Social Housing Regulatory Authority turn-around strategy; National Home Builders Registration Council irregular expenditure

Meeting report

Opening remarks

The Chairperson opened the meeting by welcoming the Department of Human Settlements and the officials from its public entities. She announced that the Chief Executive Officer of the Social Housing Regulatory Authority (SHRA) was running late. She reminded the Committee that it last met with the National Home Builders Registration Council (NHBRC) on 8 November 2016, and the purpose of the meeting was for the NHBRC to brief the Committee on the progress made with the audit investigations regarding its irregular expenditure and the form of legal actions that had been taken against employees who were implicated.

Briefing by the National Home Builders Registration Council (NHBRC)

Mr Abbey Chikane, Chief Executive Officer, NHBRC, reported that when they last met with the Committee, they reported that the key challenges of the entity were the slow and ineffective Supply Chain Management (SCM) functions, which resulted in the slow delivery of goods and services. They were also slow in complying with Treasury regulations, which resulted in irregular expenditure. The root causes of these challenges were the lack of demand planning and integration with business needs, lack of appropriate control monitoring and compliance in the SCM functions, and limited business user knowledge, discipline and accountability for compliance.

As a way of responding to the challenges, the entity committed itself to implementing changes. First, the Council drafted and approved policies for the SCM, Unauthorised Irregular and Fruitless Expenditure and Broad-Based Black Economic Empowerment (BBBEE). Second, the Control Framework was improved and compliance thereto was designed and implemented. Third, more efficient and authorised SCM processes and related controls was designed and enabled by SAP. Lastly, Demand Management was implemented, and integrated with the budgeting and planning process. This was carried out to fully understand business requirements and to inform SCM resourcing requirements.

For the 2016/2017 financial, year the entity incurred irregular expenditure of R2 309 828, which was a decrease from the previous financial years irregular expenditure of R13 077 260. In order to deal with the irregular expenditure, the Council Task Team was appointed to oversee and recommend condonation where applicable and an independent auditing company was employed to conduct the investigation independently. A meeting between the entity and National Treasury was convened in December 2016 to confirm the entity’s understanding of the process of condonement, and a special sitting of Council was scheduled for 21 February 2017 to consider the condomenent of irregular expenditure. Further, Volume 1 of the work was concluded by the audit company on 15 December 2016 and that was presented to the Committee. The second volume will be completed before March 2017.

Discussion

Mr H Memezi (ANC) said he was not happy with the large amounts of money that appeared under irregular expenditure. The work of the NHBRC was to provide goods and services to previously disadvantaged communities. However, with the amount of monies that were being stolen and used inappropriately, government was unable to deliver services to these communities. He asked that the second volume of the audit investigation be concluded speedily, but that it also be done correctly.

Mr K Sithole (IFP) noted that the special Council sitting was scheduled to take place on the same day as the Committee meeting. He asked which legal steps had the entity taken against the 19 employees who resigned after they were found to be guilty of financial negligence, and how long it would take for the audit company to complete its second phase of the investigation.

Ms L Mnganga-Gcabashe (ANC) was pleased to hear that the entity chose to employ an external audit company to conduct the investigations. However, both the Department and the NHBRC should come back and present a progress report in April 2017. She asked for clarity regarding the internal drafts of the SCM and BBBEE policies, saying that she thought the standard procedure was for entities to adopt the national SCM policies and follow Treasury guidelines.

The Chairperson reminded the Committee that the NHBRC would present on their progress report on 28 March 2017.

An official from the NHBRC responded by saying that the entity agreed with Mr Memezi and they realised how far back the irregular expenditure set them. The special Council meeting that was scheduled for 21 February 2017 was moved to 27 February 2017.  The decision to move the meeting was made after the Committee requested for an update relating to the audit investigation. The entity was in the process of drafting consequent management plans, and once the draft was completed it planned on taking legal action against the employees who were implicated. The second phase of the audit investigation was expected to take 12 months, however, the entity was scheduled to report to the Committee on 28 March 2017, and whenever they were needed to present quarterly reports. All their in-house policies complied with the national policies such as the Public Finance Management Act (PFMA) and Treasury regulations.

Mr MbuleloTshangana, Director-General: Department of Human Settlements, added that the Department and its entities were guided by Treasury regulations as well as the PFMA. He also agreed with Mr Memezi that the legal processes, as well as the audit and implementation had to be speeded up.

The Chairperson thanked the NHBRC for its detailed presentation and for cancelling their special meeting to attend the Committee meeting. She added the NHBRC was an important entity for the housing sector, therefore they should ensure that the audits and legal processes were completed as soon as possible so that they could continue to deliver their mandate.

Briefing by the Social Housing Regulatory Authority (SHRA)

Mr Rory Gallocher, Chief Executive Officer, SHRA, reported that the entity initiated an Organisation Development Project in June 2016. The development project would be conducted in two phases: phase one would be the strategy and structure, and phase two was the operations, culture and systems.

Phase one included a strategic plan update, Annual Performance Plan 2017/2018, Strategic Human Resource (HR) plan, updated HR policies, revised programme structure to enable delivery and a new structure. The new structure was approved by the Minister on 6 December 2016. The previous organisational structure consisted of three executives who reported to the CEO, now the new structure had four executives who reported to the CEO. Unlike the new structure, the previous one was hierarchical with several layers on management. Regulations and investment were separated; these departments were now managed by two executives with their own units. The previous structure’s investment team consisted of managers that accepted projects onto the SHRA’s pipeline, awarded and managed grants. The new structure’s investment team consisted of Portfolio Managers with regional performance targets based on delivery requirements. The grant awards was also managed independently of this team.

Phase two started in February 2017 and was expected to be completed in March 2018. The projects that would be undertaken under phase two were: operational framework and methodologies, Information Communication Technology (ICT), Monitoring and Evaluation (M&E), updating of sector development toolkits, rebranding the entity, culture change intervention and recruitment agencies. The revision of policies was required in order to align the entity’s operating framework to the strategy, revised programme structure and organisational structure of the organisation. The development of an ICT was important for automating processes, which would enhance performance, security and the safekeeping of records. The development of an M&E framework would help assist the entity to monitor and evaluate performance, outcomes and impact. Amongst other changes, the entity was thinking about renaming the entity, changing its logo to make it more accessible and easier to understand what the role of SHRA was.

In terms of the project packaging of pipeline applications, SAHRA received projects throughout the year and upon communication the applicants were advised to present the project to the Provincial Steering Committee (PSC). Application tools for the financial year were then distributed to the PSC, which could be obtained through the SHRA to guide packaging of the projects. Once the projects were sent to SHRA, the files were acknowledged and recorded in the pipeline template for tracking purposes and were distributed to the pipeline team. A total of 26 139 units (54 projects) were pre-assessed; one additional project was withdrawn until there was a change in the funding structure.

In terms of factors that would enable the entity to fulfil its turnaround strategy, the Ministers and Members of the Executive Council (MINMEC) would have to approve more restructuring zones, and it was awaiting MINMEC approval of the Indexed Income Bands from R1500-R7500 to R1500-R15 000 and awaiting approval from the MINMEC for the revised funding structure as per the SHRA Council resolution on 1 December 2016.

Briefing by the Department of Human Settlements on Restructuring Zones

Mr Johan Wallis, Chief Director: Programme Implementation Support, DHS, reported that in June 2005 the Department approved the Social Housing policy. In terms of the Social Housing Policy and Social Housing Act, Restructuring Zones had to be declared through a Ministerial approval. Upon approval by the Minister, these zones had to be gazetted and all social housing projects had to be located within such restructuring zones.

The social housing programme had two primary objectives: first it was to contribute to the national priority of restructuring the South African society in order to address structural, economic, social and spatial dysfunctionality and improve the overall functioning of the housing sector. Restructuring zones were identified by the local authority and a Council resolution to that affect had to be in place; the zone could not be the entire municipality but it had to be a specific area within a municipality. The demarcation process, as described in the Social Housing Policy and Guidelines of 2005, involved three phases: phase one consisted of the identification of 13 municipalities by the National Department as PRZs to pilot the social housing programme; during phase two the 13 municipalities had to formally submit their PRZs in the form of identified geographic areas, and in phase three there was an expansion of Restructuring Zones to other town and cities, should the programme prove to be successful.

There were a number of municipalities and provinces who identified and proposed additional Restructuring Zones for expansion to the social housing programme. The consultation process with both the municipalities and provinces were undertaken as an effort between the Department, SHRA, the South African Local Government Association (SALGA) and the Housing Development Agency (HDA). The consultation started in 2014 in a form of a workshop, task team meetings and assessment meetings. The final process took place on 15 and 16 September 2016 during the National Rental Task team meeting.

The assessment team had the following findings after the consultation process was complete: the Eastern Cape had 20 recommended areas for approval in the Nelson Mandela Bay Metro, Buffalo City Metro, Kouga Local Municipality and King Sabata Dalindyebo Local municipality. The KwaZulu-Natal province had 20 recommended areas in six municipalitie: eThekwini, Emnambithi, Newcastle, Kwa-Dukuza, Mhlathuze and Ray Nkonyeni municipalities. In the Western Cape a total of 30 zones were up for approval in Oudtshoorn, Mossel Bay, George, Knysna, Drakenstein, Overstrand, Stellenbosch, Saldanha Bay and Swartland municipalities. 28 zones were recommended in Mpumalanga in 10 municipalities: Govan Mbeki, Steve Tshwete, Mbombela, Nkomazi, ThabaChweu, Lekwa and Victor Khanye municipalities. In the Gauteng province 36 zones were recommended for approval; these zones were in Westonaria, Merafong, Randfontein, Mogale City and the Ekhurhuleni municipality.

He concluded by stating that in the Free State there were no zones that were recommended for approval as the province was still working on the submission of applications with the identified municipalities. The MEC for Human Settlements in the Northern Cape submitted support for Gamagara and Tsantsabane local municipalities as restructuring zones.

Discussion

Mr Sithole asked for an explanation of bullet number 2 on page 16, and why the development costs for the projects in Germiston, Alra Park Ext 5&6 and Cullinan were not included in the presentation.

Ms T Baker (DA) asked what the time frame was for waiting on MINMEC’s approval for the Index Income Band. The units at the Lekwa Local Municipality were still vacant, in fact they were not in the position to be occupied because there was no running water. The Hillside View zone in Mangaung was in construction for a long period, and there was no indication as to when the restructuring would be completed.

Ms M Nkadimeng (ANC) asked why the Limpopo province had only one municipality that submitted applications for Restructuring Zones; and whether this was due to the MEC not making any submissions or if it was due to administrative matters.

Ms V Bam-Mugwanya (ANC) said she was worried that the 44 headcount in the organisational structure would cause financial problems, especially when the restructuring took place before strategic planning. She advised the entity to try and restructure their organogram before new strategies were being implemented.

Ms M Mokause (EFF) said the fact that the North West, Free State and Northern Cape did not submit zones for approval showed that there was a lack of commitment and compliance from the provinces. She asked which measures the department would implement to ensure that there was full compliance from the provinces to help the Department reach its national targets.

Ms Mnganga-Gcabashe advised that it would be proper for the Committee to receive quarterly updates from the entity. She added that the entity ought to have a good communications strategy in place to help them make SHRA successful.

Mr Memezi said that having irregular expenditure was not something that the Committee should entertain; the entity had to learn to work within its budget. He was worried that the constant restructuring of the organisation would disturb the flow of information, and it was entirely time wasting as it affected the pace of the delivery of services. Transformation covered numerous areas and SHRA should ensure that it was empowering the previously disadvantaged. It should invest in working with new contractors that were managed by people from previously disadvantaged communities as a means of empowering them.

The Chairperson asked how SHRA ensured that small contractors continued to be empowered and assisted in areas where they did not seem to be improving, and how could they ensure that the approval of zones was done at a much faster pace. She said it was problematic that it took the entity more than five years to identify and approve the Restructuring Zones; this meant that the current zones that were being identified would only be approved after 2019. This slow pace of service delivery was unacceptable.

Mr Gallocher responded saying the cost of the projects in Germiston, Alra Park and Cullinan were part of the project pipeline budget that was yet to be verified by MINMEC. Phase one of the Organisation Development Project would be completed in the next five months and the second phase would start in two months and the phase would take 18 months to complete. Many of the areas which were identified as Restructuring Zones were owned by private companies or private owners, and not the municipality. Although some municipalities firstly reached agreements with the private owners to turn the land into a zone, the agreements expired before the land could be approved. This scenario was the case for many of the provinces that did not submit applications for restructuring zones.

The Committee had to note that SHRA did not have provincial offices and the 44 headcount was meant to make up for it not having structures in provinces. The pressing issue was mainly having the right technically skilled employees who were able to deliver on a national basis. Unlike the previous structure, the current structure was lean and many of the positions which were restructured were those that required technical skills. The entity also found that it would cause problems to have the regulator and the developer in the same management; this would bring about control issues. In the process of restructuring the organisation, he was pleased to announce that there were no retrenchments. He said that out of all the provinces, the Eastern Cape received a large amount of investments for the zones. SHRA also implemented a new communication strategy. In the past weeks the Supply Chain Manager was doing interviews on Metro FM regarding the role of SHRA and how far along the construction of the zones were.

Mr Wallis responded by saying that the zones in Limpopo were approved in the last minute before the MINMEC meeting. Their relationship with the SALGA helped the entity and Department greatly by helping the municipalities identify the Restructuring Zones. The process to submit the identified zones to MINMEC was delayed by the Department. The mistake that the Department made was allowing municipalities more time to identify zones after the deadline. Owing to this, the Department made the decision to not submit the zones that it already had because they did not want to submit the list of zones in batches. 

Mr Neville Chainee, Deputy Director-General: Strategy and Planning, DHS, added that a budget for the 2017/2018 financial year was being considered by MINMEC. Although there were 127 zones that were identified and approved, only 13 of these zones received investment. The submission of applications for Restructuring Zones was done by the provinces and not the Department itself. Hence, the Department could not force the provinces to submit their applications faster, nor could it force the municipalities to agree to the areas identified as zones.

Adoption of Draft Minutes: 14 February 2017

Ms Nkadimeng moved for the adoption of the minutes. Mr Memezi second the motion for adoption. The minutes were adopted without amendments.

The meeting was adjourned.