Progress made merging Development Finance Institutions; detailed provincial expenditure & performance report on human settlements issues, with Deputy Minister

Meeting report

The Chairperson opened the meeting and welcomed delegates from the Department and the CEOs of the Department’s entities. There were apologies from Mr N Capa (ANC) and Ms P Ntobongwana (EFF), which were accepted by the Committee.

Human Settlement Development Grants

Mr Nyameko Mbengo, Acting Chief Financial Officer (CFO) of the Department of Human Settlements (DHS), gave a presentation on the expenditure of the Human Settlement Development Grants (HSDGs), as requested by the Committee.

The revised allocations of the HSDG saw provinces like Limpopo losing a portion of their allocation and some, such as the Western Cape, Mpumalanga, KwaZulu-Natal and Eastern Cape, receiving more money.

As at 31 December 2014, 64% of the transferred funds to Limpopo was unspent, KwaZulu-Natal was overspent by 5%, and Mpumalanga by 14%. As of 31 January 2015, Limpopo had spent only 42% of their available funds, whereas KwaZulu-Natal had spent 106% of their transferred funds. The HSDG delivery performance as at 31 December 2014 showed that provinces had reached 80% delivery on sites, and 68% on delivery of units. By 31 January 2015, these figures had increased to 86% and 74%.

KwaZulu-Natal had the highest allocation of almost R15 million for 234 units, Limpopo had a target of delivering 315 units, with an allocation of R5.44 million. The total target for all provinces was 1 076 units, with allocated funds totaling just under R52 million. Actual delivery was 472 units, and just over R20 million had been spent. The annual target for rectifications was 7 226 units for all provinces, with R636 million allocated. Actual delivery was 4 867 units, with R480 million being spent.

The Operational Capital Budget Programme (OPSCAP) annual target for all provinces was R653 230 000, of which R565 692 000 had been spent, with no indication of sites and units planned and delivered.

Mr Mbengo gave details on the delivery performance on social and rental housing, as at 31 December, 2014. Nationally there was a target of 295 sites, 6 743 units and allocated funds amounting to R1 210.9 million. By 31 December only five sites had been delivered in the Eastern Cape. 3 347 units had been delivered nationally and R694.5 million spent.

The gazetted funds for mining towns in the Free State, Gauteng and Limpopo were R17 540 000, and the revised allocation by provinces was R274 290 000. Only Free State had reported their delivery of 13 sites, 117 units and an expenditure of R26 412 000. For Mpumalanga, Northern Cape and North West, 1 614 units had been targeted. The gazetted amount was R290 million, and the revised allocation by provinces was R 1 817 million. 13 sites had been delivered, with 3 013 units and a total expenditure of R297 246 000 at the end of December 2014.

The Disaster Relief Grant had a total allocation of R185 million for KwaZulu-Natal, Limpopo, Mpumalanga and the Western Cape. There were 1 744 targeted units in KwaZulu-Natal, and actual delivery was 738 units in KwaZulu Natal and Mpumalanga, with a total expenditure of R125 218 000.

The presentation outlined the Urban Settlements Development Grant funds voted for, the rollover from 2013/2014, total funds available, transferred funds and funds spent by each municipality. The City of Johannesburg had not spent 66.2% of its transferred funds, followed by Ekurhuleni with 65.3%, and 61.9% in Mangaung.

Mr Mbengo went on to elaborate on expenditure per programme as at 31 December 2014.

Buffalo City Municipality

The voted funds for the municipality were R673 289 000. Expenditure amounted to R278 193 000, leaving a R395 096 000 variance. There were 1 140 sites serviced for spatial development and the built environment. Under transport, 12 km of roads were paved roads, there was 46.5 km of gravelled roads, 12 km of surfaced roads were resealed, 358 km of roads resurfaced/rehabilitated, 3 km of storm water drainage installed and 1 km of pedestrian walkways were constructed. There were eight water service points installed for informal settlements dwellers within a 200m radius and 246 additional households (RDP) provided with water connections. 1 246 new sanitation service points (toilets) were installed for informal settlement dwellers, 2 094 additional households (RDP) were provided with sewer connections. Three waste minimisation projects were initiated.

Nelson Mandela Bay Municipality

There was R828 863 000 in voted funds for the Nelson Mandela Bay Municipality, of which R285 622 000 was spent. This was a mere 34.5%. 1 509 households living in informal settlements were upgraded, 917 households were relocated to greenfield development areas. 554 additional households were provided with water connections, and 554 additional households provided with sewer connections. 1 189 new households had electricity connections. 2 522 work opportunities were created and there were 755 full time equivalent jobs.

Mangaung -

Funds voted for in the municipality amounted to R654 406 000 and by 31 December 2014 only 27% of it had been spent. 700 hectares of land was proclaimed (township establishment completed), two informal settlements were upgraded (in-situ), 1 628 households in informal settlements were targeted for upgrading and 669 title deeds were transferred to eligible beneficiaries. 1 km of new paved road was built, 6 km of roads resurfaced/rehabilitated/resealed, and 1 km of storm water drainage was installed. 1 125 additional households were to be provided with water connections. 1 259 additional households were provided with sewer connections, 11 high mast lights and 127 additional street lights were installed.

City of Johannesburg

R1 695 189 000 was allocated to the municipality, and only 13.4% was spent. 1 364 households living in informal settlements were upgraded, and 473 title deeds were transferred to eligible beneficiaries. 589 km of roads were resurfaced /rehabilitated/resealed, 8 km of storm water drainage was installed. 5km of new pedestrian walkways were to be constructed and 60 new bus/taxi stops were also to be constructed. 1 274 additional water service points were installed for informal settlements dwellers within a 200m radius. 688 additional water service points (toilets) were to be installed for informal settlement dwellers. 4 477 additional households were provided with access to weekly refuse removal. 1 247 additional households living in formal settlements were provided with electricity connections, and 569 additional street lights were installed.

City of Tshwane- Financial Performance as at 31 December 2014

R1 469 450 000 voted funds were allocated to the municipality, of which 35.9% was spent. There were 6 122 electricity connections, and 595 street lights and 40 high masts were installed. 16 km of roads were paved, 17.05 km of pedestrian walkways were constructed and 21.8 km of storm water drainage was installed.

Ethekwini

Ethekwini spent 48.8% of their allocated R1 800 076. 992 sites were serviced, and 871 title deeds were transferred to eligible beneficiaries. 10.97 km of paved roads and 30.69 km of pedestrian walkways were constructed. 180 water service points were installed for informal settlement dwellers within a 200m radius, and 6 168 additional households (RDP) provided with water connections. 274 consumer’s units were provided with access to a free basic level of potable water, by means of an individual household supply in formal areas and by means of a standpipe within 200m in informal areas. 180 sanitation points (toilets) were installed for informal settlements dwellers, and 6 168 additional households (RDP) provided with sewer connections. 524 582 households had weekly kerb-side waste removal services in formal areas, and 317 613 informal settlements had access of waste removal. 5 260 additional households (RDP) were facilitated with access to refuse removal. 8 821 formal households had access to basic electricity.

City of Cape Town

The municipality spent 28.2% of their R1 358 879 000 voted funds. 2 057 sites were serviced, with 610 title deeds transferred to eligible beneficiaries. 66 kilometers of roads were resurfaced or rehabilitated, one bus terminal or taxi rank constructed, and 17 bus and taxi stops constructed. 409 water service points were installed for informal settlement dwellers and there were 904 sanitation service points (toilets) installed in formal settlements.

Areas identified for improvement

The national Department of Human Settlements should develop a capacity support programme to assist provinces and metros with business plans, supply chain management and accruals. Provinces should provide work in progress (WIP) reports to determine the achievement of the set targets in remaining weeks. The national Department should upscale its monitoring and evaluation unit for verification of data. Metros should consider reallocating budgets to moving projects to avoid under spending. There was a need for a metros forum to discuss challenges experienced. Also, the national Department needed to tighten the monitoring and evaluation

Discussion

The Chairperson asked the Department to say something about the capacity grant, since it had been mentioned and discussed at the previous Committee meeting.

Mr Mbengo said the capacity grant had been transferred to metros in the previous week. The transfers had been made, based on their amended business plans.

Ms T Gqada (DA) asked about the mining towns. On the figures gazetted by Treasury to the respective towns – and then there was the additional money given by provinces –in terms of actual delivery, there was nowhere in the presentation that the number of units and projects delivered also increased. Also, it was not possible that these provinces just had money lying about, so where did that money come from and did the reallocation of funds compromise any projects? In terms of the disaster relief grant, there were no annual targets from other provinces and delivery performance details. Regarding the USDG, the CFO needed to be very strict with the rollovers -- from time to time, it seemed as though metros were comfortable as they knew that they could simply commit money to spend in the next financial year. The Department needed to put an end to that, as this was the reason why the USDG was not prioritised.

Ms Gqada asked if the CFO was 100% convinced that the Department was currently spending money according to the mandate of the Department. The presentation had also mentioned metro forums -- it was assumed that the issues to be discussed at those forums were the same issues discussed with MINMEC. This would then be another structure discussing the same things another structure was already providing a platform for.

Mr Mbulelo Tshangana, Chief operating Officer (COO), DHS, agreed with Ms Gqada that the Department had to do everything possible to make sure there were no rollovers, and they would not be granted considering the current fiscal constraint climate. The Department was spending according to its mandate, and there were quarterly performance reviews and meetings with provinces and metros to look at their performances.

In Human Settlements, the issue of a metro forum was looked at differently, as there was a significant amount of money that was spent in metros – R12 billion of the USDG went to metros and another R21 billion per annum of the HSDG went to metros. With this in mind, it made sense to have a human settlements forum without duplicating already existing forums. Technically, MINMEC was mainly about accountability on performance, while this forum would discuss pipeline issues and ensure that the projects were packaged properly.

Mr Tshangana said provinces were allowed to add money to the gazetted Treasury allocation if the money was in their business plan. The minimum amount allocated to mining towns was there for basic services, which were prioritised, as most mining towns had informal settlements. On 17 March the Department would be coming back to report more holistically and in detail on what was happening in each of the towns.

Regarding the disaster management fund, the Department would do a follow up, but in the Western Cape the disaster management component was under the Emergency Housing Programme (EHP) and would therefore report on the fund differently. EHP was one of the 33 housing programmes. This was more of a reporting issue – it was a matter of having the right mechanism in place to track the disaster component.

Mr M Shelembe (NFP) said that Limpopo’s underperformance was clear, but had management looked into the cause. It did not help to merely state what was happening, without identifying the cause and how this could be addressed. Another issue was the overspending of provinces. He could be convinced of the merit of the overspending if the Department was happy with the outcome.

Ms V Bam-Mugwanya (ANC) asked if the Department had mechanisms to investigate and verify performance after receiving the progress reports from provinces.

Mr Tshangana said there was a Housing Subsidy System (HSS) that the Department used as a mechanism, and for the provinces not complying with the HSS, it would be picked up. For instance, as much as the Eastern Cape was performing very well in the current year, their compliance with the system was worrying. Also, before the end of each financial year, professional resource teams were appointed to do project verification – by law, the Department was required to do that.

Mr S Gana (DA) said it had been mentioned that KwaZulu-Natal had overspent by R175 million as at the end of January 2015. In the last year there was a report that eThekwini had spent more than their allocated budget and had been forced to go out to look for more funds. How was the Department now ensuring that provinces spent the money that they were given and did not go over, so that in the new financial year, provinces would not face the same problem that eThekwini had?

On rectification, Limpopo had no units to be rectified but the province had spent R2.9 million – the same thing had happened in the North West and the Western Cape. Last year, when there had been a presentation on the cost of a RDP house, it was around R160 000. However, in the Free State and Northern Cape, the cost to rectify a house was almost double the cost of building a new one. The provinces were spending over R300 000 and R216 000, respectively, per unit. Mr Gana asked what rectification work was being done, as it would be much easier to demolish the house and build a new one. This did not make sense, and needed to be looked into.

Mr Mbengo said the overspending reported in the report was related to what had been transferred to the province. This meant that KwaZulu-Natal was spending faster than the Department had transferred funds to the province. It had always been made clear to all provinces that they were not allowed to overspend on their allocation. However, due to the opportunities they had to push projects, they had been able to speak to their provincial treasuries and spend faster what had already been transferred to them. The Department was not worried about the province overspending on the total allocation.

Mr H Mmemezi (ANC) said the Committee was of the view that the Financed-Linked Individual Subsidy Programme (FLISP) should have been performing far better. There was a need for the programme, but progress was not good. It was comforting that in Gauteng and Limpopo measures had already been taken by the Department, where senior leadership had been sent to sit with senior leadership in the provinces to ensure that the money budgeted was spent.

Mr Mmemezi said the progress report on mining towns was vague, and should be clearer per province. This was a programme where the Committee wanted to see a difference. Linked to what Mr Gana had said, there should be value for money for all programmes of the Department. The Committee was happy that the Department had also seen that the rest of the metros were not performing well, and the metro forum would work in terms of the work done in the Ministerial and MEC meetings as well. The Department needed to indicate why the capacity grant was just transferred, and have plans to ensure that it capacitated metros to move faster.

Mr Tshangana said it had been recommended that the DHS relook at how FLISP was managed. Part of the FLISP programme was managed by the National Housing Finance Corporation (NHFC), but the budget came from the provinces. If the programme continued to perform as it was, then the Department would have to top-slice it and ask the NHFC to manage the whole of FLISP on behalf of the Department. There was no point in dispersing a component of FLISP to the provinces, and it was not performing as it should. There was a massive demand for this kind of subsidy, but it was not being managed as it should be.

Mr Mbengo said the Department had sent out letters to metros that were underperforming. They had been given seven days to respond as to why the Department should not withhold their allocations.

Ms T Baker (DA) said there was a discrepancy in the price of the completed units in mining towns. Was a standard house being built or did it vary from province to province? There was a huge cost variance per unit in mining towns from province to province. Also there was a huge difference between the gazetted amount and the allocated funds.

Ms L Mnganga-Gcabashe (ANC) asked why Gauteng and Mpumalanga could not report on rectification. She could not understand how such big metros would not need to rectify houses. Also, when provinces were not performing and there was “0” on reports, where were the managers from the national Department who were responsible for those provinces -- what were they reporting quarterly?

The Department had reported that they were worried about the over expenditure on OPSCAP. How would these provinces offset the shortfall? If the Department did not have those mechanisms, the Auditor General would come in on those metros and provinces and query the Department, as they had allocated the funds.

Regarding social housing and rental housing, she said Limpopo and Mpumalanga were not reporting. After having been to Limpopo, she had seen there were people migrating from other small towns, but there was not a single report on Polokwane as a big city, with no social housing.

On the capacity grant that was allocated a week ago, it was clear that the Department was dumping the money on the metros -- they had only three months to spend that money. Under USDG and metros, Buffalo City was spending only 4% on waste management and refuse. This meant that the metro was dirty, because there was no proper waste management.

Regarding metro forums, Ms Mnganga-Gcabashe said she was surprised that the Department was reporting this as a new thing. There had for many years been a metro forum that used to sit in Stellenbosch, where the management of metros and national department officials would meet quarterly.

Mr Tshangana said that Gauteng had not budgeted for rectification in the coming financial year because the province had done a lot of rectification in the last ten years. They had been scaling down on rectification since 2008. The Minister had emphasised a focus on creating new opportunities, but there had been no complaints or objections over Gauteng not budgeting for rectification, as they had heavily invested in it in the past.

Limpopo had not performed for three years. Their Department of Human Settlements was not under administration, but was affected regardless. They had not managed procurement for two years and could not afford contractors in the current year and failed to appoint contractors in 2013. The province had not performed in the last two and a half years, so the Director General and the head of department (HOD) had been asked to sign an implementation protocol.

Mr Tshangana said the capacity building grant was disbursed late because the Department had changed tack in terms of accrediting the eight metros. The bulk of the grant was intended to help metros once they had been accredited to appoint professionals that would help them package their programmes and their pipelines. Some of these metros were managing a budget of R40 billion and could get capacity by using other departments within the metro. For instance, George Municipality had not beefed up their technical capacity, but had rather made use of the capacity in the engineering service to manage the project in human settlements.

Regarding OPSCAP, the North West had said they had made a mistake and had promised to correct it and use 5% of it before the end of the financial year, and would not go above that. They had used some of the OPSCAP budget to fund some of their initiatives, and once they went above 5% it became an audit issue, and it would be reflected in the audit outcomes.

The COO agreed that a city like Polokwane should prioritise social housing, as there was a big demand for rental housing. However, as said before, Limpopo had not been performing for two years and therefore not a single programme could be reported on. In 2012, the province had delivered a very good Community Residential Unit (CRU) programme.

The Chairperson said that according to the programme of the Committee, on 17 March the Department had been asked to make a detailed presentation on mining towns. In the responses from the Department, the Chairperson asked that they address how they were dealing with metros that were using the USDG on programmes they were not supposed to use it on.

Ms Zoliswa Kota-Fredericks, Deputy Minister, DHS, added that the critical aspects of the report spoke to the issue of the Human Settlement Development Grant. There were two provinces which were the weakest link, but the Committee should find comfort in that there was a standing committee focusing mainly on the issues of Limpopo and the approach of the Committee with Gauteng going forward. The USDG was a precursor to the Human Settlement Development Grant, and these grants should be used for bulk infrastructure development. At the moment, it was a free-for-all scenario. The Department needed to streamline more on what the USDG was intended for, in order to give value for money.

Mr Tshangana said the USDG had been introduced without any specific policy, but the Department was working on correcting that. The best way to deal with the contestations over the USDG was to pass legislation. The grant was to buy bulk infrastructure, land for human settlement, restructure spatial planning and create jobs – the policy would outline all these.

Update on backlog in issuing of title deeds

Mr Bryan Chaplog, CEO of the Estate Agency Affairs Board (EAAB), gave an updated report on the backlog in issuing title deeds.

Both legislation and policy confirmed the need to ensure access to title. Key component of the Human Settlements Programme was that a title deed should be provided in instances of ownership. However, recent studies had shown an increasing number of beneficiaries not receiving title upon occupation. While the Department was aware of, and had previously taken steps to remedy, the problem, a more co-ordinated response was required.

Research by Urban LandMark in 2011 had shown that 1, 44 million beneficiaries had title deeds to their properties. Of the 1, 44 million, 91,000 (6%) had since been sold, generating R12 billion in revenue.

Houses were an asset -- they could be sold and used to leverage loan funding. Property appreciated in value, and home improvements translated into greater financial value.

A house gave a beneficiary an address, a place of belonging and a base for social networking. Without deeds, the houses were dead capital.

 

Informal sales undermined deeds registration systems. The potential of expanding end-user finance in the secondary housing market had been curtailed, and in turn the ability of banks and lenders to operate at the lower end of market had been severely limited. Legally, informal sales resulted in a discrepancy between the current occupants and owners. There was difficulty in title correction and confirming ownership.

 

Since 1994, 3.8 million units had been delivered. In 2011, the Urban LandMark Report showed that there were 1.44 titles in the deeds registry. Some subsidies would have gone into programmes such as rental, communal areas -- estimated at some 400,000 units. Few provinces had a clear picture, but at best most guessed how much stock they had and the outstanding deeds.

 

Pre-94 Challenge

Municipalities did not have the capacity to assume ownership and administrative responsibility for housing assets. They refused to accept the transfer of properties, given the perception they were ‘liabilities’. Provincial departments were currently paying rates and taxes to municipalities, so the transfer of assets would result in a loss of income for the municipality. Provinces also had capacity issues -- the transfer of properties was delayed due to a lack of the necessary skills.

 

Post-94 Challenge

There were delays in proclamations and township registers, a proliferation of informal settlements, a failure to value municipal properties and correction of title deeds. In regard to project management, there was a failure to close-out projects, and incorrect house allocation vis-à-vis deed registration and beneficiary administration. Home ownership was a key pillar of the government's poverty alleviation programme. The biggest problem was that there was no handle on the extent and nature of the problem. The backlog and ever-decreasing registration of title deeds significantly undermined the performance of subsidised housing assets, and represented a serious challenge to housing asset quality.

 

Scoping Exercise

During the scoping exercise, it was discovered that few provinces had a clear picture and used ‘guestimates' at best. With the involvement EAAB, they were to provide leadership and support to achieve the project goal. During the project duration, EAAB would provide logistical support (e.g. contract management, IT support and administrative support) to guide, monitor and oversee the planning and implementation processes, and would disburse national funds in line with the project mandate. The EAAB would sign implementation protocols with each province, appoint additional capacity where needed, and in line with the protocols and budgets available, they would report to the Technical MinMec and MinMec on strategy, project progress and project expenditure.

The Steering Committee would be the central guiding body for the project, with representation from national and provincial departments of Human Settlements, the SA Local Government Association (SALGA), and relevant housing institutions. There would be oversight and monitoring of the achievement of the project goal and delivery targets, and corrective actions proposed during the key phases of the project.

Critical Success Factors

The total cost of restoration could not be determined until the scale and nature of the backlog was calculated. Regarding policy, there ought to be a pre-emptive clause, de-linking the subsidy from the beneficiary, a removal of sequential milestone payments, and individual property rights on communal land. Other important factors were beneficiary administration, project management, a broader human settlements policy, and political will and intervention.

Mr Chaplog outlined timeframes, where the pre-1994 stock would be concluded in March 2017, and a full rollout and conclusion of the post-1994 stock in March 2018.

Way forward

The scoping exercise needed to confirm in detail the nature and extent of the registration backlog, and produce a detailed implementation plan and costing for clearing it. The steering committee would provide oversight by way of a national committee and nine provincial steering committees. The national steering committee was to be scheduled in February 2015.

The Department was currently in the process of reconciling beneficiary information with data from the Deeds Office. There would be institutional engagements to fast track conveyancing and to ensure there was no communication breakdown with the Department. There would be planning and monitoring of the registration of the backlog, current projects and ongoing trends in respect of conveyancing. KwaZulu-Natal and the Free State would be the pilot provinces with the sectionalising their pre-1994 hostels and the transfer of pre-94 stock in Qwa-Qwa.

Discussion

Ms Baker asked for clarity on slides 13 and 19, as the information did not correlate.

Mr Chaplog said the information on slide 13 was an indication of information that had been verified, audited and confirmed in a report covering the period of 1994 to 2009. This was information released in 2011. From 2009 to 2015, perhaps referring to “unknown” was incorrect, but what was being said about Gauteng was that the province was unable to give the exact number of its backlog.

During the scoping exercise, the EAAB did not want to release information that was not a 100% accurate. From a province’s perspective, they may have given instructions to the conveyancers, and were currently in various stages of delivery. In these stages, it meant that the process was out of the hands of the provinces. The deeds office had issued a number of deeds. The problem was that there had been a breakdown in relations between the conveyancing firms (who would have received the instruction) and the province (who had instructed them two or three years ago). This was why the Department was intervening, to bring some clarity to the matter.

Ms Gqada said the information on the presentation was nothing new. She had expected that the report would have given practical implementation of the information that the state already had.

The Chairperson reminded the Committee that the issuing of title deeds had continued, but the backlog was what the government was worried about. The EAAB had been given the scoping responsibility by Minister Lindiwe Sisulu on 28 October 2014, during the 100 day programme. It needed to be agreed on that there progress had been made in terms of the task given to the EAAB. At the next meeting, the EAAB would have to report on progress made since the scoping and the programme it had in place.

Mr Gana asked if it was possible that the stock which provinces said they had, might not be true. How was the EAAB verifying the numbers from provinces? For instance, in the North West, it was not possible to have a province that had no idea how much stock they had.

Mr Chaplog said they had contacts in the provincial departments working with the EAAB to solve the “unknown” category. Each province was represented in the provincial steering committees at the highest level, where the HOD or delegates became members working together to solve the problem. There had never been a situation where information had to be extracted from provinces -- they were all forthcoming.

Title deeds were issued weekly, the work continued, and there had been work done to reduce the backlog. There would be a presentation to the Committee on the impact made nationally, weekly and monthly. The numbers would be truly confirmed and correct if the ID numbers of the intended beneficiaries could be matched against the deeds registrar nationally. There was also work needed to get the information from Home Affairs, to confirm which beneficiaries had passed away.

Progress on the amalgamation of Development Finance Institutions

Ms Tshepiso Lehoko, Chief Director of Operational Policy Frameworks, briefed the Committee on the progress and process of the amalgamation of the Development Finance Institutions (DFIs).

This business case set out the rationale for the proposed establishment and also provided the details of the institutional framework and arrangements for the consolidated DFI. In preparing this business case, cognisance had been taken of the following:

- specific requirements in respect of public entity establishment as determined by National Treasury and the Department of Public Service and Administration;

- relevant legislative and policy guidelines - the Public Finance Management Act, Public Entities Guidelines and other legislation governing public entities;

The housing sector was supported by three DFIs – the National Housing Finance Corporation (NHFC), the Rural Housing Loan Fund (RHLF) and the National Urban Reconstruction and Housing Agency (NURCHA). The DFIs were created to promote social and economic development and individual DFIs had specialised areas of operation. National Treasury had undertaken a review of the mandates of South Africa’s Development Finance Institutions (DFIs) at the request of Cabinet (March 2008). The Treasury Review recommended amalgamating the housing sector DFIs into a single institution. The proposed new consolidated DFI would have three main divisions focusing on:

• Intermediary Finance

• Contractors

• Financing

Following the Treasury Review, the DHS had undertaken an investigation into finance delivery mechanisms for the human settlements sector. The presentation highlighted the three phase process the Department was undergoing, of which currently they were in phase two - business case and consolidation into the NHFC.

Needs Analysis

There were 9.7 million households in South Africa earning less than R10 000 per month, of which 6.9 million qualified for subsidised housing. For households earning between R3 500 and R10 000 per month, there were limited subsidies and finance available. There were 1.2 million households in informal sectors, including backyard rental and informal settlements. All these meant that there were significant housing product gaps.

There were significant constraints in South Africa with respect to finance for the human settlements sector. The presentation listed the sector challenges, which included household indebtedness, delays in approving subsidy agreements and municipalities’ inability to adequately finance infrastructure.

Rationale

All South Africans had the right to access adequate housing (Section 26 of the Constitution) and government was obliged -- as set out in the Housing Act -- to take all reasonable legislative and other measures within its resources to achieve the progressive realisation of this right. The current national housing policy framework was underpinned by a range of interventions, including capital and other subsidies, as well as the functions of the three DFIs. Access to adequate housing remained a significant challenge for South Africa. The current housing market was characterised by constraints and market failures in key segments.

The government had delivered in excess of two million houses since 1994, but needed to focus on quality rather than just the quantitative results. The revised housing finance strategy required a significantly expanded response at a number of levels if the overall human settlements needs were to be met. The revised housing finance strategy therefore strongly indicated the need to build on, as well as rationalise and coordinate, the efforts of the existing capacity of the Human Settlements DFIs, as well as other related public entities and DFIs.

Case for consolidation of DFIs

A single Human Settlements Development Finance Institution (HSDFI), with sufficient capitalisation and the ability to mobilise the necessary funding, was proposed. The core rationale resided in the need to provide effective government financing support to key segments of the housing market in the face of considerable market failure and a significant need. The rationale for such an entity was further that it would:

• Ensure that existing institutional capacity was retained;

• Realise synergies and effect cost savings;

• Maximise balance sheet capabilities;

• Regularise and strengthen the mandate and authority of the HSDFI.

 

The NHFC, NURCHA and RHLF were to be amalgamated into a single development finance entity. This would result in an improved policy and functional alignment, operational economies of scale, optimal financial resource allocation and an environment conducive to an innovative and expanded human settlements finance provision. A consolidated DFI would be extended to include the investment function of the Social Housing Regulatory Authority (SHRA).

 

The role of the HSDFI would be to provide effective government financing support to key segments of the housing market in the face of considerable market failure and significant need. Given the policy mandate, as well as the identified needs of the sector, the core functions of the HSDFI were as follows:

• Provision of unsecured finance;

• Provision of mortgage-backed finance;

• Provision of rental housing development finance;;

• Provision of development finance for reticulation and link infrastructure;

• Provision of contractor and developer support;

• Capacity building of financial intermediaries;

• Promotion of innovation and new product development ;

• SHRA investment function -- added as a further core function.

 

Options Analysis

 

Option 4 – Public Entity

The HSDFI would be established through enabling legislation. It was currently not possible to provide an overview of the provisions of the legislation, as it had not yet been developed. The options analysis had indicated that a Government Business Enterprise (GBE) (Section 3B entity) be established:

 

- To ensure the mandate and capability to raise external funding was met;

- To enable the entity to invest surplus funds directly in its own activities;

- To ensure that the entity was tax exempt, enabling greater re-investment;

 

Practical Establishment – DFI

The establishment of the HSDFI through enabling legislation would be lengthy process. Practical implementation presented two options;

 

• Option 1 –

  • Entities remain as they were until the new legal entity was established;

  • Entities would then be collapsed into the newly established GBE;

  • Remaining legal entities could then be liquidated and deregistered;

  • The investment function of the SHRA could be transferred from the SHRA to the HSDFI in terms of the new legislative framework.

 

• Option 2 –

  • Two smaller DFIs (NURCHA & RHLF) could be consolidated into an NHFC legal entity;

  • The investment function of the SHRA could be outsourced by the SHRA to the consolidated DFI until the new legislative framework was put in place;

  • The consolidated entity could be converted or transferred to the GBE once the new entity was established via legislation.

 

The legislative mandate for restructuring the capital grant currently resided with the SHRA. The timeframe for repositioning of the mandate into the HSDFI may be some time in the future. The proposed repositioning could best be accomplished at the time of formulating the revised legal framework for the consolidated DFI. It was proposed that integration of the investment function be undertaken via the outsourcing of this function by SHRA to the consolidated HSDFI.

Human Resources implications

An initial assessment of the Human Resource structures of the three institutions, as well as the investment function of the SHRA, had been undertaken. The current organisation structures showed 80 employees in the NHFC, 42 in NURCHA, 13 in RHLF and three employees in the SHRA’s investment function, giving a total of 123 employees. Using a simplistic approach of direct overlap of certain positions, a total of 15 positions had been identified where synergies could be achieved. The value of these 15 positions was estimated at R7.9 million. The three institutions, with the SHRA’s investment function, jointly had in total 11 vacant positions with a total value of R5 million.

The consolidation of the three institutions should therefore provide the opportunity for more effective utilisation of resources. It was unlikely that the consolidation would necessarily result in the rationalisation of employed positions, but rather that the redeployment of key individuals could result in a more effective organisation structure. Staff of the existing organisations would transfer in their entirety, on all their existing terms and conditions in terms of a Section 197. The transfer would be managed and coordinated by the necessary specialists and supported by a comprehensive change management and communication plan. Although a limited number of positions were directly impacted, voluntary severance packages for existing staff may be made available for duplicated positions.

Financial implications

The forecast for consolidated income for the HSDFI would be revenue of R567 million, with operating costs of R250 million. Consolidated net profit for the merged entity would be R27 million before tax, with a tax cost of R2 million incurred by the NHFC and RHLF. The consolidated cost to income ratio would be approximately 44%. Loans and advances would total R3.07 billion, with cash and cash equivalents amounting to R745 million. Funds under management would be R311 million, with an accumulated surplus of R1.485 billion and a total equity of R3.5 billion. Consolidation of the three entities was likely to result in total capital funding for the consolidated institution of R4 billion, comprising external borrowings of R528 million and own equity of R3.5 billion.

The shareholder had the opportunity to determine the scale of the institution’s impact. The immediate capital requirements of the three individual entities, as presented to the shareholder, were in the form of requests for capitalisation and approval of external borrowings. It was proposed in this business case that these requests at the individual institutional level, transition directly into the consolidated DFI, forming the initial portion of capital funding and borrowing to enable both sustainable and developmental activities at the scale initially required by the DFI.

Implementation Plan

Establishment of this entity required the drafting and passing of legislation for its establishment. The legislation would also specify the functions, governance and other key aspects of the GBE. A two-step implementation process was recommended, which included in-sourcing the SHRA investment function and merging the activities of NURCHA and RHLF into theNHFC, and then converting the DFI into a GBE by way of specific legislation.

Step 1 - immediately agree the merger of the three entities into the existing NHFC structure through the appropriate legal agreements, to transfer the assets, liabilities and other contractual responsibilities from the existing entities into the NHFC.

Step 2 – commence the process of the voluntary liquidation of the two remaining DFI shell companies.

Step 3 – pass legislation to establish the GBE and either convert the NHFC into this GBE or transfer all assets, liabilities and responsibilities into the new GBE and transfer the legal mandate of the restructuring capital grant from SHRA to the new entity.

By December 2018, the dissolution of the existing DFI companies would be concluded.

Discussion

The Chairperson confirmed that the amalgamation process was in phase two, and that the current process did not interfere with the current functions of the DFIs.

Ms Mnganga-Gcabashe said she was leaning towards supporting option two, but asked for more clarity and information on the takeover of assets and liabilities. If option two was to be the chosen route, without the legislation securing the takeover of assets and liabilities, what would the implications be?

Mr Samson Moraba, CEO of NHFC, said option one proposed the creation of a new entity and there would be legislation to set it up, and after that all three entities would then be put together. However, option two proposed the use of an existing entity – and in terms of timeframes, this would have to be done as soon as possible. Option two had two paths to it -- the consolidation of the two entities into one entity (the NHFC). In the end, the outcome was the same, but option two was speedier.

The Chairperson said that through evaluating the milestones, the Committee would understand the process better. Neither the Department nor the Committee had gone through a similar process, so this would be a learning curve for both parties.

The Chairperson thanked the Department, the Deputy Minister, the EAAB and the entities for their attendance, presentation and inputs.

Meeting was adjourned.