Mortgage Default Insurance: Banking Association briefing; Eastern Cape contractor issues, Department Human Settlements briefings on use of consultants and Green Paper Draft

Human Settlements, Water and Sanitation

12 March 2014
Chairperson: Ms B Dambuza (ANC)
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Meeting Summary

The Committee firstly received a briefing from the Banking Associating of South Africa (BASA), with input also from the National Housing Finance Corporation (NHFC) on the Mortgage Default Insurance (MDI) which had been proposed in the State of the Nation Address in 2011, but which, despite assurances made between then and now, had not been implemented fully. BASA outlined how a MDI scheme would help lenders to offset risk, cap losses, ensure that capital adequacy requirements were reduced and lead to better markets. Although originally, a guarantee fund was mooted, BASA had not been in favour of a model similar to the Canadian one, and had suggested that customers should be required to make a minimum cash deposit. BASA explained the pricing models and said that testing had been done by actuaries. The sustainability of the proposed model was questioned, by independent actuaries appointed by National Treasury, and BASA held similar concerns, although another actuarial assessment by the National Housing Finance Corporation suggested that in fact the model was sustainable. BASA questioned whether the model would give best value for money, pointed out that the NHFC would have to be licensed and National Treasury was unlikely to agree to that until a suitable model was found and it suggested that the whole initiative be scrapped, with MDI being introduced in a revised form for the whole market. It might be better to have an affordable long term fixed interest rate, as the rise in other consumer costs was creating the perfect climate for a “storm”. NHFC submitted that at current levels, it seemed that this fund would need to be recapitalised every seven to ten years, and a new scheme was being considered. Members were disappointed that these investigations had not been done fully before creating expectations in the market, but agreed that if the scheme was unlikely to show success it would be preferable to discontinue it now, although the BASA countered that no one single initiative would be the correct one. It was suggested that many stakeholders had to come together and address the problems and reduce costs in the housing sector. The Department of Human Settlements (DHS) said that it had maintained that MDI needed to be packaged with other initiatives also. 

The Committee had again called the provincial housing department from Eastern Cape, and the Nelson Mandela Municipality to present a joint report on the complaints lodged by contractors in regard to various housing projects. However, they were displeased that reports provided were little more than a summary of the problems, which the Committee already knew, and there was nothing proposed that would move matters forward. They were particularly annoyed that instead of complying with the Committee’s instructions, the provincial Department had not obtained a specific report from the quantity surveyors, saying that it preferred to get the response in this meeting. Some contractors had travelled all the way from Eastern Cape to attend the meeting, only to hear that no solutions were actually being proposed. The Department’s quantity surveyor tried to explain the process of meetings, and claimed that there was not enough time for meetings with all. The Committee questioned why Verern Construction was not present and wanted an explanation of its role as it had taken over some of the work. The Department attempted to explain the invoices and issues, yet the Committee was upset that all that was done was to substantiate the fact that there was a dispute. Contractors who were present said that they too were disappointed that their comments were not reported, and said that Thubelisha had not been included in the meeting, and asked that the provincial department should try to adopt a more neutral stance. A proposal was made that alternative professionals could be nominated from whom the department could choose. Members expressed their extreme frustration that the matter had dragged on for seven years and this was the last chance for Parliament to try to finalise the matter. The Chairperson said the Committee would not allow abuse of emerging contractors by well-established firms assisted by government, and was very critical, saying that if the provincial government had monitored and managed the process properly in the first place, this situation would not have arisen. She proposed that, given that Parliament was shortly to close, the Executive Mayor of Nelson Mandela Bay should follow up on the process on behalf of Parliament, and report back to the Committee in April. Contractors said that they would provide the necessary documents, and were prepared to work to resolve the matter, but wanted commitment from the province and municipality to pay outstanding claims.

The third matter was a report by the Department of Human Settlements on its use of consultants in the 2012/13 and 2013/14 year. This had been raised by both the Committee and Auditor-General. The Department enumerated the services done by consultants. The Committee questioned, firstly, if value for money was obtained and commented that many of the services appeared to be duplicated. Secondly, it asked why consultants were needed if posts had been filled, and wanted a specific report linking posts to services provided. The Department stressed that it had spent about R100 million on consultants, out of a total budget of over R30 billion. However, Members, whilst accepting that consultants may be used in some cases, questioned why, particularly on training, the DHS was not training its own trainers, either locally or overseas, and said that there was still an apparent mismatch between services provided and efforts that the DHS could undertake to do more of its work internally.

The Department of Human Settlements finally gave an update on the Green Paper for Human Settlements.  The Committee had felt that the whole process had taken too long and this Committee had not had a chance to do any work on the proposals. The Green Paper sought to address fundamental questions such as why a strategy was required, why this was taking so long, and how human settlements different from housing. The different stages of identification of issues, diagnostics, possible policy options, consultation, monitoring and evaluation (which was actually necessary throughout the process) and what it must achieve were outlined. In order to be successful, the Paper should be knowledge-based, from a strong technical expertise base, with adequate resources. The vision was that by 2030 there should have been measurable progress in breaking apartheid spatial patterns, and by 2050 there should be visible results in transforming human settlements into equitable and efficient spaces, with citizens living in close proximity to work and having access to social facilities and necessary infrastructure. Sustainability and improved quality of life were key to the process, and the residential property market should be functionally equitable. The short term goals and six phases of development were set out. The main challenges were that the development process was not clearly understood by all players, insufficient resources were allocated and there had been delays in collaboration with the Department of Science and Technology. Members commented that time frames for the key phases were needed. Members were happy that some of the elements included in the presentation were items that had come from the discussions of the Committee.

Meeting report

Mortgage Default Insurance
Chairperson’s opening remarks

The Chairperson said the President had announced a R1 billion guarantee fund, to assist people in the gap market and ensure they had access to housing opportunities. There were processes taken by government to ensure that the commitment was achieved. It was important to the Committee that the government ensure that the process was accessible, transparent and that its affordability be considered. Government, with National Treasury, decided not to make the Mortgage Default Insurance into a firm guarantee because of the risk factors associated with that, and it had therefore been changed to a recapitalisation programme. During the meeting the Committee would hear from the Banking Association South Africa (BASA) on its plans to ensure the programme was a success.

Banking Association of South Africa briefing
The representatives of the Banking Association South Africa noted that it welcomed and supported the introduction of mortgage default insurance (MDI). This, from a lender’s perspective, served well to:
- offset uncertainty (cost of risk)
- ensure that the critical mass provides reduced opportunity cost, with benefits to consumers as the interest rate charged could be reduced if the fee was less than the lender’s “cost of risk” (leading to marginal improvement in home owner affordability)
- make it possible that capital adequacy requirements could be reduced for lenders if a sovereign guarantee was provided (with marginal improvement in home owner affordability)
- ensure that there was no catastrophic / systemic risk for lenders (because losses were capped)
- ensure market liquidity (securitisation)

BASA was surprised when the President had mooted the “R1 Billion Guarantee Fund” in his State of the Nation Address in 2011. That was something that BASA had been asking for, as the Financial Sector Charter had demonstrated that mortgagees could lend to the affordable housing market segment on a profitable and sustainable basis.

BASA rejected the initial model mooted by the National Housing Finance Corporation (NHFC) (in collaboration with the state owned Canadian Mortgage & Housing Corporation) as the Canadian MDI model was almost identical to the USA Fannie Mae Model which resulted in the “USA sub-prime mortgage market, that led to the collapse of the USA’s housing sector “

BASA insisted that mortgagees should carry first loss so as to have “some skin in the game”. It had then instead suggested a maximum loan to value of 95% (so that the customer would be required to make a minimum cash deposit of between 7.5% and 10%). BASA was supportive of the principle that customers should have an equity stake, although there were fears that they would borrow the deposit and get into financial trouble. It was pointed out that some RSA mortgagees provided 100% bonds, so this scheme would have been regressive and it would also reduce competition

The NHFC agreed to adapt its proposed model to include these features. The MDI product, processes and pricing were accordingly finalised between BASA and the NHFC in February 2013. BASA understand that the Department of Human Settlements (DHS) and National Treasury (NT) have yet to agree the MDI model.

BASA was surprised to learn that an upfront fee would be required for the duration of the loan for the guarantee. This implied that the cost of the guarantee fee had to be less than the “cost of risk” which mortgage granters priced into their loans, otherwise it would be detrimental to home owners.

Pricing Features of a Mortgage Loan
It was explained that displacing the “cost of risk” (wholly or partially) by getting a third party (an insurance company) to carry the risk was called Mortgage Default Insurance. If a borrower defaulted and a lender was forced to repossess a home, but was unable to have the home sold for an amount at least equal to the outstanding debt (which was comprised of outstanding balance + interest + legal expenses) then a loss would be suffered by the lender. A lender would try to cover these losses by pricing the risk into a portion of the interest rate charged.

The presentation demonstrated how interest rates affected household affordability of mortgages, and the effect the MDI had on affordability. A household that earned R3 600 could get a mortgage of R29 250, although with the MDI it could obtain a higher loan of R30 900. To get a mortgage of R281 150, the household income needed to be R11 800. However, with the same income, under MDI it was possible to get a loan of R300 000.

Reporting on the current position, BASA said that a draft policy framework was in place and stress testing had been done by actuarial companies. The financial model’s sustainability was questioned. NHFC had used AON to test if the model was sustainable, and this company believed that it was. On the other hand, NT had used PricewaterhouseCoopers (PwC) to test the model and they had concluded that the financial model was not sustainable. BASA agreed with PwC, and submitted that the model was too optimistic, that MDI was not sustainable and it would need to be recapitalised after seven years. Furthermore, it was pointed out that the NHFC also needed to get a FSB insurance licence, as this was an insurance scheme. This could not be obtained until National Treasury had signed off on the model. However, as outlined, NT still needed to be convinced and comfortable that the model was sustainable.

BASA summarised its own thinking. Firstly, the critical mass and churn was making the creation of an MDI unsustainable, and only marginally beneficial to home owners. The question was asked whether it produced best value for money. BASA suggested that the State should investigate whether more viable MDI models were available. It should also scrap the initiative, and introduce the concept of MDI for the entire mortgage market. If the presumption was that lenders would relax credit standards due to MDI, this was not feasible, because of National Credit Act (NCA) constraints, losses for government, and it was now a requirement that the National Credit Regulator (NCR) introduce affordability guidelines.

Instead, BASA suggested that it would be better to address the cost drivers of housing. It asked whether an affordable long term fixed interest rate for the affordable market was not a better option. 97.5% of mortgagees use variable rates and they were therefore susceptible. With real interest rates coming off a 35 year low, this was likely to increase, with catastrophic consequences for consumers, given their high debt levels. In 2008/2009, when interest rates increased by 33%, the average middle class family lost 40% of their disposable income. Five years later they had yet to recover. Debt ratio to disposable income was still sitting at about 75%, with one out of two consumers having blemished credit track records. It was further problematic that administered prices, food and transport costs continued to rise above the Consumer Price Index (CPI) and disposable income increases, thus creating a “perfect storm”.

In summary, BASA said that for the MDI in its current state to work, the State would need to be a “market maker” for this. Currently, the capital market was too thin. The sovereign underpin would crowd in investors (and the Basel – liquidity ratio was cited in this regard). There was a need for more market liquidity, through securitisation or trade)

National Housing Finance Corporation input
Mr Secret Mogane, Head of MDI Project Office, NHFC, said, in regard to the sustainability of the funds, that the first model which was first tested by PwC was unsustainable at the current insurance premium levels. The fund and would have to be topped up every seven to 10 years. Subsequent to that, PwC was requested to assist with working on the insurance premium structure after consulting with the big four banks, which had improved the sustainability of the fund, and there was now a new scheme altogether.

Ms G Borman (ANC) said it would have been useful for this exercise to be done in 2010, before the announcements which created expectations in people. It was far better to do the homework properly, but if necessary the government should rather retract and change than go into something that was not helpful at all. After this presentation she was of the opinion that MDI was not effective at all and maybe government should be looking at something else. She asked if there would be a new scheme coming in, completely scrapping the MDI? When the bank guarantee was announced by the President in 2011, she wondered to what extent there had been sufficient checks by the Department of Human Settlements.

Mr S Mokgalapa (DA) said it was worth mentioning the terms of reference, and the provision of a million housing opportunities in the next five years was noteworthy. He hoped that BASA would do their investigations well to avoid any technical glitches when it came to implementation. It was sad that the insurance was announced in 2011, but up to now it had not yet been implemented. The presentation clearly showed there was a demand and need for it. However, he definitely agreed that the 100% government risk was not the route that should be taken.

He noted that the Committee had been at loggerheads with NHFC regarding recapitalisation, and after the Committee’s engagement with the Deputy Minister of Finance, it was still a cause for concern that there were questions around sustainability based on capitalisation. He wanted to know the reasons for the non-mortgage debt rising, and what the banks were doing to alleviate that. He also questioned what could be done about variable interest rates, and he called for BASA’s comment on that. It seemed, from the presentation, that BASA was asking that Members to support the implementation of Finance Linked Individual Subsidy Programme (FLISP) as it looked more sustainable. The FLISP could be used as an alternative, but there were other intervention approaches that were needed.

Mr Venter from BASA said that scrapping the MDI would be pre-empting something. No single initiative was the correct one as there were different facets that needed to be looked at. Multiple key stakeholders needed to come together and address the problems of the housing sector and work towards providing initiatives to enhance housing delivery and reduce the cost of housing. On its own, the MDI had a marginal impact.

He noted that non-mortgage debt was increasing and households, particularly the middle classes, were battling. Economists referred to “perfect storm” rates – which meant that rates, taxes, utilities, energy, food and fuel were increasing way ahead of inflation. The cost of living in South Africa was accelerating and salaries were not keeping up, and thus people were seeking other sources of funding.

All banks offered a fixed interest rate for up to five years, but the difficulty was that the cost of that interest rate was about 2% higher, and consumers had a choice. 97.5% of consumers opted for variable interest rates, although some should be opting for fixed rates, including the middle class. It was something that needed to be prioritised, and consumers needed to be educated on the risks they were taking.

FLISP was critically important, there had to be some form of balance and there was a need to change the models, to put more or less money in the subsidy market per unit in order to increase funds available for FLISP.

Mr Mogane said the Department had done a business case and a feasibility study which was done in two phases. In both phases the outcome was positive, and concluded that there was a need for MDI. The only question was if MDI was an all-inclusive solution. That was never what the DHS had said from the start as it had always held that it had to be packaged with other initiatives, like FLISP, which would make a huge difference. There was always a problem with access to funding. The primary aim with MDI was to provide access to funding by buying the risk that the lenders claimed to face when lending to that specific market. MDI also allowed the target market to access the market at better terms and conditions, because the risk was being taken away.

Ms J Sosibo (ANC) asked what would happen if the lender did not have the money to carry the 20% of the “first loss”. She asked BASA to explain why there was a “plus 2” when it referred to “prime +2%”.

Mr Venter said in developing countries a number of banks had had to be bailed out because they could not carry the losses they incurred. In South Africa, all the banks were well capitalised, and management was good. South Africa’s banking system was rated number two in the world. The South African Reserve Bank also placed a number of legislative restrictions on how lenders lent money and what reserves they must keep. Those were monitored very closely and had played a pivotal role in ensuring that the banks were in good standing. 

He noted that he had quoted “prime+2%” as an example and said that whatever rate was fixed was not necessarily standard, as it was based on the individual’s profile.

The Chairperson said the DHS had been given a task, to conduct a study on the building and construction costs, and she noted that this element was creeping up again. The Department was also asked to look into regulations. Those reports were still outstanding. She said that this would be something to be noted in the Legacy Report of the Committee, so that the incoming portfolio committee would need to pick up on these matters. The grants for these programmes were allocated by government, so if the municipalities were imposing other charges on developers, that needed to be followed up on.

Finalisation of the complaints raised by Eastern Cape contractors in regard to Nelson Mandela Bay Municipality projects
The Chairperson summarised that the Committee had expressed its dissatisfaction at the conduct of the Eastern Cape Provincial Department of Human Settlements, in regard to the complaints lodged against Nelson Mandela Bay Municipality projects, in respect of which the Committee had called upon both the Municipality and the provincial department. The provincial department had been given five days to ensure that the matter was dealt with and to draw a report. The officials knew that they could not come to the Committee without any written documentation. It was unacceptable that they had attempted to do this. The Committee needed to resolve the matter during the meeting, and for this reason the Members would listen to what the DHS had to say.

Mr Mbulelo Tshangana, Deputy Director General: Project Management Unit, DHS, apologised and said the officials had hoped this would be the last item on the agenda so they could prepare thoroughly. There were competing demands during this time of the year but that was not an excuse.

Mr Gaster Sharpley, Head of Department (HOD) Provincial Department of Human Settlements in the Eastern Cape, also apologised that the report was not ready. The Department had given the Quantity Surveyor latitude to be independent. The Department had not asked for the Quantity Surveyor’s recommendations because it wanted to hear them together with the Committee.

Mr C Mathale (ANC) interjected and said Mr Sharpley was out of order. The Committee told the provincial department to meet with the contractors and the Quantity Surveyors of both parties, so that when the department appeared before the Committee again it could table one presentation, with all versions and views, showing where the parties agreed and where they did not. For the provincial government now to say that it did not hear anything from the Quantity Surveyor, because it wanted to hear the views expressed in front of the Committee was out of order.

The Chairperson also agreed with Mr Mathale. The Committee wanted the provincial department and the contractors to sit down together and work out where they did and did not agree. The Quantity Surveyor was meant to be a facilitator of the process. He did not take any decisions, as he could only made recommendations, and there was no guarantee that his recommendations were either correct or would be fully adopted.

Mr M Matshoba (ANC) said the Committee had said the provincial department’s consultant should meet with the consultant of the contractors. The Committee was expecting a full report, inclusive of the contractors’ views.

The Chairperson asked if the contractors had their specialists with them in their delegation.

The contractors replied that they did not as they were aware of all aspects of the job and the matters that arose afterwards.

Mr John Kuyula, Independent Quantity Surveyor appointed by the Department, said it was difficult to meet with the contractors as they did not know who he was, and the fact that he was with the provincial Department was also a concern. There was only cooperation from contractors after they received communication from Parliament, because they then accepted that he had a mandate from Parliament to meet with them. There was only one day left to meet with the contractors, and he had met with all the contractors. He said that in the meetings, there had been officials from the Metropolitan Municipality and the provincial department. However, given that only one day was available, and this was the first meeting, it was difficult to resolve all the issues by having all the parties meet in one room simultaneously. In the meeting, it was agreed that there was not enough time to go through everything, and there was additional information that some of the contractors still needed to send through to the Quantity Surveyor for assessment.

Mr Kuyula went through the background of the Joe Slovo 950 project. He said the contractor was able to bring forth more documentation to clarify its claim to the provincial department. It was fortunate that the Housing Development Agency (HDA), whose leadership also used to serve in Thubelisha, was able to attend a meeting dealing with the matter.

Mr Mathale interjected at this point to indicate that the Committee knew the background of the project, and had heard it on numerous occasions. What Members needed to hear, however, was a report on the outcome – which claims would be paid, and which claims were still disputed. He asked whether the work would be paid for or not, and if there were claims that were not going to be paid, there needed to be an explanation why.

Mr L Suka (ANC) said Mr Tshangana had given the Committee a very detailed report that suggested a way forward. Although he was not a member of this Committee he was well versed in the issues and the background of the project.

Mr Kuyula said there was a way forward, but he was dwelling on the background because it became relevant when dealing with the claims.

The Chairperson again interjected and asked Mr Kuyula to move straight to the claims, as the Committee was familiar with the information he was now presenting. Mr Tshangana had explained all this perfectly, but there were concerns by the Committee on the disputes that he was supposed to investigate and address. Mr Mathale even said that if there was an erf number reflected on the records of the Department, with a house built and being used by a beneficiary, the State had to pay whoever had built the house.

She noted that the Committee had asked that the contractor from Verern Construction should be present. Verern Construction had become an implementing agent on top of being a contractor, and the Committee had to know what was then the role of Thubelisha, with this new role of Verern Construction.

Mr Mathale said Verern Construction had not been elevated in any way, but it had covered for Nomagwayi when that firm had left its contract with Thubelisha.

The Chairperson pointed out that, according to the previous report, the status of Verern Construction had changed, to that of an implementing agent and reiterated that this information had been provided to the Committee in writing.

Mr Kuyula said there may have been a misunderstanding, which was why he thought that an explanation of the background was important. Verern Construction came into the picture because it was one of the original contractors that was appointed. When Nomagwayi withdrew from the contract, Thubelisha signed an addendum increasing Verern Construction’s scope of work. Metro Builders was a subcontractor to Verern Construction.

Mr Kuyula then went through the claims one by one.

Invoice 1529
There was no dispute regarding the claim. The understanding was that this was the final claim to Verern Construction, but Metro Builders was claiming that this was an interim claim. It was therefore recommended that payment be made to Metro Builders.

Invoice 1538
This claim related to completion. Verern Construction had said that it had done the completion part of the houses and it claimed payment for this work. Mr Chetty claimed that they had completed the houses and that was why the amount was due to Verern. In a matter like this, it was easy to go back to Verern Construction and find out who did what. If there was money due to Metro Builders, a claim should be instituted to Verern Construction to recover the amount.

Invoice 1539
This claim was for rectification work. The scope of work relating to this did not exist in Thubelisha and Verern Construction. Neither party had any knowledge of such, but Metro Builders had a schedule of work that it claimed was done under rectification.

The Chairperson interjected and asked why Verern Construction was not part of the meeting. These were simple claims. If there was proof that Metro Builders had done the work, then Verern Construction and HDA should have been present, to agree or dispute that. The Committee had asked, previously, why the schedules were not validated.

Mr Mathale said it was clear that Mr Kuyula simply went to the report done by Mr Tshangana in the previous meeting of the Committee, and copied that information. The Quantity Surveyor could not make the same presentation as the Department that there was a dispute. The Committee already knew that the Quantity Surveyor had to bring resolutions and direction. Some of the claims could be settled, some in full and some partially.

Mr Kuyula wanted to clarify that he had actually prepared the report that was given by Mr Tshangana.

Ms Borman said the process was going around in circles. It was evident that once again the Committee was sitting with an outline of the problems, but no solution. There were more unresolved issues in the presentation. She suggested that the Committee could not proceed with the meeting. The Metropolitan Municipality or the province needed to take responsibility to oversee the report. The Committee was today meeting for the last time. The final report would have to be sent by e-mail.

Mr Suka said he was worried; and the problem was that these were small contractors. Some of the contractors drove all the way from the Eastern Cape to come to Parliament. This document had already been presented, although the specific mandate for this meeting was to try to resolve the problems that were brought up in that report. This matter had been on-going for seven years, since 2007. He asked a rhetorical question what Members were to go back and report to their constituencies - the same report?

Mr Matshoba said on invoice 1538 the consultant was saying there was a dispute, with one party claiming that there was no scope of work, and the other saying there was a schedule proving there was a job done. The subcontractors were supposed to claim from Verern Construction, the same person that did not know anything about the work. This was not giving any solutions to the Committee and was only wasting the Committee’s time. The Committee had expected to see an invoice, hear the explanation and be given the solution.

The Chairperson said when she spoke to the Head of the provincial Department, she was given the assurance that the matter would be dealt with in a fair and just manner. She asked if the manner of the presentation was just and fair. The Committee already had the information and had said that, to resolve the matter, the parties involved in this should all settle the issues. She asked them how it could be fair if Verern Construction, who was in the core of this, was not involved? It was clear that all the claims needed to be verified by Verern Construction and the HDA, which was the same information the Committee had to begin with.

The Chairperson pointed out that on the issue of wages, Metro Builders clearly stated what had happened. It had paid wages of the Nomagwayi workforce, because Nomagwayi left without paying their staff and workers were striking on site. That was a fair solution, for otherwise Metro Builders could not be expected to develop an area that was being invaded by striking workers. After the Department had told the Committee that story, it was apparently now disputing the claim. She asked again if that was fair and just?

Mr Kuyula said it would have been difficult to resolve all the issues in one day. He first had to understand the situation and the background. The issues were fairly complex and needed time to resolve, and there were more documents required from the contractors.

Mr Samuel Chetty, Chief Executive Officer, Metro Builders and Civil Contractors, was “shocked” that the presentation had not been placed before the contractors before this meeting so that he could comment on it. Mr Chetty had made his position clear with Mr Kuyula, that the process was not independent. The first instruction from Thubelisha was to proceed with the work. He asked the HOD, what would happen at the end of a financial year, if a contract was messed up by a contractor, and to whom the reporting would be done.

Mr W Gawu, President, NAFCON, said he was surprised that Mr Kuyula was now changing his tune. Mr Kuyula did not call Thubelisha to the meeting, but only contractors were called to the meeting. Mr Kuyula called a meeting for 10:00 am but by that time he was with the Department. The contractors asked that the province commit themselves to paying the outstanding claims as Parliament was closing. At the meeting, the Metropolitan Municipality had committed itself to paying the funds, but other parties did not. The contractors were asking that Mr Kuyula be neutral and not defend the party that had employed him.

The Chairperson said what Mr Gawu was saying could be true; the trouble seemed to lie with  the government employing someone, paying them and expecting them to be neutral.

Mr Sharpley said if there was any doubt on the professionals whom the provincial department had selected, the contractors collectively could suggest three registered professionals registered with the Engineering Council to work with Mr Kuyula. It would be the prerogative of the Department, through its supply chain processes, to select one of the three.

The Committee eagerly welcomed the proposal by the HOD.

The Chairperson clarified that the contractors should recommend the three professionals and the Department would have to pay for them.

The contractors then raised an issue. Some had said that they were qualified and did not want to leave the meeting, and objected to the fact that there seemed to be the impression being created that someone else could do the work better than them. Mr Kuyula and the Department had been provided with all the documents and information they needed. The contractors had capable people and they should be allowed to participate in resolving these matters.

Mr Sharpley apologised to the Metropolitan Municipality, saying that there was cooperation from them but there were instances where the Department had been unreasonable. There had not been consultations with the Executive Mayor and the MEC to the extent that this should have happened. The Department was holding a particular position and the contractors also held their position, so without undermining anyone the Department got an independent party who had not been previously involved to look into the matter, and draw their own conclusion.

The Chairperson asked when the Committee would be able to hear a report on the matter.

Mr Kuyula said some of the claims were fairly straightforward and could be resolved, with backup information and interaction with the parties involved. He claimed it would take three weeks to finalise everything.

The Chairperson said three weeks was too long. Mr Kuyula was appointed to perform a specific task and it was a pressing one. He was expected to work solely on this one task, even over weekends, so she was not prepared to give him three weeks. She said that this would only prolong the process and cost the Department more.

The Deputy Mayor of Nelson Mandela Bay, said that the municipality was humbled by the commitment of Members of Parliament and after listening to them, they had clearly articulating that they were elected for all the right reasons, and took their mandate seriously. The Municipality had good working relations with the Province and would dearly like to keep those relations intact. The Municipality, with the Minister and MEC, would make sure that it played an oversight role in the matter. There was a clear process that needed to be followed, and the Metropolitan Municipality would make sure that it was followed, and hoped that all role players would be objective and resolve the matter speedily.

Auditor-General’s management report on use of consultants in the DHS: Department of Human Settlements briefing
The Chairperson excused herself to attend another meeting and Ms Sosibo took over as Acting Chairperson.

Mr Nyameko Mbengo, Acting Chief Financial Officer, led the presentation on the use of consultants by the Department, which was raised in the management report of the Auditor-General (AGSA).

He said that the appointment of consultants followed an intense supply chain process. Units had to do a gap analysis and cite reasons for appointments of consultants before approval for their appointment was given. Appointment of consultants was now reported on the quarterly performance report.

For 2012/2013, 42 consultants were appointed, at a cost of R102.1 million. For 2013/2014, 53 consultants were appointed, at a cost of R108.6 million.

A list was then set out for the 2012/13 financial year. The consultant were appointed for:
- Redesign of Website of Human Settlement
- Audio Visual Services for Photography and DVD Production of Govan Mbeki Human Settlements Awards
- Facilitation and implementation of a Multimedia Advertising Campaign
- Management of the Functionality of the Website of National Department of Human Settlements (NDHS).
- Development of the Department’s Communication Strategy
- Video Recording of the Nelson Mandela Metropolitan University (NMMU) Educational Launch
- Appointment of independent auditor to assist with the Goven Mbeki Human Settlements National Awards
- Co-ordination and Project Management of South Africa’s Participation at the 6th session of the World Urban Forum (WUF6)
- Pipeline Planning Workshop.
- Debtors System maintenance
- Training on Supply Chain Management (SCM) for seven officials
- The creation of sustainable Human Settlements processes and capacities towards improved Human Settlements Policy and Planning, Monitoring and Evaluation, Research and Capacity Building
- Updating the current Housing Bibliography.
- Training and Development of 16 staff members on Supply Chain Management.
- Training of 30 officials on administration skills
- Revision of the Current Capacity Development Strategy.
- Employment Assistance Programme
- IT training  for 30 officials
- Work-study Investigation and job evaluation.
- Recruitment, including  advertisement of posts
- The Alignment and Final Human Settlements Strategic Plan 2012-2015 and Annual Performance Plan 2012-2013
- Security Services for Departmental offices
- Determination of the development cost of residential stands and the design of and Determination of the construction cost of various house typologies
- Implications of assignment of the transfer of staff, assets and liabilities from Provincial Departments responsible for Human Settlements to six metros
- Project Management for the establishment of the Programme Management Unit (PMU)
- Determination of the institutional arrangement for a Human Settlements Development Finance entity and to project manage for its establishment.
- Implementation of the Rental Housing Inspection Programme (RHIP).
- Development and training on the pieces of legislation administered by the Department.
- Drafting a Bill on Estate Agents Reform Project
- Conducting due diligence on the Estate Agency Affairs Board (EAAB)

Section B of the report set out the use of consultants in the 2013/14 financial year, noting that they were appointed for the following reasons:

- Development of an informal settlements upgrading programme for municipalities
- Development of a policy, as well as housing co-operative programme and legislative framework to integrate, align and develop a Housing Co-operative Policy
- Conducting a regulatory impact assessment on the Home Loan and Mortgage Disclosure Amendment Bill
- Implementation of the RHIP.
- Managing the National Department’s website functionality
- DVD Productions  for Govan Mbeki Awards –  6 June 2013
- Debtors’ System maintenance
- Security Guard services for Departmental buildings.
- Programme management of the national implementation, oversight and monitoring of the National Rectification Programme in respect of subsidised houses constructed between 1994 and 2010.
- Information System review, performance review, risk management and investigations
- Independent review of the Govan Mbeki awards
- Revision of the Monitoring, Evaluation and Impact Assessment (MEIA) Policy and Implementation Frame-work for the Human Settlement sector.
- Independent disciplinary process on Senior Management Service (SMS) members in DHS.
- Supply Chain Management review evaluation, development, support and related assistance.
- Cleaning and hygiene services in the department
- Design/Implementation, evaluation of the Urban Settlements Development Grant
- Guiding and supporting the identified municipalities in the implementation of Basic Sanitation Implementation Strategy.
- Operational due diligence for the National Housing Finance Corporation (NHFC) The National Urban Reconstruction and Housing Agency (NURCHA) and the Rural Housing Loan Fund (RHLF)
- Conducting training on mediation to members of the Rental Housing Tribunals
- Legal due diligence on the Development Finance Institutions (DFIs)
- Conducting a Regulatory Impact Assessment on the Rental Housing Amendment Bill.
- Recruitment, including the advertising of posts.
- Appointment of Presiding Officer for disciplinary hearing for two SMS members
- Employee Assistance Programme (EAP) Wellness Programme
- Investigation into SMS members in DHS and to assist with disciplinary hearings [Deviation]
- Training:  Microsoft Office for 35 officials  for five days
- Training:  [Executive] Accelerated  Development Programme
- Provision of State Subsidised Housing addressed asset poverty for Households and Local Municipalities.
- Contribution to Urban Strategies Alignment Study 2013 project under Memorandum of Understanding (MOU) between SCAN and DHS.
- Developing a new empowerment strategy for designated groups in Human Settlements
- State Information Technology Agency (SITA) services for IT related matters
- HSS Operational System and assisting Provinces.
- Computer Support, HSS Services – SITA
- Wan and Infrastructure Support Services
- LAN/Wan and Desktop Support Services
- Novell MLA Licenses Renewal – consulting days of 120 days

The reasons for appointment of consultants were stated as the inadequate capacity within the DHS, in terms of both technical skills and number of personnel, largely due to vacant positions. There needed to be assistance from other spheres of government to deliver on Human Settlements programmes.

It was reported that Service Level Agreements (SLAs) were signed with all the appointed consultants and all SLAs were vetted by Legal Services. The Department had established a Contract Management directorate within the Legal Service unit, for that purpose. Respective units were responsible to monitor performance of contracted service provider.

Ms Borman questioned the authenticity of the report. She was worried that there seemed to be a duplication of tasks by the consultants. Also, in 2013/2014, she pointed out that the number of consultants increased yet at the same time, the vacancies were being filled. Whilst she fully accepted that there was a need for consultants, where skills that the Department needed were not available in house, she felt that there did need to be a report addressing how vacancies were being filled yet the number of consultants being used was also increasing.

Mr Mokgalapa said there seemed to be a duplication of services provided. The use of consultants was understandable when it came to scarce skills, but some of the services for which consultants were being appointed did not seem to warrant their appointment, and he too wanted to hear how the use of consultants was linked to specific vacant positions. It seemed that some of the vacant positions were not filled deliberately, in order to keep hiring consultants. It also looked as if government was using consultants to fill the vacancies.

Mr K Sithole (IFP) said the Committee had been discussing the subject for a long time and he too expressed concern that instead of the number of consultants decreasing, it was increasing. There were a number of services outlined in the report that he agreed did not appear to need the appointment of consultants.

Ms M Njobe (COPE) appreciated that the use of consultants was included on quarterly reports so at least there was closer monitoring. For this financial year there were 11 more consultants which meant an addition R6.5 million was spent, and she asked if this implied that again, for the upcoming financial year a higher variance was expected. National Treasury was also concerned about the use of consultants by departments. Some of the points were vague; for instance, she wondered why training of staff could not be done by more experienced staff members, internally. South Africans were 20 years into the “new” governance, so there were staff members that were now very knowledgeable about the work of the Department and they could train new members better than outsiders could.

Ms Njobe asked why the Council for Scientific and Industrial Research (CSIR) was not featuring more prominently, and why South Africa had to get Cubans to show it how to build toilets in the rural areas. Once again, she suggested that DHS should be sending students to schools or universities, training them in or outside the country to acquire those skills instead of spending money on consultants year after year.

Mr Tshangana said the biggest part of CSIR was the Research and Development unit and their funding model was such that it had to recover costs on 70% on the work that they were doing, and only 30% was subsidised. CSIR did work with and advise government, but government paid for any cooperation with the entity.

The DHS oversaw a budget of R30 billion and the Department was only spending around R100 million of that on consultants, so by any standards that was not a significant figure. Even if the Department filled all the vacancies in the line functions it would still need a number of service providers to help manage the specialised work of the Department.  He added that the Committee had put a lot of pressure on the Department to monitor provinces and follow the money, so in the short-term service providers had to be employed and in the long-term the Department had to think about the skills it needed, how it would recruit people with those skills and how to pay them. The recommendation by Ms Njobe was noted, for the Department to send students to be trained in Cuba, and not merely for Cubans to come to South Africa.

Ms Mashishi also asked if it was necessary for the Department to add more consultants.

Ms Mnisi said Ms Njobe had come up with a long term solution of sponsoring students in order to reduce the number of consultants. There was too much spent on consultants. She asked if there was a plan in place to limit or reduce the number of consultants used by the Department.

The Chairperson said that these questions clearly showed that Members were not happy about the use of consultants. From 2011, the Committee had been discussing the matter, requesting that the Department reduce the number of consultants, but she too noted that it had in fact increased.

Mr Tshangana said it was necessary to contextualise the use of consultants. Perhaps there should have been a table setting out the value associated with the service providers appointed. Vacancies were not in the support functions, but most were in the line functions. The Department was ensuring that it had all the expertise in-house and did not use capacity as an excuse. There was the budget to buy the capacity in the market.

Talking to the training for supply chain management, he stressed that this was an evolving space and difficult part of procurement in government. Service providers were appointed to train the Department on all aspects, but he understood what the Committee was saying in regard to drawing a line when there had been enough people trained who could then become trainers for others. The main challenge was that once people were trained they tended to be poached away by other organisations and the private sector, as government was used as a stepping stone.

Green Paper on Human Settlements draft: Department of Human Settlements progress report
Dr Zoleka Sokopo, Chief Director, Department of Human Settlements, led the presentation to the Committee on the progress made in developing a strategy for human settlements and reporting on current challenges.

She said that the main questions to be answered were:
• Why adopt the green paper route in the development of a strategy for human settlements?
• Why was the human settlements green paper taking so long?
• In view of the fact that there seemed to be enough information, it was questioned why the Green Paper was not just being written?
• What were human settlements and how did these differ from housing?

The National Development Plan (NDP) with the Integrated Urban Development Framework, the Green Paper on Rural Development, the Spatial Planning and Land Use Management Act and the Human Settlements Strategy all contributed towards shaping the Human Settlements Green Paper.

She then outlined the development process. First off, the issues had to be identified. This involved defining the problems and issues and she stressed that it was important to get that diagnosis right.

Secondly, the risks associated with misdiagnosing or not clearly defining the problem included a possible non-targeting of the correct problem, and misallocation of resources.

The issue analysis involved getting an understanding of the problem and gathering comparative data and analysis

The main risks associated with not properly analysing the issues were that policies would be developed from an unreliable based, and that the decisions would not be evidence-based. In addition there was a risk that policies that had not worked well in other jurisdictions or similar contexts may be repeated unknowingly

The next stage involved the development of policy options, with a concept framework, identifying the expected outcomes. The main risks of not having a clear conceptual framework and policy outcomes were that this would lead to uncertainty as to whether government or departmental values and priorities would be furthered by that policy, not knowing what the policy was to achieve. If no policy options were developed, then there was a risk that the policy selected may not be the best one to meet government or Departmental priorities, and may not be the most effective and efficient one.

Consultation was a key issue – and here, she stressed that there was no one-size-fits-all approach. It was necessary to consider “ who, what, when, where, why and how”. If no consultation was done, or it was not done in the best way or to the right groups, this would lead to a limited understanding of the problems or issues, which would lead to poor policy solutions. There could also be negative backlash from stakeholders in reaction to a policy. Policies may not be coordinated, and there could potentially be misdirection of funds.

Monitoring and evaluation was also critical. She said, however, that performance measurement should not be handled as an afterthought to the policy development process. This should be an integral part of the whole process as it assisted in the refinement of expected outcomes. Monitoring an evaluation would allow for decisions to be taken on the indicators, and data sources indicated earlier.

The risks of not undertaking performance measurement included a potential perpetuation of misallocation of funding, and continuation of policies that may not be working optimally.

Dr Sokopo said that the Green Paper on Human Settlements should be :
• Responding directly to the South African Constitution, especially to the provisions in the Bill of Rights that affirmed the right of all to a healthy environment; access to adequate housing; and access to basic services (Sections 24, 26 & 27)
• Reshaping the apartheid geography
• Ensuring efficacy of the fiscus
• Developing a solid knowledge base to adequately respond to the demands of the 21st century around development of sustainable human settlements.
• Responding to the challenges of providing housing and basic services and reactivating communities
• Addressing weak spatial planning and governance capabilities
• Correcting the currently weak capabilities for spatial governance
• Attempting to reverse the dysfunctional settlement patterns across the country
• Addressing the challenges facing towns and cities
• Improving the uncertain prospects of rural areas
• Addressing the circular migration of households with more than one house, which currently made it difficult to understand the real demand for housing. At the moment, around 60% of the populations lived in urban areas – and this would increase to about 70% by 2030.

The problems of the current system included
• The current focus was on housing rather than on developing quality environments for low-income communities, supported by the necessary physical, social and environmental services.
• State-provided houses were not being integrated into the property market
• Private investment into housing at the lower end of the market was very slow
• Inadequate attention was paid to rental accommodation across income bands
• Current housing projects did not create efficient urban spaces

She then summarised that the Green Paper would address:

– Human Settlements Direction and Ideology
– Implementation Praxis
– Evaluation of Outcomes

The factors that would ensure its success were that it should address knowledge-based Policy Development. There was a need to acquiring necessary technical expertise, and to have adequate resource allocation. Stakeholder participation, coordination and collaboration were crucial. Communication and support were other vital aspects.

Dr Sokopo then outlined the vision for human settlements. By 2030, measurable progress should have been made towards breaking apartheid spatial patterns, with significant progress towards retro-fitting existing settlements offering the majority of South Africans access to adequate housing, affordable services in better living environments, within a more equitable and functional residential property market.

By 2050 visible results from effectively coordinated spatial planning systems should have transformed human settlements in South Africa into equitable and efficient spaces, with citizens living in close proximity to work and having access to social facilities and necessary infrastructure.

The prime aim of transforming human settlements was to achieve sustainable human settlements, with improved quality of human life. This in turn involved provision of adequate housing and improved quality living environments. There should be a functionally equitable residential property market. There would have to be enhanced institutional capabilities for effective coordination of spatial investment decisions.

She set out the plan for the next five years, which was to ensure that all South Africans had access to adequate housing and quality living conditions (sustainable human settlements) through programmes that provided at least 1 million housing opportunities (for qualifying households) and providing basic services and infrastructure in all existing informal settlements.

The development of the Paper had six phases – as follows:
Phase 1: Conceptualisation
Phase 2: Development
Phase 3: Consultation
Phase 4: Revision
Phase 5: Finalisation
Phase 6: Closure

For Phase 1, four out of five milestones were completed. The outstanding milestone was the appointment of technical reference group members. Phase 2 would include the finalisation of the concept paper, foregrounding research and the drafting of the Green Paper.

She then summarised the progress to date. The DHS had conducted a self-examination, which had included:
– Evaluations focusing on various Departmental programmes. Some were underway but incomplete
– Conducting research in specific areas of concern such as backyard dwellers
– The Department of Human Settlements 20 year review has been completed
– More synthesis, research and evaluation remained to be done.

The DHS was collaborating with the Department of Science and Technology. However, there had been some internal delays and the Memorandum of Understanding was signed only in the first week of March. The required expertise would be appointed, between the two departments.

The DHS had made some headway by incorporating issues from the Green Paper in the 2014 – 2019 Medium Term Strategic Framework (MTSF)

The main challenges were that the development process was not clearly understood by all players. To date, there were insufficient resources allocated. The delay in the MOU with the Department of Science and Technology had had some knock-on effects.

The Chairperson said it would have been useful to set out the timeframes for the key phases.

Mr Mokgalapa agreed with the Chairperson, as the setting of timeframes would ensure that the process did not take longer than necessary.

Ms Njobe said that it was satisfying to see some of the elements included in the presentation were items that had come out of the discussions by the Committee.

Legacy Report adoption
The Chairperson said that since she and others had to leave the meeting, the adoption of the Legacy Report would be postponed to another day.

The meeting was adjourned.

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