DPWI on support to PMTE; leasing model to client departments; Funding Strategy & Financing Model; with Deputy Minister

Meeting report

In her opening remarks, the Chairperson of the Portfolio Committee on Public Works and Infrastructure told the Committee that the focus of the meeting was on the Property Management Trading Entity (PMTE) because, in the previous meetings, it was clear that there was a challenge in the collection of due fees from client departments. Therefore, the Committee seeks to understand the efforts made to appoint suitable personnel in this entity, including dealing with material errors highlighted by the Auditor-General on immovable assets.

Regarding the user charge model, the Chairperson said that the Department should negotiate with the National Treasury to review the user charge model currently being used on leasing out to client departments. The Committee is raising these issues because there are challenges within the entity, especially non-payment issues.

Apologies were taken.

The Chairperson then handed over to the Deputy Minister of Public Works and Infrastructure (DPWI), Ms Bernice Swarts. She said that the team from the Department has made itself available to present before the Committee on the PMTE, specifically the user departments. She handed over to the Acting Director-General, DPWI, Ms Nyeleti Makhubele, to introduce the team from the Department.

Briefing by the Department of Public Works and Infrastructure

Ms Sasa Subban, Deputy Director General (DDG): Real Estate Investment Services, DPWI, told the Committee that the Auditor-General of South Africa (AGSA) has issued the final management report of the Property Management Trading Entity (PMTE). She commented that the submission of sufficient appropriate evidence on the restatements of corresponding amounts for property plant and equipment, which was a material stumbling block in the prior year, was resolved during the current financial period. AGSA further commended the management on resolving the prior year's disclaimer audit opinion, with the improvement being attributable to improved recording-keeping concerning the management of the immovable asset register.

The key considerations of the Immovable Asset Register (IAR) include the historical context of the IAR for the State and Complexity of the State Land Administration, with legacy emanating from the pre and post-1994 dispensations. The magnitude of the PMTE property portfolio (29 169 land parcels and 80 631 buildings) includes State Domestic Facilities built on non-DPWI land – for example, Ingonyama Trust Land in KwaZulu Natal (KZN). A dedicated and diverse team of specialists and support staff are required to manage different aspects of the IAR, and critical projects and to sustain the positive audit outcome.

On the 2016 approved PMTE functional organisational structure for Asset Registry, the approved structure provides a total number of 70 permanent positions for head office and regional offices. However, there was a need to augment this structure through additional or contract positions to the total of 67 positions. Slide nine provided the status of filled and vacant positions, followed by the recruitment process status.

The IAR has an overall 15% vacancy rate, including the contract positions currently being filled. The vacancy rate, excluding contract positions, is sitting at three percent. The total IAR staff establishment comprises 51% permanent positions and 49% contract positions, which is not sustainable. She added that DPWI is currently investigating the creation of permanent positions proportional to the number of contract positions as a long-term solution to improve and sustain the completeness and accuracy of the immovable asset register.

Mr Mandla Sithole, Chief Financial Officer (CFO), DPWI, presented the user charge model/itemised billing, indicating that the Itemised Billing gives a breakdown of the rental charge by separately calculating the cost of each component contained in the charge. These components are municipal rates, initial capital outlay, operational costs, maintenance, and a reserve for future refurbishments. Ideally, a management fee should be included if the PMTE is to be totally independent from the DPWI main vote. The PMTE is now able to deliver on itemised billing. The rates agreed to and approved by the National Treasury are far below the calculated level to achieve full cost recovery as to date. The Itemised Billing project has completed Cycle 1-5, of which the approved levy is below calculated user charges (UC), resulting in a shortfall of R14.2 billion by 2024. An additional amount of at least R25 billion is needed from the client departments over the Medium-Term Expenditure Framework (MTEF) {R 7.9 billion; R 8.3 billion; R 8.8 billion in 2024/25; 2025/26; 2026/27 years, respectively}.

There is a shortfall in the accommodation charges. The shortfall for 2025/26 and 2026/27 is R8.3 billion and R8.8 billion respectively. This adds up to R25 billion over the MTEF. As a result of the shortfall, the entity, in most cases, cannot deliver the basic services required, backlog maintenance cannot be performed, and future refurbishments cannot be executed. This all leads to further deterioration of the buildings, leading to the need for more capital injection.

Therefore, the key focus areas are that the project manager must facilitate and align the IAR to the Itemised Billing to assess the derecognition and addition of properties. Client departments must be engaged to make funds available to fund the deficit. Furthermore, the National Treasury must assist in reducing the gap in accommodation charges by working with DPWI and the affected clients to increase the accommodation charges budgets and escalation rates, prioritising clients in the red category to afford the calculated user charges. The medium-term solution includes the contractual appointment of an existing Project Manager ending 30 April 2024. The position is envisaged to continue to bring stability to the project, improve operations, and sustain the completeness and accuracy of the itemised billing. He added that National Treasury should play a more active role in reducing the gap in accommodation charges by working with DPWI and the affected clients to increase the accommodation charges budgets and escalation rates.

The Chairperson welcomed the presentation and handed over to the Members for their inputs.

See attached for full presentation

Discussion

Pertaining to staff members and the appointment of staff members which the National Treasury said would not happen because of the lack of funds, Ms A Siwisa (EFF) asked the Department what the plan is to get more staff members on board. How is the Department planning to address the issue of capacity in the entity?

Concerning the contract positions mentioned in the presentation, are these positions intended to assist the Department or the PMTE to run on a day-to-day basis? If that is the case, why are those people not sourced in to assist with the day-to-day running of the entity? So, if the contracts are for the day-to-day running of the entity, why are they not permanent posts?

Mr P Van Staden (FF+) said that, on the asset management and asset register, he is of the opinion that even if there are staff members in the positions, if there is a lack of professionally skilled people who can manage these asset registers, the same problems that are being experienced will continue to be experienced. He expressed that his opinion was not to suggest that the current people are not skilled enough. However, there is a big shortfall.

On building maintenance, he said there should be a clearer understanding of how the contracts work between DPWI and the client departments. He asked for more clarity on this process so that there is a better understanding of where the problem exactly lies. In as much as payments are a problem, there should be a better understanding of the root cause of such problems. As a follow-up, he asked if National Treasury is giving funding each year to client departments for maintenance, reckoning that the funding is not actually utilised for maintenance. Therefore, he asked the Department to clarify the stipulation of the contract between DPWI and the client departments regarding the maintenance of buildings.

Mr E Mathebula (ANC) commented that the presentation made by the CFO should be taken while considering the fact that the economy of the country is not doing well and the government is unable to adequately fund some of the projects. He added that the country has not fully recovered from the scourge of COVID-19, where a number of people have lost jobs, resulting in the under-collection of government tax – with projections showing that such a trend might be persistent for the next few financial years. Therefore, some of what has been presented by the CFO is not necessarily because National Treasury does not want to fund some budgets, but this has mainly been because of the economic situation that the country is confronted with.

Mr Mathebula praised the Department on the work that has been done, especially on seeking means to ensure that in funding projects, National Treasury is involved in looking at solutions. This is because it is true that, if maintenance is not done correctly and up to standard, and if anything happens to these properties, the Department will have to account for that. Furthermore, he added that, in the presentation, the CFO said that, if the Department does not maintain the infrastructure, particularly the buildings, there is a chance that the client might go for private leasing. So, when speaking about the clients, does it refer to leasing Department buildings, or is it other sectors using the Department's buildings? And how will the Department ensure that payments are made if the lease is taken to private leasers?

Mr W Thring (ACDP) agreed with Mr Mathebula, highlighting that the South African economy is facing severe headwinds, creating a barrier to initiating the needed growth. He commented that, during the COVID-19 period, the ACDP warned against a harsh lockdown. However, these warnings were not considered, resulting in the loss of jobs as many businesses closed.

Mr Thring said that government’s public works infrastructure is one of the biggest property portfolios. He emphasised that it is the biggest property portfolio in the country, yet, unfortunately, with some of the poorest returns. Compared to the private sector, some have 50% less in terms of their property portfolios yet are registered on the Johannesburg Stock Exchange (JSE) and doing a thriving business, generating income, and contributing to the fiscus in terms of taxes. He highlighted that the Department should perhaps check the model that the private sector is using and perhaps adopt some elements within the DPWI to ensure that there are no negative returns from this huge property portfolio that the DPWI has.

It is important to create a credible assets register. However, there must be the requisite skills and personnel to assist in the credibility of the Department's asset register. So, regarding the skills needed, they should be appropriated to develop a credible asset register. He added that, as long as there is no credit asset register, the Auditor-General will continue poking holes.

There is also a disjunct when it comes to the leasing of property, where some user departments are prepared to pay prime leasing costs in excess of R100 and, in some cases, R200 per square meter, which is what was witnessed during the visit to the Telkom Towers. But when it comes to PMTE, they tend to act like there are no funds. What are the steps of paying prior to moving in?

Mr Thring said that a conversation needs to be held with Treasury, where within the budgets that go to some of DPWI's sister departments – maintenance, rentals, and the like – should be included. That budget should directly go to PMTE or Public Works to be paid off.

Ms S Van Schalkwyk (ANC) thanked the Department for the presentation. She highlighted that the Committee's term is about to end, and it is still the same issues that have previously been raised. This is frustrating.

On the feedback on the disclaimer for 2021/22 and materials issues identified during the interim audit of 2022/23, she commended the Department for the efforts that have been made in terms of addressing the stumbling blocks on the immovable asset register that occurred in the previous years. And the hope is that things will improve, going forward.

She commented on the vacancy rate. Although it seems to be low in terms of percentage, salary level 10 had a 44% vacancy rate. Why is the vacancy rate so high? And what is causing the vacancy to not be filled? Even for the staff that work across the 11 regional offices of the PMTE, the presentation has not been clear on what is being done to retain the qualified staff. This is because there is a turnover of staff. However, there seems to be no plan to retain the staff who are qualified and have experience.

The presentation also mentioned that the total IAR staff establishment comprises 51% permanent positions and 49% contract positions. This is quite skewed and a worrying factor, as it is not sustainable in the long run. However, the Department has mentioned that it is investigating the creation of permanent positions. So, how is the investigation being done, and what is the timeline? Also, how is the Department planning to resolve this issue?

The presentation also highlighted that additional post positions for 36 months from 01 December 2023 will be appointed. However, are the additional positions sustainable in terms of affordability? What is the process towards the approval of permanent positions? There should be an effort towards employing full-time permanent positions instead of short-contract positions.

She advised that the Department should be careful about appointing staff above the establishment. Is the appointment of additional positions and contract positions in line with the existing staff establishments that have been approved? This is because, in August, the Cabinet heard from the Treasury that there are not enough funds in the short to medium term, thus the Department should be cautious in terms of making such appointments.

The Chairperson added that, knowing what Treasury has said, one of the things that the Department should do, especially with the advertised posts, is to motivate – especially for the key positions that need to be filled. She added that the Department could make revenue. She asked why the Department's Information Technology (IT) would not propose to Treasury and Cabinet to recover some of the money that had not been paid.

Responses

On the filling of positions, Ms Makhubele confirmed that the Department will have to motivate the key positions that need to be filled before Treasury allows the Department to proceed with filling those vacancies. However, if the Department struggles to fill the vacancies, then the Department will have to appeal to the Chairperson and the Portfolio Committee to assist. She emphasised the filling of the vacancies is something that is being taken seriously, as these vacancies are deemed critical to the delivery of the Department's key functions.

Regarding contract positions, the Department uses contract positions to fill the gaps where the Department may still be in the process of creating permanent positions. And when there is an urgent need for a specific job that ought to be completed, contracting outside the organisational structure then becomes the option. However, the Department is in the process of creating positions with the idea to eventually insource these projects. When looking at the immovable asset register, this is something that will be ongoing. So, such contracts will have to become part of the established structure of the Department.

Ms Subban emphasised the importance of having the specialist skills filled in the Department. She added that, in terms of affordability, as far as the asset register is concerned, the Department compares all its assets and links them to the Deeds Office and the Surveyor-General's Office to ensure that a high level of checks and balances are in place.

Also, there is a strategy that has been developed that looks at the assembling of the unutilised properties that the Department has. For example, the Department has vacant land parcels. The Department bought unutilised buildings sitting at three percent, with 97% of the Department's buildings being utilised. In terms of the land parcels, there are improvements which come to 62%.

Concerning the retention of skills in the areas of asset register, it was indicated that the Department previously engaged contract employees on a 12-month basis. And the movement from a 12-month basis to six months was also part of the Department’s skill retention mechanism, as many staff members were being lost because of the insecurities that come with being on a short-term contract. However, as a long-term measure, the Department is engaging with the relevant stakeholders to ensure the permanent creation of the proportional positions of permanent appointments. This is being done while being aligned with the current Treasury cost containment.

It was said that some vacant positions that have not been filled have not been advertised, yet they are still at the request stage and awaiting approval. 

On whether the capacitation of the asset register is sustainable, the view of the Department is that it is not a sustainable capacitation model, and that is the reason for the move from 12 months to six months. And the Department is engaging in the permanent creation of these positions.

Mr Sithole agreed with the comment that there is a need to create a credible asset register, adding that the asset register should not only be about the AG's outcome of the audit report. However, the asset register is about the entity's operational purposes. This is because the entity's properties are not well maintained for them to be credible. The AG will soon ask if the properties are an asset or liability because of the bad maintenance conditions. Therefore, the asset portfolio should be seen as the pride of the nation where even National Treasury can use the entity's asset portfolio to attract foreign investment. While there are existing economic challenges in the country, as raised by the Committee, there is however still a need to have a proper discussion with National Treasury, including the Portfolio Committees. Once the economy starts to recover, the focus must be building credible assets that can become the pride of the nation.

Mr Sithole further agreed with the point raised that the budget must be directed to the Department. Therefore, there is a need to have a binding policy instead of relying solely on international policies from the Department. This is something that the Department has engaged with National Treasury, and it is something that is being worked on to ensure that it is binding to client departments.

On the question of the reasons clients can pay at the prime rate for leases, he mentioned that this is something that has been raised, because when client departments want property from the private sector, they are able to reprioritise their funds, yet they are unable to do that for state properties. It is worrisome, and this discussion must continue to encourage departments to see state properties as a pride of the nation.

Concerning the contract between client departments and PMTE concerning maintenance, he said that maintenance is part of the Department's lease agreement, which depends on the client paying a full cost recovery. However, the challenge is that, when Treasury approves a lower tariff structure because of the affordability of the state, it then makes that contract not meaningful because Treasury will approve far less than what it is supposed to be approved. And there are huge expectations from clients, irrespective of how much they pay per rate per square meter.

In a follow-up comment, Mr Van Staden reminded the Committee that the backlog in maintaining government buildings is not a new problem; it dates back to pre-COVID-19. This problem has been existing, and it is getting out of hand. The government buildings belong to the taxpayers of this country, and they are an investment that should be looked after.

Closing Remarks

In closure, Deputy Minister Swarts said that there are many issues that the Committee has raised over time, and these issues are being worked on. She said that the issue of maintenance is something that should be discussed in greater detail. As per the last meeting, there is also a need for a full presentation on the maintenance plan because, looking at the vast number of properties that the Department has, the discussion cannot still be about proactive maintenance and preventative maintenance. Oversight needs to be taken seriously and with urgency.

On the policy of collection, DPWI needs to present what the policy entails. Coupled with that, the Public Works Act and the collection policy need to be implemented and enforced, as it will assist the Department in carrying out its duties while ensuring accountability measures for client departments that do not make payments.

Regarding permanent positions and contracts, the Deputy Minister said that the Department's intention has been to ensure that the vacant positions are filled. Several posts have been advertised, shortlisted and, in some instances, even held interviews. However, the Department has had to take a setback because of the instruction from Treasury on the budgetary issues.

The Chairperson welcomed the Deputy Minister’s closing remarks and appreciated that the Department is considering having a strong collection policy. She said the hope is that the policy that the Department will draft will provide a legal basis in line with Treasury's guidelines.

The Committee adopted the meeting minutes of 12 September 2023.

The meeting was adjourned.