Development Finance Institutions; Housing Demand Database; Human Settlements Cooperatives: DHS briefing

Human Settlements, Water and Sanitation

28 February 2017
Chairperson: Ms N Mafu (ANC)
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Meeting Summary

The Department of Human Settlements (DHS) briefed the Committee on the consolidation of development finance institutions, and provided an update on the National Housing Database on Demand.

The Committee posed questions to the CEO’s of the three development finance institutions: The National Housing Finance Corporation (NHFC), the National Urban Reconstruction and Housing Agency (NURCHA), and the Rural Housing Loan Fund (RHLF).

The Department informed the Committee that these institutions would form the Human Settlement Development Bank (HSDB) once the HSDB Act was passed by Parliament. It assured the Committee that the HSDB would focus on creating real impact on its target market of low-income households in both urban and rural areas. Currently, the key areas for providing human settlement finance were Limpopo, Mpumalanga, the North-West Province, the Eastern Cape, Northern Cape, the Free State and inland Kwazulu-Natal. He noted that previous targets had excessive focus on urban centers and metropolitans, neglecting rural populations. At an operational level, Mr. Chainee noted that the National Urban Reconstruction and Housing Agency and the Rural Housing Loan Fund would become operating entities of the National Housing Finance Corporation until the establishment of the Human Settlement Development Bank. In terms of the progress made thus far, consolidation still required Information Technology Integration, administrative integration and the physical movement of the Rural Housing Loan Fund and National Urban Reconstruction and Housing Agency staff. With regards to the latter, he assured the Committee that integration would have no adverse human resource impact.

The Human Settlement Development Bank was expected to capitalise on four sources of funding: shareholder capitalization and investor equity; operating surpluses from interest and fee income; borrowings; and income tax exemption. All of the National Urban Reconstruction and Housing Agency and the Rural Housing Loan Fund’s assets and liabilities would be transferred to the National Housing Finance Corporation by October 2017. The total consolidated assets reported for 2016 was reported at around R5 Billion. Members raised concerns about the transfer of liabilities to the newly consolidated entity, to which the executives of the Development Finance Institutions assured the Committee that none of the liabilities of the institutions would be crippling to the proposed entity.

Concerning the National Housing Database on Demand, the Department reported that the Minister of Human Settlements gave the DHS a directive to eradicate corruption, collusion and mismanagement in the register for allocation of housing. Limpopo was in the process of implementing the database, while data from the North-West Province, Kwazulu-Natal and the Free State were still in the process of verification. Gauteng had the greatest number of households on the Database, with around 955 000 of the total 1.9 million households registered.

Regarding the timeframe for the process, the DHS stated that it had already missed the Minister’s proposed deadline for implementation. He stated that this was due to uncooperative provincial and municipal entities with bad or unavailable records.

Meeting report

Opening remarks
The Chairperson reminded Members that the Department of Human Settlements (DHS) provided a progress report on the Consolidation of Development Finance Institutions in November 2016. This meeting would therefore serve as a more comprehensive briefing on the same issue. The Chairperson noted that the DHS’ presentation for the uplifting of human settlements cooperatives was not yet complete, and this would be postponed to a later date.

Report on the consolidation of Development Finance Institutions
Director-General of the DHS, Mr Mbulelo Tshangana, introduced the management committee overseeing the consolidation of three development finance institutions. Mr  J Fakasi, Chief Executive Officer (CEO) of the Rural Housing Loan Fund (RHLF); Mr V Gqwetha, Managing Director of the National Urban Reconstruction and Housing Agency (NURCHA); and Mr  S Moraba, CEO of the National Housing Finance Corporation (NHFC). He stated that the management committee were better prepared to discuss operational matter, and invited the Committee to pose any questions to himself or the “three CEOs”. Mr Tshangana informed the Committee that the Minister of Human Settlements, Ms Lindiwe Sisulu, targeted 20 April 2017 as the date for the launch of the newly consolidated Development Finance Institution (DFI). In this regard, he stated that the DHS wrote to the Department of Trade and Industry (DTI) requesting certain tax exemptions from the Companies Tribunal, which fell under the DTI’s jurisdiction. He highlighted that the Human Settlements Development Bank Draft Bill would have to be passed through Parliament in order to finalize the consolidation of the institution. Mr Tshangana stated that Mr. Neville Chainee, Deputy-Director General of the DHS, would be presenting on behalf of the Department.

Mr Chainee stated that the rationale for the consolidation of the DFI’s derived from the ‘Breaking New Ground’ (BNG) Framework, as well as the National Treasury’s Review of the DFI’s. More generally, consolidation was necessitated by three factors: Firstly, to increase the scale of the impact by the institutions, considering the shortcomings of the market in adequately addressing the needs of the sector. In this regard, the lack of finance equitability in the property sector had somewhat entrenched persisting racial patterns spatially. Secondly, he highlighted the need to improve effectiveness of the institutions. In this regard, he stated that RHLF, NURCHA and the NHFC achieved relative success, however consolidation would enable greater operational streamlining and financial leverage. Lastly, the consolidated institution was expected to be sustainable in the long-term, considering that financial stability concerns were generally used to justify reduced risk-taking among DFI’s. Mr. Chainee stressed the need for affordable housing, considering the prevalence of constrained household incomes, high levels of indebtedness, limited innovative end-user finance, and weak government assistance for the “gap” market.

Mr. Chainee stated that the proposed Human Settlements Development Bank (HSDB) would effectively cover the entire housing finance value chain for human settlements delivery. In this regard, the institution would enable greater leverage from the Urban Settlements Development Grant (USDG) and other funds. He stated that although the HSDB would not act as a retail bank, working together with retail banks would improve the ability for households to gain access to housing credit. Moreover, the HSDB would seek to change the trajectory and composition of the construction sector, considering the lack of available funding for black-owned development contractors. In this regard, the consolidation of three entities would, intuitively, create a better resourced institution and presumably better results. The HSDB’s business model also emphasized Equity funding and Strategic investments, as well as Advisory/technical assistance. 

Mr Chainee stressed that the HSDB would not be internally focused on government, but instead focused on creating real impact on its ‘target market’ of underprivileged households in both urban and rural areas. Currently, the key areas for providing human settlement finance were Limpopo, Mpumalanga, the North-West Province, the Eastern Cape and Northern Cape, the Free State and inland Kwazulu-Natal. He noted that previous strategies were overly-focused on urban centers and metropolitans, where infrastructure linkages were good. However, in rural areas where infrastructure was poor, housing finance may not be as accessible. For this reason, he continued, the HSDB would necessarily pay attention to the ‘secondary-cities’ in the aforementioned areas.

Mr Chainee noted that the HSDB proposed three primary sources of funding:
- shareholder capitalization, community reinvestment and investor equity
- operating surpluses from interest and fee income
- borrowings and its income tax exemption status.

Mr Chainee highlighted that none of the existing DFI’s were underpinned by legislation, therefore the passing of the Human Settlements Development Bank Act would allow the entity to operate more autonomously. In order to consolidate the HSDB financially, Mr. Chainee noted that all of NURCHA and RHLF’s assets and liabilities would be transferred to the NHFC by October 2017. He noted that compliance issues associated with a for-profit organization (the NHFC) taking on the assets of non-profit organizations (NURCHA and RHLF) presented obstacles to obtaining tax exemption, however the DHS has requested that the Minister of Trade and Industry fast-track the Companies Tribunal decision. Mr. Chainee noted that the draft of the Human Settlements Development Bill would be introduced to the Minister this week, and introduced to Parliament by the second term of the 2017/18 financial year.

In terms of operational integration, Mr. Chainee noted that NURCHA and RHLF would become operating entities of the NHFC until the establishment of the HSDB. In terms of the progress made thus far, consolidation still required Information Technology (IT) integration, administrative integration and the physical movement of RHLF and NURCHA staff. With regards to the latter, Mr. Chainee assured the Committee that consolidation of the entities would have no adverse human resource impact.

The Chairperson thanked Mr. Chainee for the presentation, and invited the management committee to add to the information provided by Deputy Director-General.

Mr Gqwetha, NURCHA noted that the management committee expected to orientate members of the NHFC Board later this week. Mr. Kakazi, RHLF, stated that he had nothing to add, while Mr. Moraba, NHFC, had not yet arrived.

Discussion
The Chairperson noted that the expected date for the launch of the consolidated DFI was 20 April 2017, while the ultimate goal would be to establish the HSDB. She invited Members of the Committee to raise questions to the delegation.

Ms V Bam-Mugwanya (ANC) requested to know if the consolidated entity would charge interest, considering it was not a retail bank. How would it run on an operational level?

Mr M Malatsi (DA) requested to know what impact the absorption of NURCHA and RHLF would have on existing jobs at these entities. Did the DHS have a contingency plan to ensure a smooth transition in this regard? He raised another question concerning the running costs of the consolidation process, noting that the Deputy Director-General only touched briefly on capital allocation, without going into much detail. Lastly, Mr. Malatsi noted that the process of getting a Bill through Parliament was often unpredictable. There was no assurance that the Bill would be passed, potentially creating a legislative vacuum upon the bank’s launch on 20 April 2017.

Mr H Memezi (ANC) commended the Board on their work done thus far. He noted that the process of integration and rearrangement often caused service delivery to suffer. Would there be any way to speed up the integration process?

Ms L Mnganga-Gcabashe (ANC) commended the delegation on their progress, specifically the extension of the Board to include representatives from all the entities on the NHFC Board. She stated that she looked forward to the launch of the consolidated entity. In terms of the legislative process, she assured the DHS that as long as due processes were followed, the Bill should be passed through Parliament. Ms. Mnganga-Gcabashe requested clarity on the consolidated assets and liabilities: what was the scale of these liabilities? Would these liabilities put pressure on the bank’s coffers at a later date? Lastly, she requested to know if there would be any public hearings before the establishment of the bank, considering it would be a public entity.

The Chairperson thanked Members for their questions, noting that the new entity had the potential to make a visible impact, particularly in rural areas. For this reason, she urged the delegates to not allow any particular constituency to become overshadowed, as many similar projects tended to concentrate on projects in urban areas. The Chairperson echoed the concerns of the Committee regarding job losses during the consolidation process, cautioning that no job losses would be permissible. She allowed the Director-General of the DHS to respond to the questions raised.

Addressing Ms Mnganga-Gcabashe’s question regarding public comments for the HSDB Bill, Mr Tshangana assured members that the Bill would be published for comments at the appropriate time, considering the amount of stakeholders involved in “shaping” the Bill. Regarding the running costs of the process, Mr. Zulu stated that the management committee dealt with overseeing the amalgamation process. He informed the Committee that Boards of NURCHA and RHLF were still in place, stating that it would be premature to dissolve them until operational integration was fully realized. Mr. Zulu stated that once the entities were operationally integrated, “we have a bank”, and the passing of the Bill would be the end-state of the process. He noted that most public enterprises were legitimized through an Act of Parliament, but because this was the amalgamation of three separate entities, the operating model could get started before the Act was in place. He reiterated that the DHS were targeting the second quarter of the 2017/18 financial year for the launch of the bank, as that was what they promised Minister Sisulu.

Furthermore, Mr Tshangana noted that the Minister also instructed the DHS not to sacrifice any jobs in the amalgamation process. Regarding whether the HSDB would also act as a retailer, Mr. Zulu stated that the bank could be both “retail and wholesale”, depending on how the business model was structured. He then requested that Mr. Moraba elaborate further on some of the issues raised by members.

Mr Moraba addressed Ms. Bam-Mugwanya’s question regarding the utility of the HSDB as a retail bank, stating that the HSDB would operate in a similar fashion to the Land Bank. He stated that the bank would have something that RHLF or NURCHA did not have independently: an end-to-end service that was accessible and effective. In this regard, the HSDB had no interest in diluting the market in the consolidation process; instead the market should intensify and grow. Some clients may choose to do both urban and rural projects, growing their portfolio and expanding their credit. The HSDB aimed to make this funding available for rural development, despite the growing market for urban development, he stated. Regarding the utility of the HSDB as a retail bank, Mr. Moraba stated that the bank could sell products through an intermediary institution. He noted that the Land Bank did exactly that through a retailer subsidiary focused on certain sectors of the market, creating a “holistic service offering.” He stated that a similar structure could be adopted by the HSDB. Regarding the running costs of the project, Mr. Moraba stated that total assets for the three entities amounted to R5 Billion. He also highlighted the positive income projections featured in the presentation. In order to ascertain the running costs, the business cost still needed to be fully understood. He did however say that the outlook was positive, however capitalization was required to “scale up” after the finalization of the business case.

Mr Gqwetha stated that he shared the Chairperson’s sentiment that no constituencies should be compromised or neglected by the HSDB. He stated that there was an opportunity to introduce new products into the market, however it would require greater capitalization to meet the demand. In terms of the consolidated liabilities, he stated that the institution received establishment grants, and was expected to leverage capital through borrowing from the private sector. These would be the major areas of liability, he continued. Mr. Gqwetha also noted that Public Investment Corporation (PIC) had previously provided NURCHA with R70 million, which was currently being utilized in development projects. These funds would also be transferred across, as they were effectively working capital. Lastly, he stated that liabilities had to be transferred carefully, so as not to compromise the securities behind liabilities.

Mr. Fakazi stressed that no market segments should be disadvantaged by the consolidated DFI. He highlighted that in the metropolitan areas, it could be difficult for people living in informal settlements to secure housing credit. At this stage, he stated, there was insufficient funding to meet the market demand. He stated that through his time at RHLF, market research was conducted to understand what sectors could be targeted in rural and urban areas. He noted that in many developed countries, there was emphasis on mortgage financing, however development finance was more appropriate in low-income areas. Regarding the consolidated liabilities, Mr. Fakazi stated that he did not see them as “crippling”. To this extent, he added that the RHLF was reaping the benefits of a loan from the Development Bank of South Africa (DBSA).

Mr Tshangana cited the government employment housing scheme, which was structured by the lender to deduct the relevant amount from the individual’s payroll. He stated that there was potential to create innovative finance instruments.

The Chairperson thanked the delegates for their responses. She reminded Members that they would have another opportunity to pose questions to the DHS when they presented a progress report in March 2017. She then requested the Director-General of the DHS to present the update to the Housing Demand Database to the Committee.

Update on the National Housing Database on Demand:
Mr Tshangana stated that there was a need to enhance the credibility of the existing Housing Needs Register. The current waiting list was heavily criticized, and there was a need to ensure that households that registered first needed to be given houses first. He noted that the DHS was currently working with Statistics South Africa (StatsSA) to collect and maintain an enhanced database to track housing needs. He stated that previous attempts to maintain housing registers at a municipal level have largely failed, and therefore must be controlled at a central level. He requested the Deputy Director-General to conduct the full presentation.

Mr Chainee stated that the purpose of the database was to provide the current status on the households requesting assistance, and enhance built-in controls through the creation of a single database and system. This would be the only way to ensure that the allocation of housing opportunities would be conducted in a fair, auditable and transparent manner. The database would also function as a planning tool, specifying the particular demands of the households requiring assistance. He stated that the Minister of Human Settlements gave the DHS a directive to eradicate corruption, collusion and mismanagement in the register for allocation of housing. In terms of obtaining the number of households requiring assistance per province, Mr. Chainee stated that Limpopo was in the process of implementing the database, while data from the North-West Province, Kwazulu-Natal and the Free State were still in the process of verification. Gauteng had the greatest number of households on the Database, with 955 339 households requesting assistance. A total of around 1.9 million households were registered on the database.

Mr Chainee noted that the database could be cross-referenced with the population, housing subsidy and deeds registers, so as to ensure that there were no duplications. In this regard, one of the major challenges in constructing the database was that provinces and municipalities had different waiting lists. He stated that for political reasons, the current waiting lists could not be discarded, as some households were registered since 1996. Another major issue highlighted was the security and compliance controls. No individual had the authority to alter or edit registration dates for the register, nor did anyone have the authority to delete a registration. He noted that every registration was required to be accompanied by a desired geographic location, as well as valid identification documents. Mr Chainee noted the allocation process was not conducted on a personal level, but rather on the basis of a selected province, municipality or town.

Discussion
The Chairperson stated that if the database was managed properly, it had the potential to eliminate many of the problems associated with current waiting lists. She invited members to pose questions to the DHS.

Mr M Shelembe (NFP) requested to know whether the database included the register for “service stands” offered during the 1990s, where individuals were only given the site and infrastructure, but not houses.

Ms M Nkadimeng (ANC) requested to know how the database would capture the self-built houses of people in rural areas. Would these individuals be detected if they tried to register? She noted that the presentation indicated that only three Free State municipalities had records on the database. Were some municipalities not complying?

Ms Mnganga-Gcabashe stated that she appreciated the work done by the DHS thus far. She stated that some work could not be done at a central level and was dependent on individual provinces and municipalities, therefore the challenge of creating a comprehensive database was not yet complete. Secondly, she requested a timeline for the project. She inquired as to whether people aged 80 or older were prioritized in the allocation process. More broadly, would age be a determinant factor in the allocation process? She also noted that the prioritization of individuals with disabilities should be one of the department’s primary concerns. Lastly, would the registry take the dependents of households into account?

The Chairperson agreed with Ms Mnganga-Gcabashe, requesting that the DHS provide a timeline for the completion of the project. Furthermore, she noted that the issue of corruption was particularly damaging to the credibility of the housing register. For this reason, the database had to be implemented effectively. She requested that the Deputy Director-General respond to questions raised by the members.

In response to the question raised by Mr Shelembe regarding the register for “service stands”, Mr Chainee stated that individuals that already benefitted from consolidation subsidies or “block projects” did not stand to benefit from the housing allocation registry. Regarding Ms. Nkadimeng’s question on individuals registering twice, Mr Chainee assured the Committee that the design of the system would ensure that there would be no double-allocation. Moreover, the register could be cross-referenced with the title deeds register to ensure nobody benefited unduly in this manner. With regards to the timeline for the project, Mr. Chainee stated that the DHS already missed the Minister’s proposed timeline for implementation. He stated that this was due to uncooperative provincial and municipal entities with bad or unavailable records. Mr. Chainee stated that the DHS requested a directive from the Minister regarding institutions that received subsidized rental from the DHS. He stated that these entities would also have to comply with the allocation list to “ensure everyone is on the same page.”  Lastly, he stated that the suggestions received were welcome and would be taken into consideration.

The Chairperson stated that the database would run smoothly once the DFI was consolidated, as the two processes complimented each other well. 

The Committee adopted minutes from the previous week’s sitting, and the meeting was adjourned.

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