting Summary

NHBRC’s mandate was to regulate the house building industry and protect housing consumers. The regulatory aspect involved ensuring registration of builders. Registered builders were eligible to free training done according to the technical standards required by the NHBRC.

Every house should be enrolled by the NHBRC prior to construction, and once that had happened the Council was duty bound to inspect. For the non-subsidy sector, four inspections prior to completion were done, whilst for the subsidy sector, one inspector for every 200 houses built was provided.

During the recession there was a noticeable dip in new enrolments, with the number crashing from 90 000 in 2007 to about 30 000 in 2011. The NHBRC had spent about R4 million on remedial work, a figured reduced from R15 million the previous year. There had been questions on the amount spent on remedial work, but one should not look at remedial work in isolation – as this amount was mitigated by inspections.  R4 million was spent on remedial work while R58 million was spent on inspections to prevent shoddy work. The NHBRC spent about R4 million on remedial work, which was reduced from R15 million the previous year.

Developers and professionals still failed to understand the technical and geo-technical standards required by NHBRC. The Council would assist everyone by hosting a number of workshops in provinces. There also was a challenge caused by the scarcity of appropriate technical skills, such that the NHBRC was now developing a training manual.

The NHBRC had received a qualified audit opinion and that related to its procurement processes. There were fruitless and wasteful, and irregular expenditure (where there was value for spending, but the process of how the money was awarded was not compliant to regulations).

The Office of the Auditor-General found one incident of irregular expenditure in the under R500 000 bracket which then raised concern, and the question was how many more? The Council had since ensured all payments amounting up to R500 000 followed procedure, and these included getting three quotes; technical evaluation of suppliers; and applying the 90/10 or the 80/20 preferential procurement rule.

Members voiced displeasure at the performance of the NHBRC, and said the findings of the Auditor General were serious. Visibility of the NHBRC was questioned, as Members felt the entity was not marketing itself to emerging contractors sufficiently. The Committee complained there were insufficient inspectors on the ground in order to stamp out the need for rectification of subsidy houses. Members said the amount spent on remedial work should not need to exist, especially if inspections were conducted. Committee engagements with people on the ground indicated that inspections were not happening. Members said the NHBRC board should have been present so that the Committee could have been updated about the CEO matter. Members said NHBRC was failing poor people and the emerging contractors. It was decided that another meeting should be held with the NHBRC board in attendance and a proper audit action plan needed to be presented.

Meeting report

Opening remarks
The Chairperson said the item on the utilisation of consultants had been deferred from the programme, following a request by Department of Human Settlements Director General (Mr Thabane Zulu) who was preparing for a meeting with his counterpart at National Treasury (Mr Lungisa Fuzile). The Directors General had been instructed to meet and chart a way forward on sanitation expenditure by a joint meeting between the Committee and the Standing Committee on Appropriations.

NHBRC presentation
Dr Jeffery Mahachi, NHBRC Acting CEO, said the mandate of the Council dealt with two tasks: regulation of the industry and housing consumer protection. The regulatory aspect involved ensuring registration of builders. Registered builders were eligible to free training by the NHBRC. All the registered builders needed to be trained according to the technical standards required by the NHBRC. The standards were stipulated in the building manual.

He said when homebuilders defaulted or failed to comply with required standards, NHBRC could deal with the concerned builder through a disciplinary process. Various options were available to the NHBRC and included deregistering or suspending a builder. If a homebuilder was no longer active, such a person had a choice of voluntarily withdrawing from the NHBRC.

In attempting to ensure housing consumer protection every house should be enrolled by the NHBRC prior to construction. Once the house had been enrolled, the Council was duty bound to inspect such a house. For the non-subsidy sector, four inspections prior to completion were done, whilst for the subsidy sector, one inspector for every 200 houses built was provided. Once a house had been completed, the municipality concerned issued an occupation certificate.

He said if there complaints with the structure of the house, the consumer was allowed to launch a complaint with the NHBRC. If the homebuilder was not willing to attend to the complaint, there was a conciliation process. After this process, if the homebuilder insisted on not caring, the NHBRC would hire an engineer and appoint a contractor for the remedial work. The money was recovered from the homebuilder.

Over the past seven years there had been a constant renewal of homebuilders by about 77%. During the recession there was a noticeable dip in new enrolments, with the number crashing from 90 000 in 2007 to about 30 000 in 2011. The numbers were beginning to pick up. The Auditor-General (AG) queried the performance information in terms of the number of registered homebuilders. It appeared that the NHBRC did not adhere to the projected targets.

He said the NHBRC could not control the number of homebuilders who had to be registered annually. The AG was concerned that the Council did not achieve more than 20% of its targets. The NHBRC argument had been that the Council could not control the number of homebuilders and houses enrolled in a financial year.

The NHBRC could not go out and invite people to come and register. Going forward, the Council had changed strategy and was no longer reporting in terms of number of registered homebuilders. The approach now had been to address the turnaround time for registration of homebuilders and enrolment of houses within an acceptable timeframe as key indicators. The Council needed to be customer-centric in terms of its turnaround time.

About 431 structural-related, and 36 roof-related defect complaints were received. In total 649 complaints were received, of which 350 were resolved. All the outstanding complaints as at the end of the financial year had been resolved.

The NHBRC spent about R4 million on remedial work, a figure reduced from R15 million the previous year. There had been questions about the amount spent on remedial work, but sadly one should not look at remedial work in isolation to the mitigating circumstances such as the mitigating cost meant to reduce the remedial work. The inspections fees that were being introduced amounted to R59 million.

On matters of discipline, 46 homebuilders, out of 85 cases recorded, were found guilty. Thirty of those cases were withdrawn, with seven found not guilty, and two postponed into the current financial year.

Dr Mahachi said the subsidy sector was enrolled in two phases: project and home enrolment. Project enrolment was when one had just put infrastructure in and had not yet dealt with the top structure, whilst home enrolment referred to the top structure. Over the last four years, NHBRC had been doing, on average, about 70 000.

The Council had been engaged with provincial departments and was getting support. The number of enrolments had as a result shot up to 138 000 enrolments in the previous financial year. Now the plan was to align all the enrolments with the plan of the National Department. Most targets that were not achieved related to the non-subsidy sector as opposed to the subsidy sector. The Council was content it had performed well in this area.

NHBRC would this year put a lot of emphasis on homebuilder training, especially as it pertained to emerging homebuilders. About 609 homebuilders, comprising 80 disabled; 134 women; and 94 youths, were trained in the reporting period. A number of service providers had been employed to enhance the training programme, and also in trying to ensure that the target was met.

Dr Mahachi said challenges dealt with included enrolment submissions that were still being done during and after construction. Although there had been a significant rise in enrolments, developments were not submitted prior to construction. Failure to submit prior to construction did not allow the NHBRC to go and do inspections.

There was a lot of misunderstanding of technical and geo-technical standards by developers and professionals. The Council would assist everyone by hosting a number of workshops in provinces. There also was the challenge of scarcity of appropriate technical skills, such that the NHBRC was now developing a training manual. There was also a renewed drive to train the inspectors even at municipalities. The jump in enrolments was noticeably driven by the Public Housing Projects (PHPs) and the rural projects. Thus, NHBRC had developed appropriate standards for the rural projects.

Mr Courteney Thorp, NHBRC Chief Finance Officer (CFO), said income for the Council was R741 million whilst expenditure was R580 million. NHBRC's written premiums amounted to R406 million up from last year's R322 million.

The AG had expressed concerns about unearned premiums, the risk division that went up by R199 million, and the subsidy sector in general. The concern was that the actuarial calculations should not be based in the subsidy divisions on an income basis. The same kind of assumption was used for the non-subsidy sector.

At the end of the financial year NHBRC had not received one claim from the subsidy market. The Council applied a 20% failure rate; and the concern was it should re-look at the assumption because of the increasing volumes in the financial year, in terms of what should be provided for the market, possible future claims and how that was reserved.

NHBRC was starting to receive claims in the subsidy market. Revenue contribution on the technical side was a bit of a concern, and the Minister had pointed out that the NHBRC could not rectify the houses if it was the regulator. The Council was looking to hand over to provinces the rectification contracts in two provinces already, KwaZulu Natal and the Eastern Cape. In future the revenue would address forensic and the geo-tech.

Mr Thorp said the concern of the AG was the refusal by the Minister of Finance, Mr Pravin Gordhan, to approve the investment policy of the NHBRC. The Minister of Human Settlements had written to Minister Gordhan requesting an exemption under National Treasury regulations. A response had not been received yet, but the indication had been that a decision would be arrived at in the next few weeks. NHBRC could not change investment until it got clearance from Treasury and as a result it had reduced expenditure.

There was an issue with the claims of only R15 million in the year. The general feeling was why were the claims so low. This was not the case, because NHBRC mitigated the claims by spending lump sums on inspections. If the NHBRC was not inspecting, it would save a lot of money, but the claims would be substantially higher. This was explained to the AG, and that inspections were important because they reduced the chances of a house being constructed erroneously.

NHBRC's actual income was R184 million against the actual expenditure of R186 million. There was a slight loss of R3 million, but next year there would be a major change. The NHBRC reserves should be about R956 million; that had been covered at 1.5% in investment. But the Council awaited authorisation from the Minister of Finance to continue in this way of investing.

The AG had no quarrels on enrolment fee adequacies, but had emphasised that the issue of the ratios for the non-subsidy model be addressed. The NHBRC was 278% over funded, and this put the Council in a very strong financial position.

The NHBRC received a qualified audit opinion and that related to its procurement processes. There were also fruitless and wasteful, and irregular expenditure (which meant there was value for spending, but the process on how the money was awarded was not compliant with regulations).

There were four areas in which the irregular expenditure occurred. The first one was the extension to contracts. Although done within the normal procurement processes, the NHBRC failed to notify Treasury. That had since been corrected. When there was an extension, the Council interacted with Treasury.

The second area was that the Council had allowed transfers to go through by payments account and not the procurement pit system. This was done outside of the mandate of the CEO. As a corrective measure the Council was no longer making any miscellaneous payments; everything went through the enterprise resource planning (ERP) system.

The Office of the Auditor-General found one incident of irregular expenditure in the under R500 000 bracket which then raised concern, and the question was how many more? The Council had ensured all payments up to R500 000 followed procedure, and these included getting three quotes; technical evaluation of suppliers; and applying the 90/10 or the 80/20 rule.

The NHBRC had been going through a difficult time with its current computer systems. The Council was now upgrading the computer system, but there was an accompanying manual for every bid system. When every quote was logged and recorded the Black Economic Empowerment code was worked out, and the 80/20 and 90/10 rules were calculated. Since the beginning of the year the internal audit had ensured that all the systems were in place and monitored. The AG should not find this a problem in the following reporting year.

The fourth area where the NHBRC fell foul was running the tenders under 21 days. The tenders were not open for a full 21 days and there were a lot of reasons for it. This was contrary to the NT regulations but it had since changed; all tenders remained open for a maximum period of 21 days. The four issues were the reason for the irregular expenditure, but this was not wasteful expenditure. All the additional manual systems were sufficient to avoid a qualification in the next year, while the new computer system was being designed.

Discussion
The Chairperson wondered aloud if the presentation sought to suggest that the NHBRC was not aware of NT regulations on procurement. As a government institution, NHBRC should know NT regulations but it disregarded the regulations.

The Chairperson said visibility had to be taken seriously. The Committee had visited the OR region in the Eastern Cape, and it was discovered that there were only two NHBRC inspectors in the entire region. How would these two inspectors cope with the amount of work resulting from housing projects in the area?

Dr Mahachi said that he took note of comments about NHBRC's visibility. However there were offices in the nine provinces that were supplemented by satellite offices. The Council was investigating the possibility of having mobile offices that could reach out in a number of areas. But also under consideration was the use of municipalities as service centres.

The Chairperson wanted to know the marketing strategy for the Council especially that builders knew nothing about NHBRC. Most builders came to know of NHBRC only when they got Government tenders. This delayed emerging contractors from entering the market. It was good that there be an awareness strategy that would target the local municipalities.

Dr Mahachi noted that Members had raised issues that were commentary in nature rather than asked questions and the NHBRC had taken cognisance of these comments. The Council worked closely with DHS. The Council had obtained all the plans from provinces and was now ensuring that statistical figures were aligned with provincial departments of human settlements. This would ensure that every single house was enrolled. All provinces had been engaged, except the Northern Cape. A meeting had been scheduled in a week's time. Provinces had been engaged and were actually enrolling the houses.

The Chairperson commented that the NHBRC needed to be proactive in its training intervention. The approach to train people only once they had been awarded a tender was flawed; the training needed to happen prior to getting a tender. The Council needed to contribute to the developmental agenda of government, and NHBRC should train emerging contractors so that they entered the industry well empowered. If this did not happen, the small contractors would just go for tenders only to mess up.

Dr Mahachi said when engaging the departments, NHBRC was looking not only for the list of contractors, but also sub-contractors. It was through registration of sub-contractors that they would be eligible for training with NHBRC. The view was really to grow the sub-contractors so that they could one day become the main contractors.

The Chairperson wanted to know what was currently happening with remedial work at the Naledi Local Municipality in the North West. The NHBRC were the "culprits" and should fix the 405 units that had to be rectified with its own money.

Dr Mahachi replied the North West matter was brought to the NHBRC's attention, and would be investigated.

The Chairperson sought clarity on ERP system. The Council had come with a complicated story to the Committee last year, claiming a lot of money had been spent. The Annual Report indicated that the system had had to be changed again because it did not work. This was wasteful expenditure; how could an institution get into a dysfunctional system. She hoped the current system was working or would work.

Dr Mahachi replied that the Council sought to suggest that it was in the process of implementing the new ERP system.

The Chairperson said the AG's report was scathing especially as it indicated that the NHBRC had regressed. The audit report was not good; in fact it was very bad. Not having internal controls to prevent irregular expenditure was critical. NHBRC did not even have the proper monthly reconciliation records. She would have preferred to have the Board present so that it could provide an update on the issues around the CEO. The Board would still have to come and explain this item.

Ms G Borman (ANC) commented that no institution would want to face Parliament with an audit report like that from the AG. Evidence on the ground pointed to NHBRC not doing the inspections. The Committee would want to see very little being spent on remedial work; that budget should begin to fall away. If there were inspections at different levels of construction, challenges could be dealt with. Committee engagements with people on the ground indicated this was not happening.

Mr S Mokgalapa (DA) said the Committee was concerned by the qualified report and that by not following on its mandate the NHBRC was failing poor consumers. The core mandate of the NHBRC was to conduct regular inspections and ensure quality. This was not happening at the moment; the number of complaints was indicative. His feeling was that there could be more complaints on the ground compared to what was reflected in the presentation. The challenge was huge. Preferably the Committee did not want to see circumstances that gave rise to remedial work; this was a waste of money. Why would one need remedial if inspections were conducted?

Dr Mahachi replied that remedial work would always be there in construction. These were caused by one of three possibilities: poor workmanship; materials; and or design. An inspector could not be able to pick up a design problem but poor workmanship or materials. If an engineer specified something that did not work on the ground, an inspector would not pick that. All the inspector did was check if the builder built was according to the specifications. Remedial work would occur if an engineer gave the builder wrong specifications.

Mr Thorp said two new departments were created for remedial work: quality control where all inspectors would report to; and central control that managed all subsidies and non-subsidies to ensure every inspector was allocated an acceptable workload. The new departments were in the next year's budget. Lawyers and prosecutors were also allocated into these departments to ensure there were no delays at head office in terms of legal requirements.

Dr Mahachi said the NHBRC was currently placing its own staff members at provincial offices of human settlements. Inspectors would be operating from those offices, and when there were issues they could be attended to with immediate effect.

Ms Borman said failure to honour the 21-day rule was a serious thing. This was where corruption crept in. Disregarding the regulation was more like opening up the NHBRC to corrupt practices. In the housing sector, poor quality had to be dealt with. She wanted to know the kind of a relationship that existed between the quality controller at DHS and NHBRC. It worried her that not everybody was enrolled at or by NHBRC. A proper mechanism had to be put in place, particularly with subsidy housing.

Mr Thorp replied that the audit and risk committee had been established and was fully functional. The committee had been filled in terms of the Act, and it had external members who pushed the NHBRC to the limit. Their duties included looking at the accounts, and tenders. Bid adjudication and bid committees had been established.

Ms Borman said the AG had indicated that the entity struggled with collecting old debt. What mechanism was the NHBRC putting in place to recover the money, and what was the total amount of the outstanding debt. Also a reference was made to the internal audit function; what was NHBRC putting in place by way of control? She asked if there was an audit and risk committee within the Council?

Dr Mahachi replied most of the debtors for NHBRC were mainly from government, even more so from provinces. Most provinces in the financial year had met their commitment to pay within the 30-90-day prescribed period. This was no longer a challenge at all.

Mr Mokgalapa said it appeared that people did not know much about the NHBRC. The institution had to be grounded. The Council needed to change strategy and ensure over and above registration and inspections, that it marketed what it was doing.

Mr Mokgalapa sought clarity on the disciplinary hearings. Could the delegation elaborate on the kind of ill discipline issues that were there?

Mr Mokgalapa sought a breakdown of the R231 million irregular expenditure, and how it was spent. NHBRC, just like DHS, was a serial offender in as far as supply chain management. This was a challenge, and the Committee would like to get an assurance that this would not be repeated. DHS was that close to getting a qualified report on account of supply chain management.

Mr Thorp replied that some of the contracts that were fingered by the AG ran over from the previous years, and that they would result in irregular expenditure again next year. It might not be a qualified opinion; but contracts awarded in previous years resulted in irregular expenditure for as long as they were still running. As long as this was declared, the AG would not qualify the NHBRC on it. Future irregular expenditure would not happen. Action had been taken against the individuals concerned. This was taken seriously and there was proof from the auditors that the Council had done all it could to avoid any future irregular expenditure. Had the NHBRC attempted to cancel the contracts that were awarded, it could have resulted in court actions against the NHBRC, and the organisation would have had major challenges. There was nothing wrong with the current contracts and the work.

Mr Mokgalapa commented that shoddy workmanship could only be adequately addressed through consistent inspections. What was done about the companies that performed such poor work? NHBRC needed to ensure that shoddy work did not even arise especially when it concerned RDP houses.

Dr Mahachi replied that most of the contraventions were due to technical non-compliance. This meant that the builder was not building according to the standards. This would be pointed out to the builder, and would be asked to fix. Failure to do so would lead to the builder being hauled before a disciplinary hearing. In general, those brought before disciplinary hearing would be as a result of shoddy workmanship. Non-compliance could also be administrative; this meant the builder did not enrol the property being built. This too could subject one to a disciplinary hearing.

Mr Mokgalapa asked what punitive measures were there for the culprits.

Ms N Njobe (Cope) sought clarity on those homebuilders found guilty of shoddy work, and the kind of punitive measures meted out.

Dr Mahachi replied there were many ways depending on the nature of the offence. The builder could be struck from the register; there was a fine in the current legislation of up R20 000; or the builder could be suspended from partaking in the industry.

Mr K Sithole (IFP) asked for a breakdown of the trained homebuilders by province.

Dr Mahachi replied the provincial breakdowns of training were in the Annual Report on page 44.

Mr Sithole sought clarity on the delays in the finalisation of the disciplinary process against the CEO. What caused the delays, and what impact did such delays have on the organisation.

Ms Njobe commented the cost for remedial work appeared disproportionate to inspection fees; the difference was huge. She asked if it was logical and necessary to spend that much money on inspection. She agreed that the Council was not visible. She asked if any effort was being put into marketing the organisation so as to get as many builders as possible registered.

Dr Mahachi replied with regards to the R4 million (remedial work) versus the R58 million (inspections), the objective was to mitigate the risk and ensure that NHBRC did not incur remedial work. He explained that the R58 million for inspections was not high, given the number of inspections required and that the NHBRC was in the process of recruiting a lot more inspectors. There might currently be few inspectors on the ground but the plan was to have over 400. In the subsidy sector the intention was, for every 200 houses constructed, to provide one inspector. The cost to have sufficient inspectors on the ground would always be higher.

Ms Njobe asked the criteria used to identify those builders that needed to be trained. She asked about outreach programmes, especially targeted for the rural based homebuilders.

Dr Mahachi replied that the type of training that was done was more on-site orientated, and a bit was done in class. NHBRC worked closely with the provincial departments and the municipalities. The provincial department would send a technical non-compliance team who would identify on behalf of NHBRC individual shortcomings. That information was then used to determine the training needs of builders.

Ms Njobe sought clarity on a statement in the Annual Report that the Council had condoned wasteful and fruitless expenditure. She would love a comment about page 24 of the report where it concerned R201 million in irregular expenditure. Even if NHBRC was solvent, this was a lot of money.

Ms Borman suggested that there should be another engagement with the NHBRC board. It would be ideal if the Council dealt with the findings of the AG in a specific and focussed way, and brought detailed plans to the follow up meeting. A properly tabulated formula that indicated solutions for each of the findings would really assist the Committee's work.

Mr Neville Chainee, DHS Deputy Director General: Strategy and Policy, requested that DHS be allowed to come back with an audit action plan that encompassed all the entities administered by the Department. The NHBRC could be allowed, through its chairperson, to present this, and it could as well give a clear breakdown of how the R201 million was spent.

Closing remarks
The Chairperson said the Committee would have preferred to engage the board on the AG's findings. Although the officials appeared to take the findings lightly they were in fact very serious. When NHBRC came back it would not be sufficient to say its rectifying the findings but each finding had to be dealt with individually. The AG's report was very detailed. Money should be used appropriately.

The meeting was adjourned.

[Three apologies were noted from Ms J Sosibo and Ms D Dlakude (both ANC); and Ms P Duncan (DA).]

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