Property Management Trading Entity: Department briefing

Public Works and Infrastructure

27 March 2018
Chairperson: Mr H Mmemezi (ANC)
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Meeting Summary

The Committee met with the Property Management Trading Entity (PMTE) for a briefing on the progress made on operationalisation and strategic considerations to reach financial sustainability. The presentation covered the 2012 Turnaround Strategy of the Department of Public Works (DPW), conditions for the PMTE to meet to achieve full operational status and the measures put in place to work toward achieving that status. Members were informed of National Treasury expectations, recommendations and mitigation of challenges. The presentation also addressed the strategic matters to be looked at in the next strategic phase of the PMTE, capital injection required and the financial sustainability model.

The Committee was concerned that the PMTE was charging below market rate and requested explanation for user charges/tariffs. There was great concern that the Entity was operating at a loss, yet asking for more funding, and was generally a poorly conceived idea on the part of the Department. It was noted that a number of assets were unused and steadily declining in value due to lack of maintenance.  Members emphasised that the PMTE needed the requisite skilled and competent individuals to assist in mitigating some of the glaring challenges. It was suggested the Committee should consider recommending to Parliament that criminal charges be preferred against the leadership of the PMTE for its failure to implement its mandate

Members questioned the filling of critical posts by skilled individuals, contradictory figures, itemised billing, overdraft and the Immovable Asset Register. Members wanted to know when Treasury requirements would be met so that the PMTE could be deemed fully operational.

The Committee was aggrieved that neither the Minister, Deputy Minister nor DG of the Department were present – it was thus decided the delegation should return to the Committee with the political principals for more comprehensive engagement. The Committee expected a detailed written response to the questions and concerns posed by Members today by the end of the week. 

Meeting report

Opening remarks

The Chairperson welcomed the presence of a group of University of Cape Town students whose visit was part of a tour of the National Assembly.

The Committee Secretary announced apologies from the both the Minister and Deputy Minister of Public Works and the DG of the Department of Public Works (DPW), Adv Sam Vukela, had also conveyed his apology by letter. Other apologies were noted from Ms L Mathys (EFF) and Mr K Sithole (IFP), who asked to be excused to attend another meeting.

PMTE Progress on Operationalisation and Strategic Considerations to Reach Financial Sustainability      

Mr Jacob Maroga, PMTE Acting Head, began by showing how the entity is part of DPW‘s three-phase Turnaround Strategy which began in 2012 and is expected to reach culmination in the 2019/20 financial year. The three phases are Stabilisation, Efficiency Enhancement and Sustainability and Growth, with the PMTE located in the second phase. Some of the efficiencies expected to flow from a fully operational Entity include an accurate and reliable Immovable Asset Register (IAR), implementing strategies in asset investment, facilities and lease management, and addressing adverse audit outcomes.

To achieve full operational status, the PMTE has had to meet a number of conditions set by National Treasury and these have now been achieved. These conditions were:

  • the Entity must operate a set of separate accounts with its own Paymaster General’s bank account
  • financial control measures must be in place
  • the Accounting Officer (AO) of DPW must formulate a policy and reporting framework for the Trading Account, including quarterly reporting and monthly management systems to track both cash and commitments
  • all people and institutional arrangements must be in place
  • delegations must be operational, specifying the responsibility of each of the departmental key account managers

To meet the above conditions from Treasury, some of the recent measures put in place by the PMTE included the establishment of an Internal Control Directorate; the adoption of a PMTE Generally Recognised Accounting Practice (GRAP) methodology, monthly reporting to the Executive Committee (EXCO) of the DPW, migration of staff to the new PMTE structure, identification and filling of critical vacant posts and the finalisation and approval of the PMTE’s delegations framework.

Treasury expectations

As soon as Treasury signs off on a fully fledged PMTE, a number of medium to long term expectations will direct the road to financial sustainability for the Entity and these will also shape the relationship between the two parties going forward. Treasury expects the Entity to function on business-like principles and provide services on a “full cost recovery basis.”  Amongst other, this entails:

  • charging user departments for renting state-owned accommodation and recovering all costs relating to rates and taxes, maintenance, refurbishments and capital for new acquisition.
  • charging a five percent management fee for the payment of municipal services and the management of private leases
  • (however) surplus can only be retained with the approval of Treasury
  • implementing an accurate billing system for accommodation
  • demonstrating a credible, efficient and effective plan to eliminate the overdraft
  • that the PMTE must “live” off its balance sheet

Recommendations

To meet these demands, a Status Quo document, drawn up by the DPW, made a few recommendations, including the prioritisation of the Clean Audit Project, toward an unqualified audit and final implementation of the PMTE’s financial sustainability model for both revenue and expenditure. The other expectations would be met through ongoing discussion with National Treasury.

A major challenge in relation to the expectation of full cost recovery was the huge shortfall in the PMTE operational budget. This is because currently the baseline stands at R12,6 billion (leases, accommodation and augmented funding from the DPW) while in order to fund the full operational cost recovery as well as capital future replacement, the entity needs a further unfunded R11.8 billion - this on an annualised basis. Worse, the funding gap exists on top of an operational backlog hovering around R70 billion. 

As a result of the above, and other general public infrastructure challenges such as inadequate funding of capital provision and maintenance because of low tariffs, the South African Institute of Civil Engineers (SAICE), in its 2017 Report Card, had awarded South Africa’s public infrastructure an overall grade of D+, meaning that national infrastructure sits between Satisfactory For Now and At Risk Of Failure. 

Mr Maroga stated the PMTE believed that mitigation of these challenges could be achieved through review and improvement of efficiencies, accompanied by a well-defined funding strategy directed at the fiscus, own revenue generation initiatives and cost savings and the leveraging of private sector funding. 

Mr Cox Mokgoro, Head of the Operationalisation and Financial Sustainability Programme (OFSP), outlined that in anticipation of the next phase of the PMTE, significant strategic matters needed to be considered. To begin with, and given the size and extent of the portfolio, and the potential spin-offs from effective optimisation strategies, the PMTE should be recognised as an important socio-economic lever for driving capital formation, investment growth and social development. However, the PMTE finds itself in a catch 22 situation where on the one hand it is expected to operate along business lines, yet on the other, it is forced to charge its clients at rates that are far below the open market price. This is because in 2006, when budgets residing in the DPW vote were devolved to all user departments, accommodation charges were calculated to fit within the baseline that had been part of DPW’s budget vote, but which had since been devolved. This resulted in a substantial reduction in the rate at which accommodation services were charged. For example, an office building which should have been charged at R26 per square metre was actually charged at R4.74 per square metre. On top of this there is no adequate funding for the upkeep of the entire portfolio and consequently it is deteriorating and the backlog keeps growing.

In a pilot of 13 properties in Pretoria, the DPW found that a capital injection of R0.65 billion would be required immediately to uplift the condition of those properties. Based on extrapolated data, roughly R74 billion is required to uplift the condition of the entire DPW immovable asset portfolio for purposes of implementing a sound property management strategy.

Given the challenges and expectations facing the PMTE, the Department proposed development of a financial sustainability model for the Entity as an apex Departmental Project focussing immediately on initiatives to sweat, monetise and optimise assets in the portfolio - in other words, a revenue generation exercise. The idea is to extend the user charge model to levels where it has not been taken before, through an itemised billing system that will recover the true cost of running and maintaining each piece of property. This means breaking down the user tariff into its constituent cost  elements such as Initial Capital Outlay, Operating Costs and Minor Maintenance, Major Maintenance(refurbishments) and Municipal Rates and Taxes.

The implications for the above approach are that the current IAR needs to be refined down to component level to enable the asset to be split further into parts and then separately data-classified under different segments namely:

- Unique Identifier

- Useful life

- Appreciation/depreciation

- Asset Make/Capacity/Maintenance plan. 

At this level of management, the IAR will enable far better operational decisions and thus enhance efficiencies. Coupled with a funding strategy, identification of areas for cost reduction and potential private sector investment, these new efficiencies could reduce the funding gap and put the PMTE on the road to financial sustainability. To conclude its presentation, the DPW delegation made a number of recommendations for the Portfolio Committee to note. These included:

- that management continues to engage with National Treasury and Client Departments to resolve issues relating to User Charges with a view of narrowing the gulf between current expectations and funding gaps with regard to the PMTE

- that the strategic risk posed by the growing funding gap prevents the PMTE to effectively execute its mandate

- that key projects have already been identified to address operational inefficiencies and funding requirements (itemised billing, a financial model, revenue generation, further enhancement of IAR/Componentisation, etc.)

Discussion

Referring to the achievements made towards meeting prerequisites for operationalisation of the PMTE, Dr Q Madlopha (ANC) said it would be helpful to know the time sequence of these achievements in order to judge the rate of progress towards the ultimate goal which is a fully-fledged, operational PMTE. She asked for clarity on the process of filling critical posts - if the posts have indeed been filled as part of National Treasury requirements for PMTE, who was still being recruited? Was it still specialists or just normal everyday staff?

Dr Madlopha requested DPW explain the formula used for determining the User Charges/Tariffs. She asked for one key obstacle standing in the way of the PTME goal of being fully operational - was it funding or was it expertise? When did the PTME expect to fulfil all National Treasury conditions and be up and running? She assured the Department that the Committee was always willing to assist it in any area of its work including making recommendations on the DPW’s next budget allocation.

Ms P Adams (ANC) found that it did not make sense that a business entity should charge for its services below cost as is clearly the case with the PMTE - this must be conveyed to the National Treasury. She asked for an explanation of what was meant by a “fully-fledged entity”. Making the observation that the PMTE is a specialised government institution, she asked whether it was staffed by the right people such as property specialists, economists and the like and, if so, why was the PMTE still struggling to become operational. Regarding the Status Document used to assess compliance with National Treasury conditions, Ms Adams asked if it was produced internally and if so how objective it was. She also echoed Dr Madlopha’s question on when the PMTE can be expected to officially launch especially now that National Treasury has indicated that no more funding is coming its way. She called on the DPW to fully brief the Committee on all consultation with National Treasury on the PMTE funding issue. She wanted to know what arguments were used and what the reasons were for Treasury declining the request for more funds.

On stakeholder engagement, Ms Adams asked about the 2017 Cabinet Committee which had noted progress on the PMTE and its funding challenges. She requested an update on this Cabinet process and asked Mr Mokgoro for his opinion on whether it would have any real effect. With regard to the pilot project conducted at 13 properties in Pretoria, she wanted to know what criteria were used in choosing the properties and whether a broader sample was considered.

Mr M Filtane (UDM) stated that his overall impression of the presentation was that over a period of 20 years, the DPW, as the landlord of South Africa, had only managed to generate a mere R200 million a year from running the country’s entire immovable assets portfolio. R200 million was the sum one got from subtracting R4.3 billion (cost of leasing) from R4.5 billion (accommodation charges from user departments). Yet the PMTE still wanted to proceed with a “sin”, despite the lack of funding. Mr Filtane said the PMTE was a poorly conceived idea with a plan to bring down the government. He pointed out that at R14.93 per square metre, the PMTE is charging R71 less than the private sector and, to add insult to injury, the Department still wanted to continue despite lack of funding.  Why go on when it was clear that this project is not worthwhile and has never been for 20 years? To prove that the PMTE was an exercise in futility, Mr Filtane pointed out that none of the top three, the Minister, the Deputy Minister and the DG were in attendance. The whole thing was a failure and the only solution was to scrap it and come up with a radically different approach.

Mr Filtane asked if the PMTE had the requisite skills to run its operation and further, if the operational guidelines were in synch with the Service Level Agreements (SLAs) signed with the user departments. The reason for asking the question was that he suspected a discrepancy between the expectation that the PMTE should be run according to business principles and the non-businesslike nature of the SLA’s, meaning that the whole enterprise was set up to fail. He also wanted to know what provision was made for the PMTE to deliver a social return on investment, i.e. to contribute to service delivery. One instance of this could be a plan to provide access for the poor to unused land for commercial use. He also wanted to find out if a plan for dealing with perpetually defaulting departments was available. Reiterating his position that the PMTE concept was doomed to fail, Mr Filtane was however interested in an answer to his fundamental challenge, namely, how does PMTE become an economic stimulant given its fundamentally flawed operating plan.

Dr M Figg (DA) said that the PMTE did not deserve any additional funding from the fiscus simply because of its failure to monetise assets at its disposal. More money would simply be wasted on the Entity. The presentation itself showed that a number of assets were unused and also steadily declining in value through lack of maintenance and other means. The PMTE must be the only landlord in the country not making money through assets under its ownership and control.

He wanted to know the figure for the total staff complement of the PMTE as well as the job description for each staff member. His question echoed a suspicion stated before that the Entity does not have enough correct expertise for a specialised field such as property management, which is the core competency of the PMTE. In passing, he remarked that Mr Filtane’s figure of R200 million as PMTE’s annual revenue was only gross profit – it excluded other expenses such as rates and taxes and thus obscured the true extent of how much in the red the PMTE really was.

Dr Figg expressed concern at the different figures cited at different times regarding the extent of the property portfolio sitting in the IAR. The Minister of Finance quoted one figure while the DPW Deputy Minister mentioned another – this suggested a lack of accuracy about the assets at hand. Addressing the PMTE’s overdraft situation, he wanted an explanation on what the amount and cost of the overdraft in terms of interest was and also how it was permitted in the first place. Referring to Mr Mokgoro’s suggestion during the presentation that some buildings might be sold to generate revenue, Dr Figg pointed out that the PMTE could find itself in a vicious cycle where it wants to sell property but cannot do so because that property is not in good condition to be sold due to lack of funds for maintenance. His suspicion again was that these challenges could be competently addressed by a staff complement of people who have the requisite expertise in this field, which the PMTE seems to be lacking.

Dr Figg expressed his incomprehension at the PMTE’s failure to capitalise on its accommodation charges and to raise enough revenue simply because of a perceived obligation to assist other departments. The PMTE cannot be forced to feel sorry for someone else at its own expense and National Treasury needs to be made aware of this obvious irrationality. Dr Figg believed there was something incorrect about the figure of R148 billion as Gross Deemed Cost of the entire property portfolio. The upshot of his own calculations based on that figure was that the PMTE could be charging an impossibly low tariff for office space – he asked for an explanation of how the figure was arrived at.  

Ms E Masehela (ANC) said PMTE should be making a lot of money for the state yet this was not the case because of low tariffs charged for the use of state buildings and land which, as everyone knows, are very valuable assets. She urged that this be taken up with Treasury to enable the PMTE to charge market rates. The Committee was shocked to discover, during oversight visits to some of the country’s small harbours, that rich people were leasing state property “at next to nothing”. She requested that presentations should contain the presentation also needs to indicate how functional it is. Revisiting the comments by Members on staffing, Ms Masehela failed to understand why PMTE is not actively recruiting relevant students coming out of university every year to help increase the fund of expertise needed at the PMTE. She remarked that the PMTE is the one Entity not supposed to be in the red - bringing in the right expertise is one way of ensuring against that.

Mr D Ryder (DA) said his first interaction with PMTE issues was around the time the Entity got an adverse audit finding in 2017. The Committee therefore was now dealing with a financial delinquent asking to be given keys to the safe or be given more money. Meanwhile, children are dying in pit toilets built on government property, fraud and corruption red flags are popping up all over the property portfolio, government properties were invaded by squatters and the public is greeted by generally shocking conditions when entering government buildings. Mr Ryder echoed the Chairperson’s preliminary comments that the main task of the Committee is to improve the lives of the people of South Africa. That must never be forgotten and getting bogged down in detail was the surest way of failing to provide the services people need.

Mr Ryder expected the presentation to be an update on how much the PMTE progressed on improving its next audit outcome rather than a re-look at the entire model. The elephant in the room was the IAR – there was no consensus on what and how much the state really owns. How can the Auditor-General be expected to change his opinion on the PMTE when there was no reliable information on the IAR? Similarly, how can National Treasury be expected to even consider a new financial model when there was no real knowledge of what is owned and managed by the PMTE? Addressing the changes made in 2006, when DPW budgets were devolved to user departments, Mr Ryder asked whether that decision had led to an improvement at all because the way he saw it, 11 years down the line the DPW, as the country’s landlord, was operating at a “massive loss”, the assets were degrading and the Department running an overdraft facility.  Mr Ryder said his question was meant to draw attention to the much delayed process of reviewing the DPW’s two White Papers. The review process needed to be accelerated dramatically so that a clear policy direction for the DPW could be determined especially with regard to its property portfolio, i.e. what to do about it and how.

Mr Ryder also asked whether the PMTE could ever be expected to close the gap between what it currently earns and what it was actually expected to (charging at R85 per square metre). For him the answer was an emphatic “no”, as he believed that the Entity did not have the internal capacity to achieve that level. Mr Ryder welcomed the PMTE’s financial plan as unpacked in the presentation but, regarding the request for more Treasury funding, he suggested that the Committee invite Treasury to find out what its thinking was, if at all. His own opinion was that Treasury was “laughing us off” because the money does not exist. In conclusion, Mr Ryder proposed a five point plan for the way forward for DPW:

  • get a handle on the portfolio/know what is owned
  • be clear about the role and function as custodian of state property, where this role ends and where the user department’s begins
  • negotiate properly with user departments - if they cannot pay market related or sustainable rates, renegotiate contracts as soon as possible because it takes a long time to approve budgets
  • stop the overspending, wastage, theft and criminality on DPW projects - it has become easy to charge government whatever is decided and some of the criminality lies with the contractors.
  • get the best expertise the industry has to offer

Ms D Mathebe (ANC) urged that itemised billing be implemented as a matter of urgency and expressed her concern at the D+ score given to the country’s public infrastructure by the SAICE - what was being done about this “scary” rating? What was the situation regarding leases? Were the leases replaced by SLAs and, if so, what were the implications of this in terms of duration of the contracts? Ms Mathebe called for an overhaul of all efforts against internal corruption and suggested the Hawks be invited in to investigate.

Mr F Adams (ANC) prefaced his contribution by lamenting the absence of DPW’s political principals at the meeting. He highlighted the disruptive nature of the recent political changes taking place at DPW, although he was quick to reassure the meeting that he was not trying to defend anyone. He agreed with Ms Masehela that the idea behind the PMTE was to turn DPW around and to make money. He reminded the Committee that Treasury regulations specified that trading entities are not to be funded from the fiscus. Trading entities are supposed to make money yet the PMTE is actually losing money. The Committee should not have allowed the delegation to appear before it with the kind of briefing it had just heard. The Committee should consider recommending to Parliament that criminal charges be preferred against the leadership of the PMTE for its failure to implement its mandate. He argued that when a Minister leaves a Department, the key staff should remain behind to fulfil employment contracts - this explained the number of new faces in the delegation. 

Mr Adams agreed with his colleagues that it was senseless to continue charging for services at below market rates while still expecting to make profit. For example, in 2012, properties were going for R127 per square metre while DPW was charging R4.75 per square metre. This issue should have been addressed right then but the promises made were never fulfilled. The situation had now become so bad that DPW was paying millions of Rands on leases at above market related rates on buildings that had once belonged to it.

Mr Adams called on the Chairperson to instruct the delegation to go back to its political principals and inform them that tDPW absolutely needs to fix the PMTE situation. National Treasury must be approached with a convincing plan that the PMTE can make money. The PMTE cannot be allowed to fail or else the whole Department together with the Portfolio Committee would have failed the people of South Africa.

Mr Ryder, underlining Mr Adams comments, proposed that in the absence of the political principals, it could only be fair to ask the delegation to come back another time for a more comprehensive response to the comments and questions of the Committee.

The Chairperson concurred with Mr Adams and Mr Ryder and instructed the delegation not to respond verbally to Members’ comments and questions but rather submit a written and detailed response by the end of the week.

Mr Maroga and Mr Mokgoro accepted the Committee’s instruction and endeavoured to respond accordingly. Mr Maroga also requested that another session of question and answers on the same topic be scheduled as soon as possible.

The Chairperson said the proposal would be considered and, following a look at the Committee programme for the remaining period, suitable arrangements will be made.

Adoption of Committee Minutes Dated 20 March 2018

The Committee adopted its minutes dated 20 March 2018 with minor grammatical amendments.

The meeting was adjourned.

 

 

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