Performance of Property Management Trading Entity and long-term plans to address challenges; Departmental briefing

Meeting report

Introductory Remarks
The Chairperson opened the meeting by reminding the Department of Public Works (DPW) delegation that at a previous meeting, the Committee had raised issues which now needed to be clarified.  This included the issue of the DPW buying new properties at a time when it could not maintain its existing properties.   There was also the question of private-public partnerships (PPP), which the Committee found problematic.

Mr Mziwonke Dlabantu, Director-General (DG), DPW, said the issues raised by the Committee had been noted, and answers would be provided.  Progress had been made in many areas, while in others more work was needed.  The Department was working closely with National Treasury (NT) to ensure all developments complied with legislation.  It was essential that the right institutional mechanisms were put in place.

DPW Presentation
Mr Dhaya Govender, Acting Head, PMTE, said the organisation aimed to be a leading infrastructure and property management service provider for the state, underpinned by fair and ethical dealing for the effective delivery of public services – an important aspect, taking into account extensive media coverage of corruption within the entity.

After eight years of progressively worse audit outcomes, a turnaround strategy had been launched in 2012, with the creation of a fully functional property management entity within the DPW at its centre.   Operationalising the PMTE was a critical component of the strategy, as it would house the state’s assets, and provide property management and facilities management.  As many as 12 projects and interventions had been attempted since 2000, but these had all failed, due mainly to a high staff turnover at leadership level, poor management and a lack of accountability, no appropriate business model, and internal power plays and bureaucracy.  There was now stability in the Department’s leadership, which provided an opportunity to move forward.  The key focus areas for the 2014-15 financial year would be property management and facilities management.

As far as property management was concerned, the DPW had inherited a leasing out portfolio which had not been properly maintained.  Many properties were not being used by the state.  Some of them were vacant and derelict.  The challenge for the PMTE was to ensure proper and adequate maintenance.  Part of the problem was that state departments were charged a nominal rental of R15/m², which was insufficient to provide for adequate maintenance.  A market-related rental was needed, and NT was being approached to endorse this requirement.   A priority was to ensure the use of existing state facilities, and to invest in refurbishing properties it owned, either for use by state entities, or for leasing to the private sector on a long-term lease basis.

A standardised lease agreement had been developed, and by working with the NT and the newly created Chief Procurement Office (CPO), the DPW was now in a position to benchmark the leasing of properties on the basis of price indexing for the first time.  It would take another six to nine months to introduce a base price index, which would enable the Department to maximise its buying power on lease properties and negotiate preferential rates.  The state would be able to set an acceptable annual escalation rate, which NT had currently capped at 5.5%.

Efficiency challenges were also being addressed.  The DPW had found, for instance, that there were no client departments occupying some properties it was leasing.  In other cases, the space being used was actually less than what had been stipulated in the contract.  The findings of an audit due for finalisation in mid-February would identify those contracts which needed cancellation or re-negotiation.

Facilities management was the core of any property management entity, but currently there was a dire lack of a state infrastructure maintenance strategy – and no funding for maintenance.  The PMTE had to ensure the National Infrastructure Maintenance Strategy (NIMS) for DPW properties was approved, funded and implemented.

Some state properties were in a poor condition and were deteriorating.  The asset verification process would provide the DPW with more information in this regard.   Public-Private Partnerships (PPP) could be used to refurbish and rehabilitate buildings.

In the case of private sector properties leased by the state, inadequate policies and practices had resulted in many leases expiring and not being replaced with valid agreements.  This had resulted in some landlords claiming that buildings could not be refurbished or maintained.  In some cases, lock-outs had occurred owing to Occupational Health and Safety regulations being violated.  The PMTE would have to ensure that leased properties were properly maintained to ensure there were decent facilities for public servants and the public they served.

At the beginning of the last financial year, a firm decision had been taken to operationalise the PMTE.   A key decision by the National Treasury and Department of Public Service and Administation (DPSA) was that the PMTE would, over time, function as a government component, rather than as a separate trading entity.  This would be subject to a feasibility study comprising an institutional options assessment and a business case for a government component.  A high level business case had been developed and was en route to Cabinet.  The staged operationalisation of the PMTE would take time to complete, but it was envisaged that it would have been achieved within two years and a transition to the government component would have started.

A team of property management specialists had been recruited through the SA Institute for Black Property Practitioners (SAIBPP) to assist with operationalisation, while a partnership had been established with StanLib to assist with benchmarking against private sector best property management practices.  A strategy and plan to improve debt collection and to reduce the PMTE’s overdraft was being executed, and a new accounting and billing system would go live on I April, providing the itemised billing required by client departments.  A Chief Financial Officer (CFO) Forum would be used to promote and enhance dialogue with client departments.  The transfer of immovable assets from the DPW to PMTE had already taken place, and the transfer of functions had been approved in January.   NT had provided a special dispensation to allow the regularisation of all expired leases.

NT had originally approved the establishment of the trading entity in March 2006, subject to certain conditions – primarily related to financial and human resource considerations.  All of these conditions had been met, or were close to finalisation.

Ms Yakhe Kwinana, Head of Finance, PMTE, said the entity had approved and implemented eight financial policies which had been recommended by the Auditor-General.  The itemised accounting and billing system would be going live on April 1, while the lease policy was in line for approval by the Accountability Exco.  The asset management policy was also in the process of being finalised.  Regarding the audit findings, there had been disclaimers for irregular expenditure, fruitless and wasteful expenditure, leases and retention liability.  These issues were all being attended to.

Mr Govender concluded the presentation by describing the stabilisation phase between 2012 and the present, the transitional phase which would take place between now and 2015, and the sustainability and growth phase which would take place after the PMTE became operational as a government component.  The focus would now fall on the migration of branches and staff to the PMTE, the implementation of the PMTE operating framework and governance structures, the development of property and facilities management strategies, the development of a funding and pricing model, development of an asset investment strategy and the finalisation of organisational arrangements regarding shared services.   There would be an intensive transfer of skills to current staff, through service providers, and the appointment of skilled staff to fill vacancies.

Discussion
The Chairperson said that in March last year, the DPW had indicated it was lacking certain skills.  Were all these skills now in place?

Mr Govender said persons with the appropriate skills had been recruited, with the exception of economists, and a property lawyer who would soon be taking up his appointment.

Mr Dlabantu added that the DPW had looked for a number of skills, and there had been some “hits and misses.”  Skilled people were difficult to attract from their current jobs.  Economists were still being sought.

Ms C Madlopha (ANC) said the PMTE organogram indicated where these specialist skills were required, but there were still a number of vacancies.  Would the entity be able to be operational within two years?  Were nominal rents charged only to client departments, or also to the private sector lessees?  She was concerned about long-term leases, as these caused problems for the government if there were no escape clauses.   More clarification was needed on the asset verification process, properties written off by the Department of Labour, the incidence of lockouts, and timelines for various aspects of the PMTE transition process.  What topics would the CFO forum discuss?  How would staff be affected by the PMTE becoming a component of government, rather than a separate entity – the current staff should not be worse off than their current situation?

Ms A Dreyer (DA) said that the DPW had indicated that the benefit of price indices was that it would enable the PMTE to negotiate preferential rates well below the market.  Who would this benefit?  It could provide an opening for potential abuse, as many state employees had businesses and could award tenders to themselves, or family members.  She said that where lockouts occurred because private landlords could not afford proper maintenance of their properties, it was the landlord’s problem, and the PMTE should merely look for alternative accommodation.  Did the use of StanLib and the SAIBPP to assist in skills transfer involve any duplication of roles?   Why was there a need to “strategise and plan” to improve debt collection, when it was standard practice to evict tenants when they did not pay their rent?  She commented that after eight years of failure, what was needed was an “attitude transfer”, not a skills transfer.

Ms P Ngwenya-Mabila (ANC) asked what was meant by the power plays and bureaucracy that had impeded progress in the past.   Had a strategy been developed to retain the skilled experts who had been recruited?  Had the 5.5% rate escalation limit stipulated by NT been implemented yet?  The leasing of unoccupied premises was a serious matter – had the cancellation of these leases started?  How was the PMTE going to address the problem of deteriorating properties?  The state needed to act decisively against landlords responsible for lockouts because of health and safety violations.

Ms N Ngcengwane (ANC) said she realised some of the buildings were very old and could not be maintained or refurbished, and suggested they should be sold.  However, the National Youth Service had been formed with a view to maintaining state properties, so here was an opportunity to create jobs.   She said the Committee was confused by the way old ideas had been discarded in favour of new ones, but there had still been a lack of progress.  There was a need to provide more specific time lines.  The Government Immovable Asset Management Act (GIAMA) had been implemented only at national and provincial level, while most of the state’s assets were at a municipal level, so there appeared to be no link between GIAMA and the PMTE, and this would create a problem with record keeping.

Ms Madlopha asked how staff could be appointed if the organogram had not yet been approved.

Mr Dlabantu replied that the organogram had, in fact, been approved by the Minister, as an interim arrangement following discussions with NT and the PSA.  Contracts had been entered into with staff, to retain them, and it was highly unlikely that this situation would lead to a loss of jobs.

Mr Govender dealt with the issue of price indexing.  The DPW had sufficient information from the audit of leases completed so far to determine price indexing, and would be able to decide what a fair price would be for a particular locality.  Perceptions of what constituted a fair price could be measured against the index.

Mr Cox Mokgoro, CFO, DPW, said the question had been asked about who would benefit from the PMTE’s ability to offer long-term leases at preferential rates.  The state would benefit, because the PMTE would be the landlord and its tenants would be client departments.   He added that short-term leases with private sector landlords were expensive, as they tended to load rentals to recover their capital outlay in the shortest possible time.

Mr Govender said incidents of poor ventilation and the spillage of sewage had led to lockouts in terms of health and safety violations.  In these cases, alternative accommodation was sought, but in smaller towns – because of limited availability – one did not have this luxury, and one had to try to persuade the landlord to rectify the situation.

Ms Dreyer said she was aware of instances where health and safety violations had occurred where the DPW was the landlord, and action should have taken place beforehand to rectify the situation.

Mr Govender agreed that it was the DPW’s responsibility to keep its buildings in a proper state.

Mr Dlabantu said this related back to the Department’s weak facilities management.  He had seen a number of occupational health reports by the DPW’s own inspectors, but management of the situation had been lacking.  The position was aggravated by the backlog of leases.  The Department was vulnerable in areas where it could not move, through lack of suitable alternatives.  For this reason, it was important to reduce the DPW’s dependence on private landlords for court buildings, police stations and home affairs centres.  That was why the DPW needed to know what properties it owned so that they could be used before considering outside leases.

He confirmed Mr Cox’s contention that nominal rentals would apply only to government tenants, while private sector lessees would have to pay market-related rentals.

Ms Dreyer said that as the biggest property owner in the country, the DPW should use its “muscle” to secure better accommodation at competitive rates.  In small centres, in particular, it should be able to negotiate more favourable rates.

Mr Govender agreed, and added that this was the reason for the change in negotiating strategy.  Price indexing played a key role in this regard.

He said that by the end of February, the verification of all property in the Immovable Asset Management register would have been completed.  This would provide information that would be refined over the next two years.

The CFO’s forum would enable the DPW’s CFO to meet the provincial CFOs to discuss issues of common interest.   It would also provide an opportunity for them to engage with clients on a national and provincial basis.

It was not possible to set firm dates for all the processes involved, but arrangements for the PMTE needed to be finalised by March 31.

There was no need for Section 197 to be applied in respect of the movement of staff.  As a government component, the PMTE employees remained employees of the government, and their terms and conditions remained unchanged.  However, it was appreciated that the situation needed to be carefully managed in order to allay fears that jobs might be lost in the transition process.

Mr Govender said it was true that state properties were being leased where there were no client departments.  The Special Investigation Unit (SIU) had found this out in 2012, and a series of court cases were now unfolding.

Mr Dlabantu said departments should compile a list of their accommodation requirements, so that their needs could be matched to the availability of empty premises.

Mr Govender said no duplication of roles had taken place through the involvement of StanLib and the SAIBPP.   The former had helped with the development of business plans from June to October, while the latter had a 12-month contract to assist with property and facilities management issues.

He said landlords had been approached to establish the impact of the NT’s inflation-targeted rate increase limit of 5.5%, and many had been prepared to accept this.  Others were not, so in terms of the NT’s directive, the DPW would be forced to go out on open tender.  The DPW should have a clear idea of the full impact by the end of the financial year.

Although no reference had been made to the National Youth Service (NYS) in the presentation, the DPW had given effect to the NYS in the manner in which its buildings were being maintained, with Gauteng setting the lead in this regard.

The Department was committed to cutting down on the use of consultants, but given the nature of the turnaround process, it would still be necessary for some to be used for the purpose of skills transfer.

Ms Kwinana said the entity’s debt reduction programme went hand in hand with its overdraft of R1.3bn, which was mainly the result of providing services and paying suppliers, and then having to claim up to three months later to recover the money from clients.   The PMTE was now engaging with NT to allocate capital infrastructure budget directly to the Department, instead of to the client departments, thus obviating the need to claim back funds.  This would reduce the overdraft immediately by R300m, while the new billing system – linked to landlords’ billing dates – would lead to further reductions.

Mr Mokgoro added that the PMTE had no major current debt problems.  The challenges related to the 2006 period, and involved lost records, trying to recreate accounts, and negotiating with clients for payment.  The only “problem” client currently was the Department of Health.

Ms Ngwenya-Mabila said the Department needed to be congratulated on reducing the number of disclaimers from 13 to four.  However, she wanted an assurance that by next year, these matters of emphasis will have been dealt with.

Mr Mokgoro said the DPW would have dealt with them, and would make it very difficult for the AG to find fault.  He was concerned, however, that lease issues were “the elephant in the room.”

The Chairperson said that with the elections coming up soon, was there a government policy in place to ensure the PMTE project would be carried forward under the new leadership?

The DG responded that one would expect there to be a continuation of policy, and this had already been indicated by the Minister and the Cabinet.

The Chairperson thanked the delegation for the presentation, and closed the meeting.