Strategic Planning for Housing Delivery: hearings

Meeting report

HOUSING PORTFOLIO COMMITTEE
3 November 2004
NATIONAL HOME BUILDERS REGISTRATION COUNCIL, NATIONAL HOUSING FINANCE CORPORATION, SOCIAL HOUSING FUND, RURAL HOUSING LOAN FUND AND SOUTH CAPE SOCIAL HOUSING ASSOCIATION: HEARINGS

Chairperson: Ms Z Kota (ANC)

Documents handed out:
National Home Builders Registration Council submission Part 1
National Home Builders Registration Council submission Part 2
National Housing Finance Corporation submission
Social Housing Foundation PowerPoint submission
Social Housing Foundation submission
Rural Housing Loan Fund submission
South Cape Social Housing Association submission

SUMMARY
The Committee met to hear briefings by entities involved in rural development and the provision of 'social housing'. The various groups provided accounts of activities and achievements and future strategies. Numerous questions were raised including the role of municipalities within social housing, systems of financial accountability, levels of consumer education, problems around accessing private sector funds and future development targets.

MINUTES

National Home Builders Registration Council briefing
Mr P Makgathe (CEO-NHBRC) stated that the mandate of the NHRBC was to provide a world-class system of evaluation of building to protect the interests of consumers. Quality standards were to be maintained within the home-building industry. A warranty fund was to be maintained which would be grown on an ongoing basis to avoid further funding requirements from government and ensure self- sufficiency. Emphasis would be on the historically disadvantaged home-builders. Most municipalities were engaged in the development of homes using sub-contractors and technical support was being provided.

The scope of activity was to represent the interests of housing consumers by providing warranties against defects arising from a failure to comply with regulations. Homeowners that could not pay for repairs would be assisted. Homebuilders were registered to improve the structural quality of houses and inspections were carried out. Education on consumer rights was provided and training programmes around business skills were offered to new builders in all provinces. All homebuilders have to register with the Council and required technical standards were disseminated. Properties were enrolled with the Council. Funds were generated from registration and enrolment. Each house had to be inspected as a service to members.

The Council had to protect the interests of both the housing consumer and the builder. The consumer wanted quality assurance and the builder desired cost-effective delivery. The relationship required well-written contracts to address the potential conflict situations. Complaints were received mainly from consumers and the challenge was to reconcile the parties in a mutually beneficial manner and undertake reconstruction where applicable. This process was dependent on the maintenance of sufficient funds.

The Council consisted of numerous committees. A disciplinary committee was necessary to deal with non-compliance of regulatory requirements that resulted in structural defects. A technical advisory committee and an industry advisory committee existed as part of the structure. Provincial customer care centres operated in all provinces with the larger provinces subsidising the smaller ones. Revenue arose from registration fees and background checks were conducted on potential subscribers. Debtors were prevented from joining in the interests of the Council as a whole. The total enrolment fee was R1 450 and R600 was expected from builders on an annual basis. Approximately 55 000 units were currently enrolled and late enrolment also generated some additional revenue. Banks did not provide bonds unless the home was registered; thus forcing certain individuals to seek last-minute enrolment.

A subsidy sector had been introduced with a current contribution of R16 million while the non-subsidy sector provided the bulk of revenue. The warranty fund steadily increased since 2000 due to decentralisation and improved accessibility by members of the public. Investment stood at R556 million controlled by outsourced fund management in cash and bonds. 4 964 new builders had registered in the current financial year and a number of renewals had occurred. Late enrolment was decreasing together with complaints. The suspension rate was increasing but re-registration was improving. Only 13% of the subsidy sector had been approved. Shortage of skills, lack of awareness of consumer rights and poor material contributed to significant challenges.

Discussion
Mr M Masala (ANC) asked whether inspectors were available throughout the country and what relationship existed with municipal inspectors. He asked what actions would be taken against unregistered builders within the subsidy sector and what was the motivation behind checking personal credit histories.

Mr T Dodovu (ANC) asked whether the Council could play a role in the sub-Saharan region in accordance with NEPAD initiatives to enhance housing delivery. Clarity was sought on the process to acquire a new mandate for the Council as required by law. He asked what steps were being taken to improve the accounting standards and methods currently in use following recent criticism by the Auditor- General.

Mr Makgathe responded that a team had been compiled to investigate accounting shortfalls and to recommend solutions in accordance with the specific requirements of the Council. The Minister would be appointing a Council as a list had already been compiled. Concerns raised by the Auditor-General had been addressed and a Kenyan delegation had recently visited NHBRC on a fact-finding mission. An out-sourced inspectorate was operating in the non-subsidy sector within all provinces. Within the subsidy sector, a full time inspector was present for every five hundred units reporting to the provincial offices. Discussions had been held with the Department regarding the role of municipal inspectors and the clash of interests. An accredited inspectorate could be established in the near future together with provincial governments and municipalities. No unregistered builder should exist in the subsidy sector and tenders would only be awarded to registered builders. ITC checks were conducted to protect the interests of consumers and the status of the fund as contributions would be made if a contractor failed to complete a project. Sound financial control should be in place but the information would not be used in a discriminatory manner to prevent membership as provisional status was available.

Mr Thorp (Finance Director-NHBRC) stated that the previous system used to expect 20% enrolment up front with the balance payable within 180 days. The balance was not recorded until due. A new system recorded the entire amount on day one but the outstanding amount remained due. This resulted in increased debt as reflected in the annual statement. Revenue also increased which raised the value of the Council. The Council was selling warranty schemes and a premium was owed if claims were sought and repairs undertaken. The bad debt figure was currently overstated and reflected money owed for 180 days.

Mr A Steyn (DA) asked whether a minimum value existed in terms of the warranty reserve. The definition of a homebuilder had to be clarified and whether individuals had to register themselves or their home. He asked whether subsidy projects had to register and whether late enrolments were inspected to determine status of work in place. The reason for decreased audit fees was requested as well as the increase in wasteful expenditure. He asked whether the Minister played a role in determining salaries for Council members.

Ms S Ntombela (ANC) asked whether the training provided to emerging contractors was on a voluntary basis and what monitoring process was in place.

The Chairperson asked how inspections pertaining to extensions were carried out and how effective the consumer education campaign was.

Mr Makgathe replied that the Council was not participating in the extension of homes but this would be considered in future. Empowerment builders received training on a voluntary basis but it was strongly encouraged as financial skills were needed. Remuneration was determined by the remuneration committee and approved by the Council and not by the Minister. Increased lease agreements were due to expansion of office space within provinces caused by decentralisation. Additional costs arising from late enrolments were due to the engagement of an engineer in determining the status of the house to avoid future liabilities. Participation within the Peoples Housing Process would occur in collaboration with provincial administrations and site inspections would occur to ensure structural viability. The definition of homebuilder required further clarification due to the phenomenon of owner-builders who resided within a house while under construction and individuals building more than one unit at a time. The minimum value of the warranty reserve should remain below 5% of total value.

Mr Thorp replied that loan liabilities would only be expensed on occurrence in accordance with new accounting standards. Interest on wasteful expenditure was being paid to creditors due to decentralisation and the move from a non-integrated to a fully-integrated accounting package which was available online.

National Housing Finance Corporation briefing
Mr S Moraba (Chief Executive, NHFC) stated that the primary responsibility of the corporation was to attract private sector finance into the housing market and associated development initiatives. Low and middle-income earners were the target client base. In 2002 the corporation realised that the banks were not co-operating and legislation was recommended to assist the process. The Financial Services Charter helped to address shortcomings and niche lenders were identified to participate. The corporation was instrumental in establishing the social housing sector and banks were now participating voluntarily. Most social housing projects were funded by the corporation. Attempts were made to attract other funders to engage in co-funding initiatives.

Beneficiaries would seek either to rent or buy property and an incremental approach was encouraged to allow the building of a house over a period of time. Products were based on the demands of the end-user. Highlights included the sponsorship of quarterly forums on finance to investigate low income housing. Annual housing symposiums discussed issues and challenges faced by the market. Policy and research was undertaken to identify reasons for market discrepancies such as defaults and the experience of failed borrowers. The potential of the township market was investigated to consider scope for development. Failure had occurred within advocacy and arrangements regarding transfer costs following attempts to remove the need for transfer costs below R150 000. Future attempts would be made to reduce costs associated with property transfer.

R1.7 billion had been disbursed to date creating 220 housing opportunities. The corporation managed the job summit pilot project with delivery to date in Mpumalanga. The challenge lay in providing effective housing development in a sustainable and cost-efficient manner. A priority was to reduce non-performing loans to reduce the drain on funds as evictions were a problem. The private sector would not be interested in sufficient quantity until this issue was improved. The bad-debt ratio was currently at 10% which was significantly higher than private institutions. Future funding remained a concern as a continuous drain on reserves would prove detrimental to the overall mandate. The role of the corporation within the FSC was still to be determined.

The corporation would participate within the new housing plan by changing the risks of the private sector. A retail route was being considered to bring the corporation closer to the end-user and strengthen understanding of the target market. An example would be provided to the private sector that low cost housing could be a viable business option. Funding for informal settlements would be pursued and initiatives introduced to reduce rental costs. Future funding needs would be accessed through bonds or securitisation.

Discussion
Mr Steyn asked whether the corporation had not failed in its primary objective of accessing private funding. Clarity was sought on the distinction between the corporation and Nurture. The role of the Committee in helping to unlock property assets within the townships should be discussed. He asked about the bad debt and the bottom line regarding the balance sheet.

Mr T Dodovu (ANC) asserted that the corporation had undergone many changes since inception and asked whether objectives had been achieved. The risks involved in retail operations had to be investigated. The relationship with social housing associations needed clarification and what proposals existed to improve the situation within this sector.

Mr Moraba replied that certain assumptions were made such as the lack of interest by banks within the market. Meetings were held with the major banks and commitments were made to support the corporation. However, in two years only 2500 loans were forthcoming and substantial commitment never materialised. Therefore, a new approach was needed to attract more capital. A second assumption was that small banking capacity existed but funding was required. However, capacity was small with many start-up operations engaged in micro-lending and few in housing. Identifying who to provide money to remained the key challenge. Institutions would be financed to improve capacity and fund projects. Real impact required partnership with banks. Nurture focused on initial developmental funding while the corporation investigated rental or ownership options over the long term. Constraints existed in unlocking township property value that had to be addressed such as a lack of interest on the part of residents to trade in property. A solution would be to provide education on property value and improve access to finance.

The financial director stated that R121 million had been impaired which would be recovered. The strategy was not to abandon under-performing activities but find ways to resuscitate them.

Mr Moraba responded that all stakeholders were involved in finding solutions and the retail network would require an effective delivery process in partnership with other players. Research would be done to facilitate this project using experts and a report would be compiled detailing the strategy.

Mr S Masango (DA) asked for clarity on the distinction between group and company.

The Chairperson asked about existing linkages and whether the DBSA could not be approached. Interest rates charged by micro-lenders served to recycle poverty and prevented people from improving living conditions.

Mr Steyn asked for clarity on the relation between bad debts and impairments and to justify the 42% bonus paid to executive members.

Mr M Sonto (ANC) asked whether part of the risk management strategy would be to interface with beneficiaries and promote financial discipline.

Mr Moraba stated that accumulated debt was reflected in the financial statement. The financial goal was not to accumulate profits but to ascertain whether the mandate had been met as the context of developmental housing was problematic and involved potential losses. Bad debt was not crucial in determining level of performance but sustainability was fundamental. Particular products would be considered to serve the informal and self-employed market. Companies were subsidiaries operating within the group. The DBSA had expressed interest in providing finance and discussions would occur.

Social Housing Foundation briefing
Mr B Moholo (Managing Director-SHF) stated that the Foundation was established in 1997 to assist in the provision of social housing in a sustainable manner. Presently, stagnation existed in the sector which required attention. Policy should be well-informed to promote improved standards of living. Key stakeholders included consumers and funders and the intention was to create synergy in the provision of service. Funds would be disbursed in compliance with statutory requirements. The Foundation had served as a catalyst in promoting housing delivery through discussion with key role-players such as provincial governments. Meaningful quantification of social housing units was difficult to achieve. The rental sector was underdeveloped but demand for rental was growing and options should be considered.

Management capacity within the organisation had to be developed to improve responses to needs. The sector had to be regulated in a more efficient way and linkages provided with international institutions. Awareness around social housing needs would be continuously promoted and statistics provided regarding the market. Access to grant funding had been facilitated for social housing institutions. A new model was needed to make social housing more affordable to the poor. Larger projects had to be undertaken involving at least 2000 units requiring innovative responses. A social housing bill was needed to clarify various roles within the sector. Defaults would have to be reduced and additional finance attracted into the market. The Department would form a new unit to make efficient use of additional funding sourced from the EU. The majority of funding originated from the Department but other donors such as the Dutch and Norwegian governments existed.

Discussion
Mr Steyn asked for clarity on the aims of the Foundation and whether measured objectives existed to ascertain success. He asked for further detail on low to medium income in relation to the objectives and the number of units developed in the current year. One project developed 140 units but only 80 were occupied. Detail was sought on the requirements of the PFMA in relation to the Foundation.

Mr Dodovu noted that the institutional target had been exceeded and asked whether the institutions established were sustainable. He asked how the Foundation would fit into the new strategy developed by the Department.

Mr Moholo replied that the Foundation dealt with intangible products that proved difficult to measure. The Department would be engaged on specific projects to determine delivery targets. Interventions would be quantified in future to improve evaluation. Social housing was not inexpensive and therefore medium earners had to be involved. The number of institutions involved had increased and more co-operatives were registered. Market demand was not determined properly and appropriate responses were needed. The intention was to increase the focus on the lower end of the market in terms of rental. The Foundation was in the process of appointing internal auditors to address problems. A Ministerial review of social housing had recently been completed and the findings would be discussed within MinMEC. Many social institutions were struggling and the intention was to support them by facilitating turn-around. Improved regulation was necessary to enhance grant making and to promote capacity-building. Innovative policy should guide the social housing sector.

Rural Housing Loan Fund briefing
Mr W van Emmenis (Managing Director-RHLF) stated that the mandate of the Fund was to address the housing needs of the rural poor and assist individuals to access credit to build a new house or extend existing property. Seed capital had been accessed from the German government to create a social venture fund to operate within a high-risk market. Housing covered by the fund was broad-based including home-based business, creches and extensions. Minimum living levels were targeted including peri-urban areas. The Board sought to access private capital and other financial services. Currently no clients were in distress indicating sound management principles.

Applications of R55 million currently existed and total commitment of R340 million would prevail at the end of the year. Access into rural areas had been improved by the establishment of an extensive network allowing for opportunities within the unbanked market. The cancellation of the Personnel and Salary System (PERSAL) in 1998 had slowed down disbursements but 2003 saw a consolidation due to a merger of smaller entities. The average loan size was R4 725 and the total cumulative loan target was 68 000. Loan loss impairment was stated on a monthly basis in accordance with accounting standards. A moderate profit of R2.5 million was achieved for the six months ending in September. The Fund would continue to target black-owned and managed entities and no clients were currently in distress. 55% of loan recipients were female and 82% of the staff component was black.

Mr Jabulani stated that the majority of loans issued were used to develop housing, provide education and contribute to working capital. 61% of end users were happy with the service provided. Further consumer education would be undertaken to improve financial management skills and the rural market would be expanded. Anecdotes were provided of successful projects within rural areas.

Mr van Emmenis stated that government must remain committed to sustainable development and retain access to the National Payment System. The Fund remained the only organisation capable of leveraging funds into the rural areas.

Discussion
Mr Dodovu asked whether a contradiction existed between the Fund's mandate and research findings in that limited work was currently recorded within rural communities. He asked whether the Fund contributed to the Presidential Lead Projects. Approximately 31% of funds borrowed were not spent and clarity was sought on where this money went.

Mr Masango asked what steps were taken to ensure correct utilisation of funds by end-users and the definition of distressed clients.

The Chairperson asked how rural communities accessed the fund and the interest charged by intermediaries.

Mr B Dhlamini (IFP) asked how the profile within rural areas could be improved to attract more clients.

Mr van Emmenis responded that the Fund met demand in accordance with an affordability requirement. A significant distribution network existed through intermediaries. Loans were used to pay for materials and construction costs and careful screening occurred during the application process to determine use of funds. Costs prohibited monitoring of all loans but the guiding principle was to improve general living conditions within rural areas. Education would be provided to increase consumer awareness and finance skills. The Fund provided the cheapest credit rates within the market and attempts would be made to reduce this further.

South Cape Social Housing Association briefing
Mr R Isaacs (CEO-SCHA) provided an overview of the organisation's objectives in relation to social housing needs and challenges to overcome in improving delivery rates. Problems around accessing funds were emphasised and constraints to establishing such entities. The governing principle would be affordability and a sound application process coupled with a well-informed staff component.

The Chairperson asked whether the Association had a financial statement or record of building units.

Mr Isaacs responded that no units had been built to date and funding was sought.

Mr Dodovu suggested that the Association approach the provincial government to establish linkages and secure local government support.

The Chairperson concurred and recommended registration with the George municipality to initiate the process of establishment and to build capacity.

The meeting was adjourned.