Human Settlements risks & municipal inspections; Local Content procurement

Public Accounts (SCOPA) (WCPP)

18 June 2021
Chairperson: Mr L Mvimbi (ANC)
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Meeting Summary

Video: Public Accounts Committee, 18 June 2021, 14:00

The Social Cluster Audit Committee of the Western Cape Provincial Government (WCPG) outlined the five assurance gaps and eight emerging risks in the Provincial Department of Human Settlements.

The Western Cape Department of Human Settlements (WCDHS) spoke about the outcome of its oversight visits to 11 municipalities that had defaulted on the Human Settlements Development Grant (HSDG). It also received a presentation from the Western Cape Provincial Treasury on local content.

Members of the Committee asked about the root causes of the problems at the 11 municipalities, if they had been resolved and expressed relief that the money had not been lost. They requested clarity on the role of community development forums and construction cartels in threatening housing project viability. Members inquired about the price premium for local content compliance. They praised Western Cape Treasury for the lengths to which it went to comply with these requirements.

Meeting report

WCPG Audit Committee for Social Cluster Departments presentation
Mr Ameen Amod, Chairperson: Audit Committee for WCPG Social Cluster, explained that the Audit Committee had identified five assurance gaps not being covered by the internal audit system due to insufficient resources: lack of access to bulk services, unauthorised access to critical systems and information, inadequate mechanisms for customer feedback, theft of cash from Rental Housing Tribunal, and ineffective use of training and development opportunities. These risk areas had not been monitored independently by the Audit Committee although the Executive Committee did engage with them. The Audit Committee had also identified eight areas of emerging risk: componentisation of assets, possibility of onerous inventory disclosure requirements being introduced, uncertainty about National Treasury plans for Integrated Financial Management System (IFMS) that was to be piloted in the province, transition from clean audits to performance auditing, unintended consequences of safety resources needing to be diverted to gender-based and xenophobic violence, threats to viability and completion of housing projects by community development forums (CDFs), non-cooperation from communities where land was required to be cleared for construction, and COVID-19.

WCDHS presentation
Mr Melvin Stoffels, WCDHS Director: Financial Management, responded to the Committee resolution for a briefing on the WCDHS oversight visits to 11 municipalities that defaulted on Human Settlements Development Grant (HSDG) and measures to address the problem. He explained the standard operating procedure for monitoring the spending HSDG funds. He described in detail the findings of the Oudtshoorn and Witzenberg visits and summarised the findings of the visits to the other nine municipalities, which had had similar challenges. WCDHS found that all money had been used for its intended purpose, incorrect balances had been corrected, building contractors in Oudtshoorn that had not been paid regularly were paid directly by WCDHS, and Public Finance Management Act (PFMA) non-compliance by municipalities had been highlighted and addressed.

Ms L Maseko (DA) asked WCDHS to clarify how it was going to recover HSDG funds that were unspent or not used for their intended purpose. Was there a regulation that empowered this? She recalled that it had been trying to recover money from Beaufort West for a sanitation contract. How was it going about this?

Mr D America (DA) asked if the problems described at the municipalities were ongoing, in particular PFMA non-compliance and usurping of municipal functions by the provincial government, or had they been resolved? What was the reason for the accounting mistakes at the nine municipalities? Was it insufficient capacity or negligence? He was please to hear that none of the funds had been lost.

Ms N Nkondlo (ANC) asked the Audit Committee to clarify its loaded statement on the emerging risk created by community development forums. In which areas are they threatening the viability and completion of housing projects? The Audit Committee’s view did not coincide with her own experience of CDFs in Gugulethu and Khayelitsha. She asked for specific examples where a community was not cooperating. How had it come to be that the community was threatening a project intended for its own benefit? She appreciated the outcome of the oversight visits to the 11 municipalities but asked if the problems were being fixed. What was the reason for the accounting mistakes? Did these municipalities actually know what they were supposed to do? What were the root cause of these mistakes?

Mr R Allen (DA) asked how much the interventions at the 11 municipalities had cost WCDHS. It was astonishing that certain municipalities were still failing to comply with basic legislation.

The Chairperson asked the Audit Committee to elaborate on the risk of cash theft at the Rental Housing Tribunal, and what could be learned from the IFMS piloting.

WCPG Audit Committee response
Mr Amod replied that he had been trying to use an innocent term when he had identified CDFs as a threat to housing projects. In fact there were construction cartels that had nothing to do with community building which were trying to secure construction contracts for personal gain. The Department supported CDFs and community involvement in general. The non-cooperation he referred to arose when people who were not due or guaranteed to receive the housing refused to vacate the land for the housing development. The cash theft risk had not materialised but had been identified as a potential risk. The IFMS pilot project had not progressed much in the last two or three years and the Western Cape had not yet become part of the pilot.

WCDHS response
Mr Tertuis Simmers, Western Cape MEC for Human Settlements, commented that there were complex community dynamics at play in the provision of housing. At Velddrif, for example, completed housing units had been damaged by community members who were not entitled to move in. He confirmed Mr Amod’s account of the problems caused by construction cartels and said that the Forest Hill site was a classic example of this problem.

Ms Phila Mayisela, WCDHS Head of Department, explained that WCDHS signed social compacts with the community when it was planning to develop a site. Problems arose when people within the community refused to adhere to the agreement. This had happened at Joe Slovo, for instance, where a project had had to be abandoned after ten years of planning, and Boys Town construction site where two community liaison officers had been killed by construction cartels. It would be preferable for municipalities to disburse HSDG funds themselves, rather than having WCDHS do it on behalf of the municipality as had happened at Oudtshoorn. This was a last resort.

Mr Francois de Wet, WCDHS CFO, replied that the Department had successfully recovered as much as R250m from municipalities following accounting errors. It had also recovered R4m that had not been spent on its intended purpose. The Beaufort West irregularities would be resolved and presented in the WCDHS annual financial statements. He conceded that WCDHS did not always communicate perfectly with municipalities when HSDG funds were allocated, adding that WCDHS was ultimately accountable for the funds. He estimated that the oversight visits to municipalities cost less than R100 000.

Further discussion
Ms Nkondlo accepted Mr Amod’s explanation of the threats to housing projects and requested that WCDHS replace the references to “CDFs” with “construction cartels” in its report to correct the impression that CDFs were causing the problems. She observed that the events at Joe Slovo seemed to show that the social compact approach was not working properly. Was this true in general or only in exceptional cases? She was not satisfied that the root causes for municipal accounting errors had been fully explained. It was not ideal that WCDHS take over the functions of municipalities – rather the root causes should be addressed.

Mr de Wet explained that the municipality had used the HSDG funds to pay other expenses such as Eskom.

The Chairperson said that this was a serious problem.

Ms Mayisela replied that the social compact system was not at fault – rather, there were just a few bad apples within communities. She gave the example of a social compact taking two years to sign for a housing project. There was a high level of intimidation taking place within communities, which led to delays. It is a very sensitive issue and the leaders there in the municipality have their lives and their families threatened.

Ms Maseko remarked that Ms Nkondlo had raised a genuine concern about the problems at municipalities and suggested that the Committee make a resolution to take the matter to the Standing Committee on Local Government, so that the challenges of municipal non-compliance could be explained by the municipalities themselves such as not meeting their payment schedules or using funds for other purposes. The Department could not be expected to speak on behalf of the municipalities.

Western Cape Provincial Treasury presentation on local content
Mr David Savage, Provincial Treasury Head of Department, spoke about the fact that  Progress and strategy of public procurement reform.

Mr Isac Smith, Director: Asset Management: Provincial Treasury, gave a broad overview of the legislative environment for preferential procurement to ensure standardised approach for all municipalities. Over the last 20 years there has been three iterations of the regulations. Local content is included. The process that the 2017 regulations introduced was explained in terms of the changed thresholds and the five competing areas in preferential procurement. For Western Cape procurement spending in 2020/21, of a total of R12bn, the considerable amount of R7.2bn had been spent locally within the Western Cape. It has a holistic approach to procurement on both products and services. Only 30% of the R12bn had been spent on products, while the remaining 70% had been spent on services which focuses on local suppliers. Over the past 20 years, Western Cape had done a lot to build a supplier database to provide this to decision managers and to communicate its supply chain strategy to businesses in the Western Cape. There was a focus on strategic sourcing and local economic development in the Western Cape. Of the R12bn, 6.35 bn had been spent on exempt micro enterprises (EME) and qualifying small enterprises (QSE) with 51% going to black-owned businesses.
He showed the 28 sectors designated by the national Department of Trade, Industry and Competition (DTIC) - a few of these had thresholds of a 100% local content threshold, which sometimes delayed service delivery unless it obtained an exemption from National Treasury. He discussed the implementation challenges of the local content requirements such as South African Bureau of Standards (SABS) verification of the products. If the supplier has lied, then the Auditor General makes a finding of irregular expenditure on the part of the Department - so it is a tricky situation if SABS has not yet issued certification. Suppliers faced onerous administrative burdens. Problems sometimes arose in adjudicating the local steel content of turnkey construction projects, and the provenance of materials in the textile and leather sectors was sometimes difficult to trace. COVID-19 had also led to some unique problems, where local suppliers had not always been ready to respond to increased demand. He summarised Western Cape’s key initiatives in its aim to make it easy for businesses to do business with WCPG and the local content requirements.

The Chairperson noted that much of the presentation was familiar and invited Members to comment.

Ms Nkondlo asked for an explanation of the premium associated with local content requirements. What did it mean and how was it calculated? She asked Treasury to provide information on local content products as opposed to services that Western Cape had procured. She appreciated the empowerment of black-owned suppliers, but what were there figures for women, youth and people with disabilities?

Mr America appreciated the lengths to which Western Cape went to comply with the DTIC bizarre, illogical and “Leninist” approach to procurement and wondered how it compared to other provinces.

Provincial Treasury response
Mr Savage, Provincial Treasury HOD, replied that the premium was a result of the basic economic principle that restricting supply while demand was constant would drive up prices. However, it was very difficult to calculate this premium exactly, as many variables were involved. Local content data was only currently available in aggregated form. Also, it was not permissible to discriminate between suppliers in different provinces, and that information on women, youth and people with disabilities was more closely associated with the Preferential Procurement Framework than the Local Content Framework. He reiterated that Western Cape was moving away from a compliance strategy and toward an enabling strategy. There were inherent challenges in creating positive lists of specific items to subject to local content requirements. He was unable to comment on the performance of other provinces when it came to local content procurement, but he did believe that the Western Cape was a frontrunner in both strategy and outcomes.

Mr Rodney Moolman, Provincial Treasury Director: Local Government Supply Chain Management, noted that all provinces were dealing with the same local content compliance challenges.

Ms Tasneem Rakiep, Provincial Treasury Acting Director: Provincial Supply Chain Management, added that although she could not comment on implementation, the Western Cape did share best practices with the other provinces.

Mr Smith admitted that Western Cape did need to focus more closely on local content requirements but it did not have granular information about specific designated sectors. Western Cape was doing its best to eradicate the premium associated with local content requirements by engaging with the market and looking at ways to streamline the process of certifying a product’s local content through the DTIC or the South African Bureau of Standards.

Further discussion
The Chairperson observed that local content requirements were an important component of the transformation agenda. He was not surprised that there were some challenges and resistance, as it was a new policy, but he commended Western Cape Treasury for its report. He noted that a local content summit had been organised and asked whose initiative it had been.

Mr Moolman replied that it had been a joint initiative of the Western Cape Treasury and the Cape Town International Conference Centre (CTICC). The effort to share understanding of the supplier market and the regulatory challenges was greatly appreciated.

Mr Savage added that a more recent summit had been the initiative of the Drakenstein Municipality. Another exciting recent development was the rollout of an automated procurement planning system, which would hopefully assist local businesses by making Western Cape’s supply chain more transparent.

The meeting was adjourned.


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