Housing Provincial Conditional Grants and CapEX: Third Quarter 2006/07 Spending

FINANCE SELECT COMMITTEE
23 February 2007
HOUSING PROVINCIAL CONDITIONAL GRANTS AND CAPEX: THIRD QUARTER 2006/07 SPENDING

Chairperson: Mr T Ralane (Free State) (ANC)

Documents handed out:
National Treasury on Provincial Departments of Housing Conditional Grants and Capital Expenditure
Western Cape Presentation
Northern Cape Presentation
Free State Presentation
Kwa-Zulu Natal Presentation
Limpopo Presentation
Eastern Cape Presentation
Mpumalanga Presentation
Gauteng Presentation

Audio Recording of the Meeting

SUMMARY
The National Treasury said that of the R188 364 681 adjusted budget, 69.9% had been spent by the end of December, which represented a year on year growth of 13.9%. In terms of housing, the adjusted budget was R10 424 166 and it had spent 59.5%, with the provinces projecting to under spend by R280 639 000.

The Western Cape reported that their funding allocation had been R 598 million and the province had a backlog of about 400 000 homes. The present funding delivered less than 15 000 houses per annum but a delivery rate of about 50 000 houses per annum was required to meet the 2014 targets. Their actual delivery up to December 2006 was 12 060 houses built (75%), and 15 690 sites serviced (85%). 
 
The Northern Cape said that the budget allocation for the 2006/07 financial year was R104 774 million and 88% had been spent as at December 2006. The expenditure from October to December 2006 had increased tremendously and resulted in an over-expenditure of R1 681 million.

The Free State said that at the same stage in the last financial year, 10 735 housing units had been built. By December 2006, 9 065 units had been built. R 516 573 000 had been budgeted and R 296 161 677 had been spent by the end of December. Some of the challenges facing the Department were that there had been an exodus of technical inspectors in the Department, which impacted on the quality of houses. In response, consulting engineers would be appointed to assist the Department. The quality of the building work, as well as the workmanship in the housing units was not always of good standard as well.

Kwa-Zulu Natal said that they been allocated R1 251 183 000 in the adjusted budget. In terms of their service delivery targets, 5 320 normal sites, 5 721 informal settlement sites and 788 blocked sites had been visited. The Department continued to show clear contributions to the achievement of Provincial Priorities; remained committed to integrated development; would facilitate the integration of the housing sector plans with the Municipal Infrastructure Grant and would participate fully in the development of municipal infrastructure development programmes.

Limpopo said that some of the delivery capacity constraints were the limited capacity of contractors to deliver on a large scale. There were also material supply constraints, especially in bricks where the supply did not match the demand. There were also challenges in planning co-ordination. There were land constraints where were problems in acquiring suitably located land in prime areas. Some of the strategic interventions were improving contracting strategies with a mix of highly capacitated and emerging contractors. 

Gauteng said that they projected over-expenditure for the whole financial year was R139 669 000 but the Department had adequate capacity to monitor all project development that was underway in the Province. Reasons for under expenditure as at the end of the third quarter were the alleged fraud in the Department that culminated in delays and scrutiny of all claims.

During the second quarter of the financial year, the newly appointed professional resource team was appointed with the task of house and stand certification. As at the 1st to the 31^st of January 2007, the Department had increased its expenditure patterns strongly. In fact, the Department spent R212 million (11% of its budget).
The Eastern Cape said that they had spent only 38.2% (R291.1 million) of their R761 994 million in the first nine months of the year. Some of the challenges facing the province’s housing delivery were the layered coordination and communication processes.

The majority of developers were municipalities and they used emerging contractors, some of whom were unable to cope with the work. A fast-tracked procurement process affecting a total of 18 projects with a combined value of R433 million would ensure on-site activity by early in March. Projects in the new financial year were being packaged for execution by the established contractors.

Mpumalanga said that that for the 2006/07 financial year the housing grant allocation was R421 million. They had received R313 million of this and had spent R184 million (59%). The reasons for the under expenditure in the housing grant were that there were problems in the capacity of the contractors as well as problems in planning and project management. Challenges still existed. For example, there were delays in the submission of registration forms and technical reports for water and sanitation projects and the process of appointing contractors and consultants was very slow. In response, the Department had requested additional financial and technical resources to improve provincial monitoring.

MINUTES
National Treasury Presentation
Mr Anthony Phillips, Senior Manager: Fiscal Policy, said that of the R188 364 681 adjusted budget, R131 660 269 (69.9%) had been spent by the end of December, which represented a year on year growth of 13.9%. There was also a projected over-expenditure of R1.03 billion compared with a projection of under expenditure of R464 million at the same period last year. He said that in terms of these projections, it was evident that the traditional “March Spike” had occurred much sooner this financial year.

In terms of housing, the adjusted budget was R10 424 166 and had spent R6 202 738 (59.5%), with the provinces projecting to under spend by R280 639 000. In terms of the economic classification of this information, on average about 74.5% of a province’s housing budget went to transfer payments.

In terms of the Integrated Housing and Human Settlement Grant (IHHSG), R6 349 949 had been allocated and at December R4 171 909 (60.8%). It had to be noted that five provinces had spent under 60% though (Mpumalanga, Free State, Gauteng, Limpopo and the Eastern Cape).

Western Cape Presentation
Ms Shanaaz Majiet the Head of Department, said that their funding allocation had been R 598 million and the province had a backlog of about 400 000 homes. The present funding delivered less than 15 000 houses per annum and a delivery rate of about 50 000 houses per annum was required to meet the 2014 targets.
The provincial strategy was to accelerate delivery to show capacity to attract and efficiently use additional funding. The Department had also
embarked on a programme to identify and utilise state owned land for various types of housing.
The city of Cape Town had been allocated R355 million and had spent R281 884 520 (84%) between April and December 2006 compared with 96% performance in 2005.

In terms of the performance in some of the districts, the Breede River/Winelands and Stellenbosch areas in the Cape Winelands District (with spending rates of 16% and 2% respectively) were not doing well. Other poorly performing areas were the Overland in the Overberg District (7%), Prince Albert in the Central Karoo District (0%), and Berg River in the West Coast District (11). 

In terms of their overall performance, they had spent R614 million (102%) of their R598 million allocation. They had also been given additional funding of R150 million and they targeted to build 16 000 houses and service 18 000 sites by March 2006/07. Their actual delivery up to December 2006 was 12 060 houses built (75%), and 15 690 sites serviced (85%).

Discussion
Mr D Botha (ANC) (Limpopo) asked how the low expenditure in some districts and the problem of outstanding claims affected building contractors. What were district councils doing to help improve the spending?

Ms Majiet replied that in terms of the outstanding claims, the municipality was responsible for contracting with developers. The trend was that large municipalities would contract with and pay the contractors themselves. The province would then reimburse the municipality after inspecting the work done. Any problems that arose would then be between the municipality and the contractor. The district councils were putting renewed efforts into how they could assist municipalities, as historically they had been reluctant to do so.

Ms D Robinson (DA) (Western Cape) asked if the lack of delivery was caused by a shortage of land or was it because the contractors did not have the capacity to build more.

Ms Majiet replied that there was an infrastructure boom in the Western Cape, with some cranes being booked for the next five years for instance. Also, land was too expensive in the Western Cape. Land was available, but it was at exorbitant prices. There was a need to look into utilising state land more strategically to solve some of the problems here. 

Northern Cape Presentation
Mr R Soodeyal, the Acting Head of Department (HOD), said that the budget allocation for the 2006/07 year was R104 774 million and R92 616 million (88%) had been spent as at December 2006.
A total of R49 109 was to be spent in the third quarter and it was made up of the draw-down for the third quarter, that is R23 787 million, plus the roll over of R25 322 million for the first and second quarters.

 The actual expenditure for the quarter therefore was R50 795 million.

The expenditure from October to December 2006 had increased tremendously and resulted in an over-expenditure of R1 681 million in terms of their draw-downs received from the National Treasury that amounted to R 90 982 million and the expenditure as at end of December was R 92 615 million. By the end of the financial year they were going to over spend by about R30 million. The expenditure incurred over the quarter was for completed top structures, houses under construction, services for phased development projects and transfers.

The projects were being closely monitored with frequent meetings being held between the Department, developers and contractors. Appointment of additional building inspectors and the input of Thubelisha had assisted with the monitoring and evaluation of the projects, which led to an improvement in spending.

Free State Presentation
Mr K Ralikontsane, the HOD, said that at the same stage in the last financial year, 10 735 housing units had been built. By December 2006, 9 065 units had been built. He said that R 516 573 000 had been budgeted and R 296 161 677 had been spent by the end of December.

The remaining funds as at the 1^st of January 2007 were R232 467 323.


Actual expenditure in January 2007 was R19 207 686 and the actual expenditure until the 20^th of February 2007 was R1 603 145. The projected expenditure for the remaining period in February was R6 274 000. The
projected expenditure for March was R35 million with R89 726 000 going towards the purchase of materials.  

Some of the challenges facing the Department were that there had been an exodus of technical inspectors in the Department, which impacted on the quality of houses. In response, consulting engineers would be appointed to assist the Department. The quality of the building work, as well as the workmanship in the housing units was not always of good standard as well. To address this, all consulting engineers bidding for the project relating to quality assurance on housing projects, were required to provide professional indemnity.

The implementation guidelines as well as the policy framework for the Finance Linked Individual Subsidies had not yet been finalised. The Department was actively participated in the National Task Team to finalise the matter.  The fast-tracking of the accreditation of the Mangaung Local Municipality presented other challenges and intensive training sessions were being planned to provide hands- on support.  It was also important that all deeds were registered correctly. The Department was investigating deeds incorrectly registered and would ensure that all other deeds were registered.

Kwa-Zulu Natal Presentation
Mr W Evans, the Chief Financial Officer, said that they been allocated R1 251 183 000 in the adjusted budget. In terms of their service delivery targets, 5 320 normal sites, 5 721 informal settlement sites and 788 blocked sites had been visited.

The Department was in the process of finalising the Conditional Grant Business Plan for the 2007/08 financial year. This plan was fully aligned to the Annual Performance Plan and Budget Statement of the Department. The compliance to this plan would be reported on a quarterly basis as part of the Department’s quarterly reporting process.

The Department received the majority (86%) of its funding from the IHHSG. The purpose of the grant was to promote the achievement of a non-racial, integrated society through the development of integrated sustainable human settlements and quality housing.

The Department had an agreement with the Flemish Government to fund the formation of Housing Components in municipalities. The Department would receive €590,179 (about R5.5 million) in terms of this agreement. It was anticipated that the Department would receive R1.56 million during the 2007/08 financial year for this programme.

He wanted it noted that the Department continued to show clear contributions to the achievement of Provincial Priorities; remained committed to integrated development; would facilitate the integration of the housing sector plans with the Municipal Infrastructure Grant (MIG) and would participate fully in the development of municipal infrastructure development programmes (IDPs).

Discussion
Mr Botha asked what the state of the contracts were with contractors were in the Northern Cape since they were going to over spend and were going to withhold payment for some projects till the next financial year. How were they going to survive?

Mr E Sogoni (ANC) (Gauteng) said that he was concerned about the Northern Cape’s projected over expenditure. Why did they not try shifting funds from other areas to deal with this?

The Chairperson asked all the provinces at what stage they were in accrediting identified municipalities. How was the Northern Cape going to deal with it’s over expenditure. He asked the Free State how credible their projections were.

Mr Soodeyal replied that they had been operating under an assumption that the Provincial Treasury (PT) was going to allocate another R30 million to them but this did not happen. The Department did not see this as crisis as the projects concerned were in various stages of completion so the contractors would not be submitting invoices until after the 25^th of March. They would then be paid on the 1^st of April when the Department received its first allocation for the 2007/08 year.

The Chairperson commented that this was a very concerning development and was interested what would emerge about this in the fourth quarter hearings. 

Mr Phillips from the Treasury said that rectifying or paying the over spend in the next financial year was against National Treasury regulations as all Departments had to make their payments within 30 days.

Ms S Sooklal, a National Treasury Director, added that she was concerned about the practice in the Northern Cape. The Treasury had been encouraging provinces to plan multi-year projects over the whole MTEF period. Northern Cape was not doing this. She said that what they were doing was “not the right thing.” This showed that there was non-alignment between planning and budgeting.

Mr Soodeyal said that the Department would negotiate with their PT about how to deal with the over expenditure.

Mr Ralikontsane replied to the Chairperson’s question about the accreditation of municipalities by saying that they had identified five municipalities in the Free State and they were busy dealing with capacity issues and challenges in them. Their figures and projections were realistic. They were about to transfer the remaining funds for the remaining projects for the financial year.

Mr Evans said that only Ethekwini in Kwa-Zulu Natal had been accredited at Level 1 status. Things were going well here.

Limpopo Presentation
MEC Nkoana-Mashabane said that without the rollover, R328 458 000 (63% of their budget) had been spent. As at the 12^th of February, this figure had gone up to R376 479 000 (72%) had been spent.

Some of the delivery capacity constraints were the limited capacity of contractors to deliver on a large scale. There were also material supply constraints, especially in bricks where the supply did not match the demand. There were also challenges in planning co-ordination. There were land constraints where were problems in acquiring suitably located land in prime areas. Migration patterns also played a role where there was an increased rate of urbanization and incomplete (blocked) projects.

Some of the strategic interventions were improving contracting strategies with a mix of highly capacitated and emerging contractors. Forward planning was improved and some blocked projects were unblocked. A Development of Social Infrastructure Plan was implemented and Multi-Year Settlement Plan and Housing Chapters in municipal IDPs were developed. Public Private Partnerships were being encouraged and well-located land for development of integrated sustainable communities was acquired.  

Gauteng Presentation
Ms B Monama, the HOD, said that their allocation had been R1 374 891 000. Of this, R1 080 334 000 (21%) had been spent. For the third quarter, R463 596 000 had been allocated and transferred and R311 595 000 had been spent. The Department’s projected over-expenditure for the whole financial year was R139 669 000.

The Department had adequate capacity to monitor all project development that was underway in the Province. They had appointed professional resource teams made up of engineers, quantity surveyors, architects, project and construction managers, as a means of assisting the Department in executing its mandate of monitoring and controlling housing delivery in the Province.

The only constraint which would have a negative impact in the coming financial year was from a financial perspective. The Department was projecting possible over expenditure for 2006/07 and this would then have an impact on the coming financial year’s budget allocation.

Reasons for under expenditure as at the end of the third quarter were the alleged fraud in the Department that culminated in delays and scrutiny of all claims.
During the second quarter of the financial year, the newly appointed professional resource team was appointed with the task of house and stand certification. This gave rise to municipalities implementing their own bridging finance facility on housing relating projects.


The Ekurhuleni Metropolitan Municipality could be cited as an example of where bridging finance of R100 million was incurred from their own funds. Claims to this amount were not submitted to the Department which had a negative impact on the cash flow.
Similarly the city of Johannesburg and the West Rand/Sedibeng were guilty of the same practice.

The Department had undertaken measures to improve the expenditure performance during the fourth quarter. Claims from the respective municipalities such as Ekurhuleni which had bridging finance housing projects were now materialising.
As at the 1st to the 31^st of January 2007, the Department had increased its expenditure patterns strongly. In fact, the Department spent R212 million (11% of its budget).

Eastern Cape Presentation
Mr N Mzamo, the Housing Project Manager, said that they had spent only 38.2% (R291.1 million) of their R761 994 million in the first nine months of the year. Some of the challenges facing the province’s housing delivery were the layered coordination and communication processes.
The majority of developers were municipalities
 and they used emerging contractors, some of whom were unable to cope with the work.
The negative impact of all of the factors had been building up over the years to what was now possibly their worst point.

The Department had taken over some of the unblocked projects which were slow-moving by engaging established contractors including Thubelisha.
The involvement of established contractors had a number of advantages: speedier procurement processes, bulk material purchases and the sourcing of additional resources to reinforce existing construction teams.

The established contractors were performing the normal contractor role as well as performing tasks relating to the budget; specifications; the schedule; materials; labour procurement and site management. The Department was also embracing emerging contractors to mentor them to graduate to higher skills and expertise levels by allocating projects to them in accordance with their capacity levels.

A fast-tracked procurement process affecting a total of 18 projects with a combined value of R433 million would ensure on-site activity by early in March. Projects in the new financial year were being packaged for execution by the established contractors. He said that a big leap in provincial delivery was envisaged.
The Department was confident that the dominant elements of the delivery under-performance problem had now been exposed, and were being dealt with in a meaningful way.  

Mpumalanga Presentation
Ms B Mojapelo, the Chief Director of Housing, said that for the 2006/07 financial year the housing grant allocation was R421 million. They had received R313 million of this and had spent R184 million (59%). In the Human Settlement Redevelopment Grant they had received R1 876 000 and had spent R969 000 so far.

The reasons for the under expenditure in the housing grant were that there were problems in the capacity of the contractors as well as problems in planning and project management. She added that the low baseline of their budget did not enable them to attract skilled personnel. Some of the corrective measures were to review the organogram. The Department also requested a review of the baseline allocation by the PT. The PT assisted them in appointing two engineers from African to help them and the Department appointed some professionals from Cuba as well.

Also, contracts with poorly performing contractors were terminated. There was a move towards using social housing as their instrument of choice for service delivery. The Department was going to provide bridging finance for municipalities for serviced sites and begun to purchase properties for inner city regeneration.

The Department had committed itself to enhance the developmental capacity of municipalities to deliver on the Municipal Infrastructure Grant (MIG). The allocation criteria were set by the Division of Revenue Act (DORA) which also set the framework for the allocation to municipalities. They were going to provide a mechanism for the co-ordinated pursuit of national policy priorities with regard to basic municipal infrastructure programmes and they had to monitor the adherence to labour intensive construction methods.  

Challenges still existed. For example, there were delays in the submission of registration forms and technical reports for water and sanitation projects. The process of appointing contractors and consultants was very slow and there was insufficient capacity in the municipalities that were operating as Water Services Authorities for the first time.

In response, the Department had requested additional financial and technical resources to improve provincial monitoring. The Department of Provincial and Local Government and the Development Bank of Southern Africa had appointed Siyenza Manje engineers to assist the Albert Luthuli, Nkomazi, and Mkhondo municipalities. The Department of Water Affairs and the Departmental technical teams continued to give assistance with infrastructure business plans.

Discussion
Mr Sogoni asked who had the responsibility to deliver houses in Limpopo. Was it municipalities or the province? If it was the municipalities, were they accredited? What were they doing to deal with ineffective contractors? He asked Gauteng why were there late claims being made? He also asked the Eastern Cape on a progress report on the accreditation of municipalities there. 

MEC Nkoana-Mashabane replied that in Limpopo the province appointed the contractors and managed the projects. At present only Polokwane was at Level 1 accreditation but they were assessing others. With regards to the contractors, the Department assessed about 100 of them and decided to appoint four with a lot of capacity to handle all of the projects and three of them were 100% owned by previously disadvantaged individuals.

Ms Mojapelo replied that the late claims arose during the last quarter and were caused by changes in the payment system. This issue had since been resolved. There had been a problem with one municipality that had struggled with capacity and its ability to claim timeously. The Department assisted them with their capacity issues and improvements were expected.

The Chairperson asked the Eastern Cape how confident they were that they had ‘turned things around’ after given their low expenditure.

Mr Mzamo replied that the Eastern Cape had realised that when they made their initial projections they did not consider the implementation programme and its challenges and problems with the availability of land and problems with dealing with bulk projects. The Department had relooked at its figures and the HOD could now confirm in writing that they were accurate.  With regards to accreditation, Buffalo City and the Nelson Mandela Metro had been given Level 1 status. In the financial year they would assess more municipalities for accreditation.

The Chairperson said that all of the problems that the Committee heard were caused by the National Department of Housing because it did not withhold funds from the provinces without the necessary capacity to handle them. DORA gave the National Department the power to relocate funds to the provinces that did have the capacity but this did not happen.


The meeting was adjourned.