Mortgage Default Insurance & Rural Household Infrastructure Grant (RHIG): input by National Treasury; Auditor General findings: progress report

Meeting report

Opening remarks
The Chairperson said the Committee expected a briefing from the audit committee of the Department on its fiduciary duties, and how it coped with challenges experienced when performing its work. The Committee would get feedback on progress made on issues raised by the Auditor General (AG). Although established by the Department the audit committee was independent. Tendency had been to subsume the audit committee because its members were on the departments’ payroll. Consequently, audit committee members could not candidly criticise departments.

Parliament should support these oversight institutions; the Committee was here to advice and build; even if it criticised sometimes, the end result should be to play that advisory role to both the audit committee and the Department. She called on audit committee members to speak freely on experiences with the Department.

The Committee looked forward to work with the audit committee; the responsibility bestowed on the committee was massive. Hopefully the audit committee would act as a vanguard; and its presence within the Department was highly appreciated.

Audit Committee progress report on audit findings
Ms Sindisiwe Mngxongo, Chief Operations Officer: National Department of Human Settlements (DHS), said the Department was comfortable with the working relationship it had with the audit committee. There had been challenges but those were being addressed. During the 2013/14 financial year there would be improvement in areas highlighted by the AG in the 2011/12 audit report. DHS was seriously considering the input made by the AG last year. It would not be easy but the Department had worked tirelessly in all areas that were highlighted.

Mr Khulekani Buthelezi, Audit Committee Chairperson, DHS, said the four-member audit committee acted as an independent advisor to both the Director General and the Minister. It adhered to all the principles as far as clean governance was concerned. It assisted DHS achieve accountability, transparently, and manage the Department’s revenue assets.

Internal controls at the Department were not entirely effective and deviations were reported by internal auditors and the AG. In certain instances, matters previously reported were not satisfactorily addressed. Delays in implementing management action plans had been escalated by the audit committee to the DG and the Minister, and management had since committed to implementing the action plans.

He commended the Department for the measures it put in place to fight corruption and fraud. However there were areas of concerns. Risk management remained a challenge, and management had since been advised to put measures in place to address this. The Department established a Risk Management Committee (RMC), but it was not optimally functional due to lack of participation and commitment from the risk owners – Deputy Directors General and Chief Directors. This was addressed jointly with the audit committee following the resignation of the chairperson of the risk committee, who cited lack of management’s commitment to attend meetings.

Risk management had been approved to be part of management performance evaluation. A representative from the audit committee participated in the RMC to ensure oversight on risk management activities. The composition of the RMC was very good and compliant with the standards that had been set. Commitment from management had since been received that this was one area that much focus would be given to.

The audit committee had proposed that risk management committee meetings be part of management's performance evaluation. It was recommended that risk management incorporate all senior management, so that it was taken seriously. There would be consequences if senior management did not comply in future. That recommendation had since been approved.

Another area of concern was performance management. Indicators and targets did not adhere to the SMART principle. The audit committee was concerned especially as challenges persisted in addressing the internal audit. Performance targets were not measurable, and there was insufficient evidence to support actual achievements. And in instances where deviation occurred, no reasons were provided. A commitment was made to ensure there was alignment of the strategic plan to the objectives.

Another thorny area was information technology (IT). The audit committee viewed IT as a critical environment for running the Department. DHS was in the process of establishing IT governance structures. An input was sought from the audit committee, and the committee had since been made aware a recovery plan was being drawn up and the input would be incorporated.

As of now the recovery plan for strategy was non-existent; the network system was still unreliable. It was important that the system was implemented so that the business of the Department was supported. The IT was an integral part of every business plan; without it, then DHS could kiss its strategic plan goodbye.

He said the audit committee was concerned with the Rural Household Infrastructure Grant. Issues raised by the AG were the material under-spending and that required massive input. Management implemented alternative controls, such as appointing additional service provider in addition to the Independent Development Trust (IDT) and Mvula Trust. The audit committee would continually monitor progress.

Ms Thebi Moja, DHS Audit Committee member, dealt with progress on the AG’s findings. She said in the 2009 and 2010 action plan there were seven matters not addressed in each of those years. In 2011/12 54 audit queries were raised and plan actions were documented by the managers concerned; 40 of these had been fully resolved and the remaining 14 were in the process of being addressed. The 14 remaining would be addressed during the course of the year.

She took the Committee through the whole list of AG’s findings and the remedial action taken to address them. Repeat and common findings included approval of overtime and creditors not being paid within 30 days. This was concerning and had been escalated to the DG and the Minister. It was within the power of the Executive to implement the system; this was doable.

It was commendable that the Department was vigilant on the issue of payments, and that it took time to verify projects prior to effecting payments. However this led to the Department missing the 30 days. But it was good that compliance was not done for the sake of complying. The audit committee encouraged this approach of verifying; DHS should not just receive invoices and pay without ensuring work had been done. Other matters included debt management policy; non-compliance with National Treasury (NT) regulations; assets that could not be physically verified, and in bad working condition. She congratulated the Department for checking the condition of the assets twice a year. But this exercise should be supplemented further by documentation.

The IT sphere remained a concern as already alluded to, but the audit committee continued to monitor it. There was non-compliance with the Division of Revenue Act (DORA). Another issue was interest calculation which was based on a policy that was not approved. The policy had to be changed to indicate that the Department charged interest; this was an issue with the AG.

Ms Moja said the Department was fortunate that the things upon which findings were made did not drastically impact on delivery. These were administrative issues that were within the Department and could be addressed. Some of the issues could not take longer than a year to fix; in 2014/15 there should be new things. Addressing these findings was truly within management, there was nothing that was not doable within all of these findings.

Mr Buthelezi said the audit committee could prepare a longer presentation on internal audit if the Committee so wished. The Department should not manage the issues the AG made findings on, but rather look beyond the issues raised by the AG. DHS needed to correct the entire system, and rectify the system. The Department should not be content with resolving what the AG had identified; it could be that the system was ineffective and not working.

Discussion
Ms G Borman (ANC) thanked the audit committee for coming to Parliament for the first time since 2009. The lack of support for the RMC by management was concerning. She asked if having an audit committee member on the RMC was a new development, and if it was necessitated by the type of management support. Had this position improved?

Mr Buthelezi replied the Department’s audit committee tried to adopt the best practice. The committee had recommended having executive and non-executive members. The chairperson of the risk committee was a non-executive member, who was not part of the audit committee. The committee appointed a new member to sit on the risk committee; Ms Moja had been appointed about two months ago. The Department was in the process of appointing the chairperson to replace the one who resigned last year.

Ms Borman wanted to know how the audit committee had dealt with the RHIG, especially as the programme had been problematic since inception. How effective would the audit committee’s comments have been had they been made much earlier?

Mr Bhoola asked what impact did those unaddressed challenges have on other broader issues such as fraud and corruption, and risk management. He commented that the 30-day payment deadline was concerning especially since the President had given a clear mandate on the matter.

Ms Moja said the audit committee monitored the utilisation of funding for RHIG. This was not enough. A lot of money was not utilised; this year too was no exception, a substantial amount had not been used. The issue was how extra providers were secured. The Minister had mandated officials not to just wait for Mvula Trust and IDT - if they were not delivering. DHS had to find other suppliers. The only concern for the audit committee was how the suppliers would be procured. Again the Department was still challenged in complying with the 30 day payment period.

Mr Nyameko Mbengo, DHS Chief Director: Financial Management, said the finding by the AG, was that DHS did not on request for quotation stipulate the criteria for evaluating quotes. This was addressed and amended the request for qoutations; the challenge was that when one appointed a contractor a year ago on the basis of requests that did not indicate a criteria and that contract ended a year later, if a payment was made the following year, the actual amount of the payment made was still regarded by the AG as irregular expenditure. This was what happened with the financial statements.

Ms Borman interjected and wanted to know the role of the audit committee if issues were persistent. She said her question was informed by the fact that challenges with RHIG had been experienced over a number of years. The grant was allocated to fast track sanitation delivery in the rural areas and DHS could not spend it year after year. What then became the role of the audit committee?

Ms Moja replied the audit committee could only monitor. Service providers could be changed if they failed to deliver. But the process of getting service providers was cumbersome and frustrating. This was even frustrating to the AG and NT.

The Chairperson wanted to know if the termination clause for underperformance was included in contracts of service providers. Termination clauses should be there so that providers could be dumped on account of failure. Why was the Department challenged in getting rid of the service providers; why should there be legal consequences if people failed to deliver?

Ms Funani Mahlatsi, DHS Chief Finance Officer (CFO), replied the Department would love to prepare a presentation on the six providers that had been appointed to help with the implementation of RHIG. The providers performed splendidly in the short time they had been engaged. It took DHS long to realise there were contractors out there who could have assisted the Department with the challenge of speeding up the process of building toilets for rural households. These providers would have helped the Department in the past two years.

Ms Mahlatsi agreed with the purpose of the audit committee and that the Department need not be reactive only when the AG raised issues. DHS took reviews, and a work-study had been conducted on supply chain and payroll systems. The private sector had been engaged for some degree of independence. The report gave recommendations going into the future; essentially DHS had reviewed its processes. The Department had realised that while it had brought controls within the list of findings, some were not working.

Ms Borman sought clarity on whether the issue of "policy not fitting practice" was being addressed, and if so, what was the timeframe?

Ms N Mashishi (ANC) sought further clarity on the statement that most of the things were within the Department to correct the entire system. If the Department could fix all of these things, who should come up with the timeframes to address them?

Mr Buthelezi replied that timeframes for the implementation of the AG’s recommendations were categorised into short, medium and long term. Failure to implement resulted in those issues being taken up with the DG and the Minister. The audit committee had made it clear to management that action plans needed to be managed by a specific person who would stick to deadlines. This would allow for people to be held responsible for non-compliance.

Mr S Mokgalapa (DA) commented that the presentation was pretty much what the Committee knew especially as it pertained to adherence to the SMART principle, supply chain management challenges, IT, non-adherence to the Division of Revenue Act and lack of monitoring. What had been done to jointly address this matter with the Department? The Committee was worried that there seemed to be serial offending on these issues. Even when the Department got an unqualified audit opinion, matters of emphasis remained on the same issues.

Mr Buthelezi said it was a pity that the Department spoke about participation of outsiders to assist with the SMART principle for predetermined objectives and targets. It was sad that when the outsiders got involved there was no value for money and no improvement. The Department got KPMG last year to develop, plan, and align objectives. The audit committee expected that once management had been trained these things would not be recurring, but still they were there. The audit committee could only advise, interrogate the predetermined objectives, give input and audit on a quarterly basis. Management had to implement as it was their responsibility to implement; there had been some improvements, but the road was still long.

Ms Moja replied that the audit committee ensured that internal auditors complied with DORA, and that they went out to provinces; secondly they had forums where they shared experiences. DHS conducted physical verification of projects too late, and they were aware of that. When the financial year ended two or three provinces would still not be done. Capacity had been cited as a challenge. There was room for improvement and a lot more needed to be done on Human Settlements.

Ms Mahlatsi explained that among the things the Finance Unit would love to be considered was the stipulated DORA requirement of having to submit reports by month end, during which time reconciliations were still in the process of being finalised. At the end of the day, during this time there were transactions that needed to be verified before expenditure could be declared an actual. These were issues that came from the old era; unfortunately departments were still audited by the book. There was a need for a meeting with Treasury and the AG. For DHS not to be reactive to the AG findings, there was a need to review the systems.

There was a need for a tight clause to be inserted on DORA, for provinces, on how they were monitored. The clauses that said DHS reacted when provinces did not do the right thing was too generic. The point for the Department was what it did in order not to stop the money because it had an impact on poor people on the ground. A poor person did not know the processes of withholding; it did not matter to him or her. At the end of the day, the person needed a house.

Mr Mokgalapa commented it was concerning that the Department was allocated funds every year, and yet it continued to miss targets because they were unrealistic. He asked why there were no consequences with regards to non-attendance of the RMC meetings. The audit committee was the one that needed to be blamed for this. The lack of internal control systems was a challenge and had resulted in the DHS continually experiencing under expenditure. Provinces could be blamed but part of the challenge was that the DHS did not follow the money. This had been a thorny issue, and raised a question about how the DHS improved on internal controls to ensure that money disbursed to provinces was accounted for.

Mr Buthelezi said a hotline and lifestyle audits had been recommended. There would be nothing wrong about conducting such an audit at the top level. If one spoke of a control environment in an organisation, it had to start at the top. Management should lead by example. Although recommended, it had not been implemented yet.

Admission of debt (AOD) questioned
Mr Mokgalapa asked when the Department would sign the Presidential proclamation on the Special Investigating Unit (SIU). He noted the proposal for lifestyle audits for senior managers working in the risk area, and wanted to know far had this gone. How far were the investigations on allocation of low cost housing to government officials? Did the SIU know the extent of the problem? He requested that issues of conflict interest, irregular contracts, and supply chain management corruption be commented on.

Mr Thapelo Mashabane, DHS Acting Chief Director: Internal Audit, Risk Management and SI, replied the challenge with proclamation was with the SIU, as they needed to finalise consulting. The Department had asked for an urgent meeting to get the proclamation finalised next week.

When the proclamation was issued it was mainly aimed at recovering. Currently there was a focus on cases where disciplinary action had been preferred for officials. He cited an instance where officials accepted receiving low cost houses illegally. Currently cases were referred to Premiers’ Offices for disciplinary measures. However there was a challenge with municipalities, as they said the cases were not within their jurisdiction.

Mr Mokgalapa sought clarity and details on the 600 cases that were there in the Department.

Mr Bhoola wanted to know if there were challenges with the Labour Relations Act in so far as how employee cases were handled by the Department. Why were employees, found to have flouted the departmental policies, still at work?

Mr Mashabane replied he would have to get clarity on the cases as he did not have details. The cases were pending and did not have details.

Ms Mahlatsi said a detailed report would be provided on the outstanding cases.

Mr Mokgalapa sought clarity on the admission of debt (AOD); what did this mean? Was there a reason that DHS opted for the AOD as opposed to outright dismissal or prosecution of corrupt officials. The approach was faulty, because the Department just recycled criminals, and yet it wondered why the system was not being cleaned up. There had to be a rethink of the AOD.

Ms Moja said the audit committee needed assistance from Parliament to propose legislation that declared committing an offence against the state a dismissable offence.

The Chairperson suggested that the official formally write the proposal down, and submit a document to the Committee and make a recommendation. As the Committee would be in discussions with the Minister next week, they should make sure that it had reached the Committee by then so that the Minister could take it directly to Cabinet. The Committee could also make a recommendation in its report to the House about this. The challenges posed by DORA also would be included in there.

Risk Management Committee mandatory attendance
Mr Mokgalapa sought clarity on performance evaluation. This was a challenge if targets were not specific and achievable. How were people measured and remunerated if one could not evaluate performance. He asked if the resolutions and recommendations of the audit committee were implemented. Non-implementation of the audit committee’s recommendations could render the committee useless. He also asked who was responsible at the Department in making sure that the RMC functioned well.

Ms Moja replied that, in terms of the Public Finance Management Act (PFMA), the DG was responsible for ensuring there was a system in place for risk management. When the DG failed to turn up for meetings, they simply did not happen. The DG was responsible for everything. He did not need to be physically there at the meetings; hence the suggestion that attendance had to be written into the performance contracts for DDGs, and they had to prepare reports, for the DG’s attention, on how they managed risk in their respective units. The DG had to carry the whip to get people into the boardroom; this was unfortunate.

Mr R Bhoola (MF) commented that the audit committee was frank in identifying the weaknesses and challenges. The Committee welcomed that and also that the audit committee looked to rectify the challenges. Obviously the audit committee had to synchronise and align.

Ms N Njobe (Cope) said structures were in place to ensure there was compliance in all aspects. She failed to understand why problems persisted. Where was the problem? How did the audit committee assess the extent of the challenges?

Ms Njobe said it looked as though there were challenges with complying with Treasury regulations. Were the regulations so stringent, that they were impossible to implement? If this was so, why were they were not being reviewed?

Ms J Sosibo (ANC) wanted to know who the additional service providers were appointed on top of Mvula Trust and the IDT. It puzzled her that the Department continued with its work if IT was still a challenge.

Ms Mahlatsi said the list of appointed contractors would be provided to the Committee. A call was made for inputs on the PFMA. Departments realised that some of the clauses in the Act were red-tape. Treasury had put out a call for comments to review the PFMA for the first time since 1999.

Ms Mahlatsi said the Department acknowledged the comments made about risk management. The chairperson of the audit committee was correct in saying he had been raising concerns about risk management. Some branches had done risk management analysis; DHS had done some reviews and had drawn up plans. The report to be handed to the interim chairperson and the DG would indicate the process that had been undertaken.

Ms Mahlatsi said she welcomed the lifestyle audits. The Department would prepare a report on under-spending and come back to the Committee. It was not about spending but what was on the ground.

The Chairperson commented the challenge with DHS was the IT system. This was where gaps and loopholes were. All the departmental challenges could be listed but the IT was the greatest, and without it being solved, problems would persist. Both the Committee and the AG had been struggling to get the system up and running. The question was who failed to get this system running. Who were the people in the unit? If one could not respect the institutions supporting democracy, who was that? Why were such individuals at the Department? Failure to implement a functional IT system was tantamount to sabotaging the work of Government.

The Chairperson voiced frustration and said it was clear the officials responsible for IT were clearly pursuing an agenda different to that of the South African Government. This was unacceptable. Officials were good at arguing with oversight institutions rather than complying. Such should be reported to the Minister.

The Chairperson said the attitude to challenge things rather than comply was the main issue even with the Treasury regulations. If there was a challenge with regulations, all DHS needed to do was to indicate and unpack those with the Committee. The Committee could confer with its counterparts in Parliament, as was the case with DORA and how it affected the use of the Urban Settlement Development Grant (USDG) and monitoring thereof. The AG complained that the Department refused to do monthly financial statements because “it was not in the law”.

The Chairperson sought clarity on leave and overtime. These issues had to be resolved soonest. Officials could not claim for overtime when they had failed to complete their task. Overtime should be unpaid on account of failure to honour deadlines. She cited the example of the Housing Development Agency (HDA) regulations that had not been prepared since 2008. The Department had indicated it wanted to use a consultant as officials did not have time. The Committee was clear on this one; officials had to work unpaid overtime and ensure the Committee received those regulations by 15 May.

Mr Mbengo said the AG complained about overtime because the approval memos were not attached to the claims. This was addressed, and specific procedures were developed to ensure that all risk around overtime was addressed. That document was approved by the CFO.

Debtor’s policy exchanges
The Chairperson sought clarity on the accuracy of the statement that DHS awaited approval of the debtors policy. She asked if consultants were hired to prepare annual reports, because last year’s annual report indicated the policy had not been done. This was irritating; the Department should go back and read this annual report. Quite a string of issues were inaccurately captured or not updated from the old reports. If the debtor’s policy was done and awaiting approval, on whose desk was it lying now?

Mr Mbengo said the debtors policy had been amended and was ready for approval.

The Chairperson wanted to know the amount of time a new policy had to remain with the DG, awaiting approval. She insisted that Mr Mbengo respond.

Ms Moja agreed with the Chairperson and said the tendency had been to say the policy was with the DG and awaiting approval; and yet the DG would have no knowledge of it. For the past two years, the claim had been that the policy was done awaiting DG’s approval.

Mr Mbengo said the debtor’s policy was done and finalised and submitted to the DG’s office. He had no knowledge of when the policy was done. The policy was developed and submitted; and it was re-submitted last week for approval.

The Chairperson interjected and wanted to know how the official could not know the time he had submitted the policy. She wanted to know the reasons why the original policy was not approved.

Mr Mbengo replied they did not ask for reasons.

Mr Mokgalapa interjected and wanted to know what was re-drafted and re-submitted if the DG did not provide reasons for not approving. What was amended if the unit did not get the reasons for not approving?

The Chairperson said the official did not appear to have answers and it was fine if he did not reply.

COO comments
Ms Mngxongo, DHS COO, said the Department appreciated the guidance it received from the Committee. The Department was committed to improvements in all areas where challenges had been identified. From this financial year DHS would try to find synergy on performance agreements and how they were aligned to the strategic plan and the annual performance plan. It was necessary that there was synergy with human resource processes.

The best practice in business was spending more time in planning; time spent in planning would ensure implementation became easier. This was different to doing things just for the sake of compliance. Whenever the Department came to the Committee it compiled an action list each time. This would enable the Committee to have more information about what was happening at the Department.

Ms Mngxongo said the Department would ensure that when a service level agreement had been concluded, legal opinion would be sought before the DG signed off. This would assist in making sure that legal opinion was not sought late in the process.

The Chairperson interjected and said the statement was vague. This was the challenge with the language of technocrats. The question was simple; did DHS have a termination clause or not? Was there no prepared clause that was already there in every signed contract? MPs wanted clear and direct information. Was there no clause that spelt out that if one failed to deliver, the Department would simply cancel?

Ms Mngxongo replied the clause was there but it was important for DHS to be decisive in implementing it effectively. She said on policies not approved, DHS sought to ensure that the system was used efficiently and effectively. There would be standard items per branches so that the Department did not fall behind in certain areas internally.

The issue of guilty officials was dealt with by the Minister of Public Service and Administration. The Minister had indicated the practice of officials who resigned when disciplinary action was preferred; only to be employed elsewhere in the public service. It was being looked at. This process was underway; it would be ideal if the Committee could also make its contribution to that process. This was work that had already started. The Department had been found wanting in many instances. This made the issue of intergovernmental relations all the more important, especially if roles and responsibilities were to be clarified.

The dysfunctional hotline
Mr Xolani Xundu, DHS Chief Director: Communications, clarified the 0800146873 was a call centre that operated from 07h00 until 21h00. This was operated by people who spoke all official languages, and it dealt with housing related matters. DHS relied on DPSA’s toll-free number (0800701701) for anti-fraud and corruption. The Department used to have its own line that was managed by auditing firm KPMG, and was no longer functional. The number was listed under KPMG, and DHS was trying to get it back. The process of registering the number under the DHS depended on KPMG and Telkom; hopefully, the process would be finalised in two months.

Mr Buthelezi said until last week the Department had believed it had a hotline, whilst in actual fact it had a call centre. He had had an indication that the hotline had been implemented and was functioning. The hotline had to be manned all the time, and by people who spoke all official languages. But the hotline should be outside of the Department, so that it could offer some degree of confidentiality. [0800703703 – was given but when dialled the number was not functional].

The Chairperson said it was concerning that officials did not seem to address issues raised in these meetings, and even failed to alert executive management to issues. The Committee still expected an update on the whistleblower’s policy. The Committee should return and look at the whistleblower’s policy and the call centre. The changing of a number should not take two months, especially as there was someone at Telkom who dealt specifically with government departments.

General comments
Ms Duncan sought clarity if it was good practice for an executive member of the audit committee to be serving on the risk management committee.

Ms Moja replied that, in terms of responsibilities of the audit committee as observed by the PFMA, the committee had to oversee risk. The member in the RMC did not take decisions but rather advised, and sought to understand how the RMC undertook its functions. The audit committee would be overseeing how the RMC undertook its business.

Ms Moja commented that overtime issue was difficult because there were no standards on how much a person should deliver in an 8-hour day. The problem was being looked at. On whether officials could claim overtime was difficult. The audit committee had never reviewed the policy, but it would review it and would ensure it was in line with DPSA guidelines as to under what circumstances overtime was paid.

Mr Buthelezi said over reliance on the State Information Technology Agency (SITA) was a challenge because SITA had its own challenges. Within the duties and powers of the agency, there were 'must do' tasks and 'may do'. Departments had to procure everything through SITA knowing full well that the Agency was ineffective. SITA was currently being investigated by the SIU. If the Department would continue to rely on SITA to provide their IT, then there was a problem. The audit committee had been advising DHS to procure those services from outside that were not mandatory for SITA to provide. Not addressing the challenge of IT would impact on the service delivery of the Department.

Mr Buthelezi said the Department had been advised to look at how Small Medium and Micro Enterprises (SMMEs) were paid. A suggestion had been that SMMEs be paid within 15 days because they had challenges of cash-flow in their businesses. Government had a responsibility to support them. DHS should go beyond the call of duty to look at how it could assist small organisations.

The Chairperson commented that the meeting was fruitful, and that the audit committee had demonstrated it understood the challenges. She withdrew the comment that officials sought to sabotage the work of Government.

National Treasury workshop: Mortgage Default Insurance (MDI)
The Chairperson said the MDI was announced during the 2012 State of the Nation Address (SONA) as a measure to address the challenges of those who fell within the gap market. The process had taken a while but the important thing was the end product that would come out of this. As long as the process was beneficial to the people, it did not matter how long it took. Members needed to ensure that this was suitable for the people of SA. Last month the Committee had agreed with Treasury that there should be a detailed briefing on this programme. It was the Members who would have to explain this programme to the general public. Government needed to come up with a product that was acceptable to the people; and in turn Members needed to market something that people would understand. Clarity was needed on this programme so that it did not turn out like the RHIG. It was unfortunate that confusion about the RHIG would not come to an end until it was clarified which department needed to administer the sanitation function. The bone of contention was that the President, in his SONA, transferred the sanitation function to Human Settlements. The Committee felt aggrieved by the RHIG programme because it had done a lot of work on sanitation and yet no one cared to engage. Decisions were taken without approaching the Committee on the sanitation function.

Ms Ulrike Rwida, Treasury Public Finance Division, DHS Budget, said it was important to recap as to where the country was with housing. About 85% qualified for some household assistance from Government in the country. The distribution of household income in SA was quite skewed. A significant amount – almost half - of households earned less than R3 500 a month. Of the 14.5 million households that were there in SA, about 65% lived in a formal structure, and about 9% in informal settlements where there was no tenure of land.

Over 70% of poor households lived in informal housing and a significant amount in traditional dwellings. Homeownership was by households who were outside the free housing programme or fully subsidised programmes. About 53% households in SA owned their homes whether fully paid or not.

It was noticeable that not everyone wanted to own a home; there were young professionals who came to cities looking to rent with no intention to own. Sometimes the country needed to provide for differentiation between home owning and rentals. It was noticeable that the number of people renting rooms in backyards was increasing. This made sense given the global uncertainty; people were losing jobs and moving back home with parents.

It was important to understand those households that wanted to own their home, and Government wanted to provide finance for this. There had been a decline in traditionally big houses especially after the financial global crisis in 2008. The country always completed new houses for the smaller dwelling types of houses. This too had been declining since the 2004 highs that the country had.

Data from the National Credit Regulator indicated that a number of people had been applying for credit. Almost half of the applications were being rejected across all credit lines. While application approvals had been decreasing, the value of loans granted had been increasing. People were taking more and more unsecured personal loans. This indicated that those households at the top end of the market were getting the mortgages.

Since the financial crisis in 2008, the number of mortgages that had been granted decline significantly by end of 2012. There was less mortgage activity across the entire market. The credit regulators indicated 64% of all active clients were “impaired”; this meant half of the credit clients were people who had some kind of debt. The rule of thumb in financing was that 60% of household income was what became a mortgage.

One of the things Government could do to increase affordability of homes was to reduce the interest rates. It was interesting that there was still no product on the market for those who earned between R3000 and R6000. This needed to be narrowed as to who really should be supported.

Ms Rwida said housing and housing finance were significant in the economy. But also equally important was how big the mortgages were in relation to the Gross Domestic Product (GDP). The increases in mortgage as a percentage of GDP – around 43% – meant over 40c for every rand in the economy was used for mortgages. Although one was the money market and the other was a fixed rate market one could not always draw comparables. Residential property as a percentage of fixed investment was also significant. But since 2007 there had been a decline in residential property as a percentage of fixed investment in the country.

The emphasis put on the infrastructure programme related to the intention to grow fixed investment in the economy. But there had been a decline since the financial crisis. The relationship between housing and the economy was quite strong; in good times people lent more. Where was the role of government in all of this?

It was important for Treasury to understand its role and why it wanted the subsidy. Was it because of providing for the public good and because nobody else would want to provide. This was what the state would provide; the state would always interfere where the market failed to provide. The market failed to provide for the public good. The other thing that Treasury always worried about in designing subsidies was model hazard. This meant not putting someone in an unfair position because of what someone else had done.

Ms Rwida said there were certain things that banks knew and Government did not about the markets. This allowed them to take advantage of the people; this was undesirable. Government wanted to find the risk of any instruments. This meant whoever had to pay for the service had to benefit from it too. Government did not want to pay for something yet have the private sector benefit extensively from it.

In designing subsidies there were four broad principles. One of them was efficiency that sought to understand whether for a given set of inputs, there would be returns. Secondly, there was the equity point of view. Thirdly, when designing subsidies Treasury wanted to be clear and transparent about the budget. This was a big issue - why one would want to capitalise something directly or have a guarantee. Often guarantees were implicit and they had hidden subsidies. If this was so, then one was hiding the true cost of that. That could have significant instability implications for the fiscus, because there was no knowledge of how much the guarantee was, and there was no knowledge of how to put the thing into the budget. The reason why one would want to go for a direct subsidy or capitalisation was because it was a lot more transparent. The fourth issue tested when designing subsidies, was the impact it would have on the market.

Ms Rwida said housing finance varied across countries. The term varied between 20 and 30 years, and there could be fixed interest rates. She cited the example of the United States that charged fixed interest through the life of the interest. This had sometimes created problems for that country. Generally, where there were fixed rates regimes they were not longer than five years; so if one had a 20 year loan, the rates would be fixed for the first five years and not the entire period.

Around 2008/09 there had been changes in lending practices; there had been regulatory changes across the world. As result most countries tightened regulations around lending practices. The US did not only tighten regulations in the financial markets, but on how properties were valued and regulations on consumer protection.

In Canada they reduced the maximum loan periods; increased the minimum down payments; reduced the minimum down payment; they also had a public Mortgage Bank Insurance; and also drew rules around on how much the insurance one could lend. She said the trend had been that of the five countries with the high home ownership, they were the most who had difficulties with their debt.

Viability of the Mortgage Insurance relied on effective contract management, functioning systems for mortgage such as title registration, effecting banking and insurance regulation, and reliable judicial and court systems. With Mortgage Insurance one should know how to diversify the risk across a broad pool of insured mortgages. There had to be scale for this to work. The longer the recession, the more petulant the consumers become because households tend to lose their job. The catastrophic risks were significant here. Putting together a mortgage insurance in SA was scary because it would mean moving money from other programmes.

She said according to the PFMA, the way guarantees worked was that when there was a need for a bailout; the money would come from the budget vote. One needed certainty when looking to bail out, and if that were to happen, it meant taking money from DHS budget. Obviously this was not ideal because one would have to move money meant for poorer households to bail out a bank. In designing mortgage insurance in SA, one had to worry about the institutional design: who got the benefit and who paid for it.

She said it was important that the country maintained strong underwriting standards. There had to be effective monitoring systems as early warning for weakening underwriting standards. One had to build long term capital buffers into the business cycles. Whoever monitored had to have experience from both the insurers’ and lenders’ side.

Discussion
The Chairperson commented Members should consider enrolling for the human settlements course at the Nelson Mandela Metro University. She asked if the presentation covered all questions asked by the Committee. The questions pertained to the announcement of a guarantee fund to support the gap market by the President. The understanding was that before making this announcement, the President would have met with all those concerned. And now all of a sudden Treasury came up with technicalities and opted for capitalisation; what was the difference? She sought clarity about the beneficiaries.

Ms Rwida replied she could not speak on political decisions as to why the announcement was made before the finer details were agreed on the matter. Treasury had advised the Minister after the announcement was made that it would be better if it was capitalisation because it would provide more stability to the fiscal framework. Capitalisation was transparent and would be easy to understand the liabilities. The guarantee was the opposite of this. Opting for capitalisation was more for certainty to the budget because one could quantify the risks quite easily. It would also be easy to account for it in the budget annually than if doing a guarantee.

She said with regards to benefits, the household benefitted; but also it went to the banks. It was necessary to ensure banks did not take advantage of Government. The question was how one partnered the banks to do all of this; or why were the banks not doing this on their own. It was know the banks were uncompetitive in SA, and there might be collusion issues. Perhaps they would need some intervention from Treasury to do this. She said the biggest policy question was whether to have a stable economy or increased homeownership. Government had to strike the balance.

Ms Sosibo sought clarity on the process to be followed. The President had made an announcement about a  Guarantee, and officials advised the Finance Minister on capitalisation - which would take precedence?

Mr Mokgalapa commented stabilisation of markets and access to homes was both vital. The reason that SA did not feel the economic crisis was because it had a very stable financial market. This needed a concerted effort; the question why did the private sector not want this was pertinent. As the public sector, there had to be clarity on whether it wanted to carry this cost; what were the implications on the fiscus?

Mr Mokgalapa commented that a much bigger workshop with all stakeholders was needed on the matter. The fundamental political question was the President put forward a R1 billion guarantee fund, Treasury should find the money; and yet Treasury said it preferred capitalisation.

Ms Duncan said Parliament needed to get private sector on board to make the discussion broader so that a subsidy could be designed.

Mr Samson Moraba, National Housing Finance Corporation (NHFC) CEO, said the presentation clarified a lot of things.

The Chairperson interjected and disputed the claim. It did not clarify anything, otherwise there would be no questions.

Mr Moraba replied that the reason private sector was not doing this was because they were out to make money. They were in business to make money; they see opportunities long before anyone else does. The private sector would identify an opportunity and do something about it. In the global context, every finance housing system looked at dealing with minorities in those countries; not the majority. Everyone in those countries was affluent. Only the few who could not afford houses. In SA this was the reverse; the majority could not afford.

Government had an obligation and should do this in a way that was sustainable, that would not collapse its finances. In every country there would be indigent people who would need government support for the rest of their lives. Backlogs in SA were dramatic. Other countries had been doing this for the past 100 years; and yet SA had only been doing it for the past 20 years. He said the country did not have to benchmark itself with developed countries. The Western countries had said they could give advice to SA but it ought to be country specific; SA had a different history from theirs.

Mr Moraba clarified that all insurance companies were regulated by the Financial Services Board, and prior to starting business they required capital. He understood the advice from Treasury, and that the R1 billion could be used for capitalisation while the functions would remain the same. Capitalisation was money put into the company. When the rating agencies came, they looked at how appropriately capitalised an entity was. In a guarantee, one could not be specific. The NHFC agreed with what Treasury was raising.

The Chairperson said there was problem with NHFC agreeing with Treasury. This was a national issue. Politicians needed to understand this thing. It did not help to agree; rather make the politicians understand the issues. The institutions should not leave Parliamentarians behind, this was a national interest issue. Further explanation was needed. The Committee fully appreciated the efforts and supported the institutions. This was a collective battle.

Mr Bhoola described the concept as highly commercialised. He said it was important that the country copied countries who were relatively on the same economic scale as SA. The country was a building democracy and it had to get its models right and ensure everyone was provided with adequate housing as per the Constitution.

Mr K Sithole commented that affordability was crucial. This thing should be focussed on informal settlements and traditional dwellings. He asked why not any African countries had been researched for this model. There was a need for a follow-up workshop.

Ms Borman asked that the presentation be simplified. There was no way MPs could understand this; all that was needed was a simple arrangement that could be understood by a simple ordinary person.

The Chairperson agreed and said when Members visited their constituencies they had to be able to unpack the guarantee fund. This was being delayed by certain processes; Members want to know how far the process was. Members did not have answers to the guarantee fund. The processes were taking too long. The Committee appreciated the work done, but someone who could unpack and simplify the concept was needed.

Mr Mokgalapa sought clarity on how the Financed Linked Individual Housing Subsidy Programme (FLiSP) and the mortgage default insurance was linked. A broader workshop on the guarantee needed to be the resolution of the Committee over and above an explanation of how the MDI would work in practice.

Mr Moraba replied the Treasury presentation dealt with affordability and access. Access spoke about those people who had a reasonable income, but based on strict lending criteria that the banks had set, such persons could not get loans. These might even be people who had a good credit track record, who might have been honouring credit responsibilities. Since the 2008 fallout, banks had become strict about lending. People especially public servants could not access mortgages. Mortgage insurance could assist those people. Mortgage insurance was about access, and ensuring there was a greater market for lending that banks had previously not serviced correctly. The MDI meant confidence about the loan given out.

Mr Moraba said FLiSP catered for those people who could not get subsidies, on account of their salaries, and yet still did not qualify to get a mortgage. The FLiSP reduced a loan by a FLiSP amount based on the salary a person earned. It dealt with the affordability challenge, and in a way was tantamount to reducing the mortgage.

Rural Household Infrastructure Grant (RHIG): discussion
The Chairperson sought clarity on what Treasury officials thought the RHIG programme was. What efforts had been done in ensuring that the function was fully transferred to Human Settlements? She said the Committee was not arguing about scheduling. As far as the Committee was aware, sanitation was still administered by Human Settlements. There was no instance where the President had changed from his proclamation that the function be administered by Human Settlements.

Mr Steven Kenyan, Treasury Director: Local Government Budget, said when the National Assembly voted on the Division of Revenue Bill, the Appropriations Standing Committee had tabled a report with the recommendation that Treasury should submit a report on the RHIG. The Department was working on that report and it would be tabled in Parliament.

He said although most of the sanitation function had been transferred to DHS, most of the legislative tool had remained with the Department of Water Affairs. If the function were to be fully moved, then legislation had to be tabled and that legislation would have to come from DHS. Another thing that the Committee needed to be aware of was that the question of who administered the sanitation function had been considered by ministers in the social cluster, who in turn tasked a group of DGs to consider the issue. The DGs had met earlier this month and had been discussing this and would report back to that ministerial committee.

The Chairperson interjected and said the President had said the function should fall under Human Settlements. Something was not right here; another process said the ministers should decide; what did that mean? There was a transfer of sectional title management between departments and such challenges were never encountered. DRDLR came before this Committee and handed over their legislation. The Committee took over and drove the legislation until it was passed. She asked if it was the ministers who advocated for RHIG to be transferred to local government; or that it be changed from Schedule 7 to 6. The Committee took its mandate seriously and did not want to be taken for granted. The Committee even went to the extent of inviting the Accountant General, Mr Freeman Nomvalo, to assist Treasury in its consideration about if the transfer were to happen. Treasury then came and took all the work the Committee had been doing and threw it into the dust bin. Treasury did not even have regard or courtesy to warn the Committee about its move.

National Treasury was not impartially in its dealings with other departments. The actions left Members suspicious. Treasury put pressure on DHS by declaring the function a Schedule 6 function. The Committee wanted the function to be transferred to the Human Settlements portfolio. The Minister should come and explain why they went against what the President had said.

When it came to under expenditure, local government was worse than DHS. This was evident in the expenditure patterns in the Municipal Infrastructure Grant (MIG), and yet officials went to collude with the South African Local Government Association (SALGA) and decided to ill-advise the Minister. Due to the agenda officials were pushing, they were confusing all the ministers. The Committee wanted that function administered by Human Settlements. Local government would never be able to spend this money; it would just go to waste.

The Committees made an input when the matter was still open for discussion. Officials should take politicians seriously, and advise them correctly. Treasury officials misled the Minister. This would be no end until Treasury resolved the matter.

Mr Mokgalapa requested that clarity be given on the role of Human Settlements in the function of sanitation.

Ms Borman said the Department was set up for failure right from the beginning. This was not clearly thought through when sanitation was transferred to Human Settlements. Every time a portfolio changed, it meant work started afresh and that had led to unrest among communities who were waiting for toilets. Had Treasury seen how disgusting it was that people were relieving themselves on the ground? The function needed to be with Human Settlements.

Mr Bhoola jibed at the Chairperson’s frustration and said the Committee did not have to look for a shop steward. Administering the function of sanitation elsewhere, other than Human Settlements, frustrated a number of Human Settlements projects. Many of such projects were locked due to absence of bulk services, and as a result a number of years were lost before projects were completed. Provinces had failed so miserably, that some failed to put up sanitation offices. At local level, officials lacked competency and skill to administer the sanitation function.

Ms Njobe said it was puzzling that the Minister went to make a proclamation, and then ministers came and discussed the opposite of what had been instructed. What were the social cluster ministers discussing that they could not discuss before the announcement was made? The sanitation service was a concurrent function with housing and was how quality of life could be measured. Sanitation provision could improve the lives of people in rural areas where there was no running water. The decision to award the function to local government, where capacity was at its lowest, did not appear right. All these things should be considered; when giving this function to local government who were challenged with their own mandate. Would they have capacity?

Mr Kenyan explained that the motivation for Treasury was concern about the people on the ground and the delivery of sanitation. It was concerning that a large number of people still did not have access to sanitation. The grant was motivated by the backlogs, and the intention was fast-track the rollout for particular households. Treasury was disappointed by the performance of the grant over the last three years. The money was not being spent and the infrastructure had not been built. The pattern had been very little expenditure  for 11 months of the year, and then a bloated expenditure in the last month. One could understand that in the first year; in the second year it was unacceptable, but in the third year then one realised the programme was not working. This was motivation for Treasury to want to make a change and make the grant work.

National Treasury looked at how improvements could be realised in the grant. The challenges of local government were well known, but it had been noted in the last couple of years that the performance on the MIG was improving more than the RHIG. Municipalities were building capacity to deliver; the census indicated an increase on the number of VIP toilets being built. The RHIG was no comparison to this in terms of delivery. It was clear that it was not the RHIG grant that had been rolling out the toilets but municipalities.

He said while the allocation for RHIG had been R300 million; through the MIG, sanitation allocation was R3.2 billion. A major impact was likely to be achieved through the correct and effective implementation of the MIG. Evidence indicated that on toilet provision, the municipalities had been performing better than the Department. This was the reason Treasury wanted to explore putting the money with local government.

Much money had also been given to the Department of Cooperative Governance and Traditional Affairs (COGTA) to improve capacity at local government through an agency. Another motivation was that whilst DHS could come in and build the toilets, the ongoing maintenance of the infrastructure was the responsibility of the local government. It was not conceivable that DHS would go and monitor each and every rural household across the country. Ultimately, the maintenance responsibility would be left to the municipalities and the municipalities were funded for that function. Municipalities should do the maintenance of the VIP toilets; they had funding for it and would always carry out the function.

Ms Rwida clarified the RHIG was the responsibility of Human Settlements. The functions on how the grant was implemented had changed. Treasury was now the implementers and DHS would have oversight. She explained that when transfer of the function occurred, the Water Services Act should have been amended. That did not happen. DHS should have come up with new legislation that defined the scope and functions. This did not happen as well. The responsibility was confused at the moment, and this added to the motivation for rescheduling the grant. She said the intention was to have the money flow and delivery continue while policy oversight was clarified. Legislatively there was confusion as to what extent Human Settlements could administer sanitation. The function was not being taken to COGTA as it had the MIG. The way the MIG was designed was to allow municipalities to look at their infrastructure needs holistically.

The Chairperson wanted to understand what the Department of Water Affairs (DWA) was saying in private engagements with National Treasury.

Ms Rwida replied the difficulty with sanitation was that it was a water-specific function. From an engineering point of view this was what Treasury grappled with. Whilst the toilet belonged to the house, the pipes underground were dependent on water. Whilst the house was built with a toilet, it was about what happened underground. And to what extent could Human Settlements deal with what happened underground?

The Chairperson wanted to know why Treasury was not categorising sanitation. Treasury had to be impartial and solve these matters. The Committee understood there was a master plan developed by both DWA and DHS, but at the end of the day the departments would have to integrate. Why was this legislation not transferred; the Committee was committed. Treasury should assist DWA in transferring the legislation. Where was the problem?

Ms Mahlatsi commented DHS had learnt something and would have to go back to the DG. She said the Forum of the DGs was where legislation was going to come from.

The Chairperson said the DGs needed to be summoned to Parliament. She said the Committee was comfortable with the explanation.

Ms Borman commented that this matter needed to be sped up.

The Chairperson said Treasury needed to write a report to indicate that although the money was paid to municipalities for the purpose of sanitation, they were still accountable to Human Settlements for the function. The Committee would follow that money.

The meeting was adjourned.