SHRA & NHFC 2021/22 Annual Performance Plans; with Deputy Minister

Meeting report

Briefing by National Housing Finance Corporation (NHFC)

 

Mr Sizwe Tati, Acting Chief Executive Officer (CEO), National Housing Finance Corporation (NHFC), said the corporation was a Schedule 3A public entity that supported housing delivery through the provision of affordable housing finance for citizens with a monthly income of between R800 and R22 000. The Rural Housing Loan Fund NPC (RHLF), the National Urban Reconstruction and Housing Agency NPC (NURCHA) had merged into the NHFC on 1 October 2018. This merger was a crucial step towards the formation of the Human Settlements Development Bank (HSDB).

The value proposition of NHFC centred on:

• social housing finance that provides subsidised rental accommodation to people earning R1 500 to R15 000;
• providing privately-owned rental housing and student accommodation finance (not subsidised);
• subsidy and affordable housing finance (RDP financing);
• strategic partnerships, and investments (a new area where NHFC partners with developers to plan new cities);
• incremental housing finance (NHFC funds non-bank intermediaries with loans, who then fund homeowners to assist with housing improvements in rural and urban areas);
• programme and fund management (NHFC takes up funding role as mandated by DHS); and
• the finance linked individual subsidy programme (FLISP).

The values of NHFC which sought to achieve the overall vision of the HSDB, were serving the households' evolving needs to access adequate affordable housing, to develop quality living environments, and to prioritise the development impact through transformation and sustainability. The NHFC offered four main categories of products and services to its primary customers -- financial assistance, fund management, guarantees, and other services such as advisory and advocacy services.

Ms Mandu Mamatela, Executive Manager: Corporate Strategy, NHFC, said the impact statement of the Corporation was to build sustainable human settlements that improved the quality of households. She outlined the four outcomes in the five-year annual performance plan were functional, efficient and integrated governance; improved delivery of affordable housing; increased access to affordable finance to enable end-users to have appropriate, spatially just, and adequate housing; and increased penetration and participation of low-to-middle income households and businesses in the housing market.

She said the projected figures for housing opportunities in 2021 were lower than the actual figures of 2020 because of the pandemic which had affected the economy. However, NHFC believed that the market would recover. The current realities as NHFC transitioned to the HSDB were a fractured market, despite the efforts and progress made, with citizens having inequitable access to the benefits, resulting in an affordability problem. Although the country had 16.7m households, about 81.1% were considered formal dwellings, 13.1% were informal (slums), and the country had an estimated housing backlog of between 2.3m and 3.7m households, growing at 178 000 a year.

Only 7.7m households (46.3%) earned less than R3 500 a month and qualified for a government subsidy -- Reconstruction and Development Programme (RDP) homes-- while 7.2m households (37,1%) earned between R3 501 and R20 000 a month, making them ineligible for RDP homes but unable to afford to participate in the private property market, and 0,8m households (4,3%) earned between R15 000 and R20 000 a month.

A situational analysis of the external environment using, the PESTEL model, showed that political, economic, social/cultural, technological and legal factors created a barrier to access the low-cost housing market. Legal factors included clarity on land reform and expropriation issues, timelines in legislation approval, and COVID-19 had negatively impacted on rental agreements and payment conditions, so the NHFC had had to make concessions. Environmental factors included an increased awareness of the enterprise ecological footprint, which introduced new issues of planning affordable housing sustainably. Technology factors included the fourth industrial revolution that had brought new technologies and innovation into the market, enabling lower-income households’ ability to access affordable finance, and innovation in housing materials had led to cheaper raw materials required to build better quality housing. Politically, the newly formed democracy had inherited a flawed system that had isolated most of the population away from economic activities, and high levels of fraud and corruption had reduced investor confidence which had resulted in a decline in the property market.

Economic factors included a reduction in household income as a result of COVID-19, an impact on interest rates, and a risk averse appetite which made the financial sector continue to serve the middle-higher end of the market. Also, the rental market was in a deflation mode. Social factors included rapid urbanisation and population growth, which had increased migration to metropolitan areas, so spatial issues needed to be addressed. Also, limited exposure, and a lack of education and awareness of financial planning, savings, and wealth generation, limited the lower end of the market from participating in property markets.

Internally, the NHFCs governance structure was appropriate. The board had eight non-executive directors and one executive director, with a balanced and skilled mix of gender (five men and three women), race, and age. The operating model was aligned to ensure maximum development impact.

The group's balance sheet showed capacity to leverage, with a low debt to equity ratio, and the demand for the product offerings of the NHFC continued to increase. However, it continually monitored its cost to income ratio to ensure that it was financially sustained. The institutional knowledge, existing partnerships and stakeholder relationships would assist it to achieve its objectives and maximise development impact.

However, the manual processes and operations of the NHFC were a weakness, so its processes were being automated to achieve sustainability and continuity. Also, change management processes were being reviewed to ensure a cohesive entity. The weaknesses and threats of the economic situation presented many opportunities for the NHFC to play a pivotal role in the human settlements value chain and maximise its development impact whilst remaining sustainable if addressed and targeted appropriately.

Analysis of performance contributions at the programme level

 

Under programme one: Administration (Functional and Integrated Efficient Governance), the projected output indicator for unqualified audits was the audit outcome. The audited performances in 2017/18, 2018/19, and 2019/20 were unqualified audit opinions, but the estimated performance in 2020/21 was unqualified audit opinions with no material findings, and this was also predicted for the medium term expenditure framework (MTEF) in the five-year APP. Similarly, targets had been drawn up for the statutory compliance, anti-fraud, corruption and risk management reports, internal annual audit plans, and management of credit losses.

The targets established for programme two: (Integrated Human Settlements Planning and Development), were under strategic partnerships and subsidy housing finance. The output indicators for targets in programme four (Rental and Social Housing) were the value of disbursements and the value of approved loans under the output of disbursement of approved loans. Although the baseline targets set for social and private housing in 2020/21 had been low because of COVID-19, they had been surpassed. The output indicators for targets in programme 5a (affordable finance and investments) and 5b (grant facilitation) had achieved the desired impacts. The output indicators for targets in programme six (sector transformation) measured disbursements to previously disadvantaged intermediaries such as broad-based black economic empowerment (BBBEE) companies, youths, women, and people living with disabilities.

Ms Kyna Sambo, acting Chief Financial Officer (CFO), said the key value drivers of the NHFC were loan pricing/ interest margins, loan book growth and quality, operational efficiency, capital allocation and capital structure, such as debt to equity and cost of funding. Budget assumptions were built around interest rates, and the business offerings of NHFC were severely impacted by changes in the Reserve Bank's repo rate. The COVID-9 pandemic also impacted the impairments and bad debts profile of NHFC. Expenses were focused on CAPEX items. She outlined the key performance indicators.

Mr Tati said COVID-19 had impacted the business of NHFC, and he hoped that income would increase as the economy was being revived. The key risk factors for outcome one were a qualified audit opinion, a delay in the establishment of the HSDB, and challenges in balancing its developmental mandate with financial sustainability.

The NHFC had mitigated the risk by:

• complying with all applicable regulatory legislation -- prescripts, guidelines and practices;
• having robust engagement with the Department of Human Settlements (DHS);
• revising its financial model;
• implementing a business continuity plan, an information technology (IT) strategy and governance framework review;
• implementing a risk appetite statement; and
• changing its product pricing policy and strategy.

 

SHRA on its strategic plan 2020-2025 and APP 2021/22

 

Ms Alice Puoane, Manager: Corporate Services and CFO, Social Housing Regulatory Authority (SHRA) said the strategic roadmap of the entity had changed to focus on a transformed, compliant, sustainable social housing sector, and on integrated, quality and affordable social housing. Its vision had changed to create an integrated South Africa, where citizens lived a good quality life in well-located and affordable, quality rental homes. Its mission was to ensure there was quality housing for lower to middle-income households in integrated settlements by investing in, enabling, regulating, and transforming affordable social housing for the rental market. Its values had not changed, but its mandate-directed outcomes were functional, efficient and integrated governance under administration, investing in quality affordable social housing for rental delivered in strategically located areas, to enable the enhanced performance of delivery agents and projects. It also had to ensure that municipalities and provinces had increased capacity to deliver social housing, that there was an effectively regulated and sustainable social housing sector, and that it initiated a transformed social housing sector value chain.

SHRA's 2020/25 strategic plan for Outcome One (functional, efficient and integrated governance) had outcome indicators on the external audit outcome and stakeholder satisfaction index, with a projected unqualified audit opinion, with no matters of emphasis, from a baseline of an unqualified audit opinion, with matters of emphasis.

For Outcome Two (quality affordable social housing for rental, delivered in strategically located areas) the outcome indicator was the number of social housing units delivered in strategically located areas. The projected MTSF target for the 2019-2024 financial years was 30 000 social housing units delivered, from 13 968 social housing units.

For Outcome Three (enhanced performance of delivery agents and projects) the outcome indicators were percentages of delivery agents that received institutional grant support, who at minimum maintained their level of accreditation, and projects that received institutional grant support that was accredited for a capital grant award.

For Outcome Four (increased capacity of municipalities and provinces to deliver social housing) the new outcome indicator was to ensure that several municipalities were capacitated to deliver social housing. The projected APP target was to capacitate 12 municipalities to deliver social housing. In the current financial year, eight memoranda of association had been signed with municipalities.

For Outcome Five (an effectively regulated and sustainable social housing sector), the outcome indicators were the number of fully accredited social housing institutions, the number of social housing units accredited, and the number of social housing units under regulation.

Ms Pouane said that a new indicator had been established in 2020/21 for Outcome Six (transformed social housing sector value chain) for the social housing sector transformation barometer, with a projected target for 2020/21 to 2024/25 that involved an improvement in the state of transformation across the social housing sector. A situational analysis of the SHRA's enablers and resources showed that the standard performance benchmarks were not effective for all types of institutions, so training programmes had been implemented. Good feedback had been received from participants, such as provincial and municipal officials, and the National Department.

SHRA had been viewed as an entity that did not support transformation because of not having a welcoming environment for new entries/ applicants. This was because these new entrants did not submit the necessary documents, so municipal support projects and incubation project implementation had been used to mitigate this challenge. Also, SHRA lacked an effective information communication technology (ICT) strategy, as its inefficient manual systems did not give feedback to applicants timeously. SHRA had therefore completed three modules to mitigate the ICT challenges and was presently working on other ICT modules.

The 2021/22 focus areas were an organisational structure review, a culture of caring, of being part of the solution, to drive “real” on the ground transformation, implement the Council-approved five-year stakeholder management and communications strategy, strengthen the regulatory functions and capacity of the SHRA, improve social housing institutions' (SHIs') accreditation processes, and the strengthening of other human capital, internal systems and processes.

Gains from the MTSF showed that a total of 13 968 housing units had been delivered. A further 23 241 units were in various stages of delivery, with 9 273 of these already under construction and 12 477 that had been awarded capital grants but were yet to break ground.  As far as the accreditation of units was concerned, SHRA had exceeded the MTSF target of 27 003 by 8 611 units.

SHRA performance targets for 2021/22

 

SHRA had five programmes, and each had different core functions.

 

Programme One (Administration) had two components -- corporate services and office of the CEO; Program Two dealt with compliance, accreditation, and regulation; Programme Three involved sector development; and Programme Four covered project development and funding.

 

New indicators added to the administration programme were measurements of implementation of the approved internal audit plan, compliance with statutory reporting requirements and prescripts, adherence to the anti-fraud and corruption policy, and implementation of the approved risk management plan introduced in 2019/20. However, the output indicators introduced in 2020/21 for administration were the achievement of the stakeholder management and communications strategy annual implementation plan and the development of an affordable rental housing policy position. Projections in the MTSF for stakeholder management were 80% for policy development, approval and implementation in affordable rental housing.

 

New output indicators introduced for 2020/21 /in programme two were the measurement of funds spent by grant recipients on main contractors and professional teams that were from the designated groups. Over the MTSF, percentage increases projected were 20%, 25%, and 30% in the 2021/22, 2022/23 and 2023/24 financial years.

 

The new outcome indicator for programme three under the customised incubation programme was a measurement of the number of incubation programme participants receiving project accreditation. The projects targeted over the MTSF were two in each financial year.

 

The new outcome indicator introduced in programme four in 2020/21 was a measurement of the projects accredited by municipalities in the municipal support programme. The projects targeted over the MTSF were two in each financial year. Another new outcome indicator in programme four in 2020/21 under the preferential spend of the Institutional Investment Grant (IIG) was a measurement of the IIG recipients that were from the designated groups, and participants in the incubation programme that were women or youth-owned or controlled. The project targets' increases were 33% in 2021/22, and 50% in both 2022/23 and 2023/24.

 

New outcome indicators for programme five in 2020/21 under the accreditation of Social Housing Institutions (SHIs) were the measurement of the number of additional fully accredited SHIs and conditionally accredited SHIs with accredited projects. Projections over the MTSF were an additional two, three and four fully accredited SHIs in 2021/22, 2022/23 and 2023/24, and an additional five conditionally accredited SHIs each year. Under tenancy compliance and satisfaction monitoring, measurement of subsidised housing projects’ tenant satisfaction surveys would be conducted.

 

New outcome indicators for programme six in 2020/21, under preferential accreditation of capital grant applicants, were the measurement of new project accreditation applicants that were controlled or owned by a black majority, and new project accreditation applicants that were controlled or owned by designated groups. Projections over the MTSF were additional 85% and 40% increases respectively. Under the preferential award and spend of the consolidated capital grant (CCG) was a measurement of the funds spent by grant recipients on main contractors and professional teams that were from the designated groups, with increases projected at 20%, 25% and 30% over the period.

 

Risks and mitigation

 

The risks under outcome one were inadequate or insufficient resources to effectively support optimal organisational performance. This was due to financial management shortfalls in organisation-wide financial reporting, budget management and expense containment; inadequate performance and monitoring management; de-centralised and ineffective stakeholder management; inadequate business continuity management and disaster recovery protocols; inadequate document management protocols, and inadequate health and safety management practices.

Outcome two was threatened by insufficient resources to meet delivery targets. This was due to insufficient budget allocation, not being able to upscale the delivery of social housing, failure to implement social housing policy, and the fact that strategically located land was not available.

Outcome three was at risk because the buy-in of provinces and municipalities was not sufficient. This was because political leaders did not support social housing initiatives and the fact that provinces and municipalities could not drive social housing programmes.

Outcome four was challenged by inadequate sector regulation which arose due to unplanned involvement by various stakeholders which negatively impacted on the sustainability of the sector, insufficient expertise within the SHRA to perform and enforce its regulatory role based on the Act, and accreditation of delivery agents that did not have the required capability. It was also challenged by fraud and corruption, adverse reputational damage to SHRA due to insufficient understanding of social housing across the value chain, rejection of SHRA's role in the sector due to legacy issues, and perception by the social housing sector of a failure by the SHRA to support transformation.

SHRA outlined several initiatives to curb the risk in each outcome, based on the source of the risk.

Summary of revenue

 

The operational grant had increased from R46.8m to R58m, representing an average annual growth from 2017/18 to 2020/21 of 7.4%. The growth in operational grants had fallen to an annual growth rate of 4.7% -- to R66.6m in 2023/24 -- because SHRA was reducing the consultants it was using in professional surveys. It was training staff in this regard, and this was reflected by a progressive decrease in professional fees in the projected MTSF..

Discussion

 

Ms S Mokgotho (EFF) observed that there were fundamental differences between the number and nature of budget programmes in the estimates of national expenditure (ENE) and APPs of the NHFC, and asked it to explain why there were such differences and clarify if the entity planned to reconcile them to ensure that there would be improved monitoring and comparison of budget spending performance. She sought clarification as to why there were percentage increments in the implementation of plans and reporting, and why the target for the internal audit report was set at 50% completion in quarters two and three under programme one. Why was the informal settlement upgrading programme (programme three) included in the APP, but not included in NHFC's outcomes? She asked for clarity on the recent developments on the Human Settlements Development Bank (HSDB).

 

Commenting on the negative impact of the pandemic on the economy, she pointed out that the income of the NHFC was sensitive to interest rates and economic indicators that had an impact on housing projects that affected more than 90% of the NHFC lending portfolio. She therefore asked it to explain the strategies being considered and implemented to improve its financial resilience and profit margin, as rate cuts had significant negative impacts on its profit margin.

 

Ms Mokgotho asked SHRA to state the municipalities it would assist in the 2021/22 financial year, clarify the current status of the municipalities' support programme (programme four), the options being considered to ensure that the targets in the programme were achieved, to confirm if additional funds would be released for the projects, and to state the status of the social housing growth plan in the programme.

Ms G Tseke (ANC) asked the NHFC to state why the target for the percentage disbursement of funds to previously disadvantaged groups in the 2020/21 financial year had been changed to a monetary value. Why had the additional human resources identified in the revised organisation structure -- such as chief risk officer, social housing management analyst, built environment analyst, business analyst, compliance administrators, project accreditation administrator and regulations manager -- not been included in the budget? She also asked why the deployment of integrated IT systems, which was part of its new IT and communication strategy, was not captured in its budget.

Mr M Tseki (ANC) asked the NHFC to describe the response of commercial banks to housing loans during the pandemic. He asked for status reports on the progress of the Act, and added that he was impressed with the quality of the HSDB.

Ms N Mvana (ANC) asked the NHFC if the HSDB, based on the Act, had assisted the low-income category during the pandemic. She asked SHRA to further clarify how it would resolve specific risks.

Mr M Mashego (ANC) appreciated the improvement in reporting of the HSDB, but remarked that the entities had not shown that they were prepared for the smooth running of the APPs.

The Chairperson observed that there were a lot of officials in acting positions, and some of the officials contracts’ were expiring soon, particularly those in the NHFC. She asked the Deputy Minister and the Director-General to indicate the status of the acting positions. She asked the NHFC to clarify the partnerships and investments that the HSDB would create. She observed that most contractors involved in the incubator programmes were mostly white and male, and asked how NHFC planned to ensure that women, people with disabilities, and youths were enlisted in the incubator programme. She welcomed the inclusion of transformation in social housing, but asked SHRA to clarify its commitment to resolve specific challenges in the entity.

NHFC's response

 

Ms Phekane Ramarumo, Board chairperson, NHFC, said the restructuring of the NHFC had resulted in some gains in broad-based black economic empowerment (BBBEE). Improvements were evident in scorecards, such as the business council, developers and previously disadvantaged groups. It had implemented ways to ensure that more people who could not previously access housing credit now had access. The NHFC was also innovating technology development programmes that improved digital marketing, database procurement and management of staff. COVID-19 had affected the NHFC's operations but with the economy opening-up, its profit margins would improve.

Mr Tati said the NHFC was having ongoing communications with the DHS on the Act, and communications were at an advanced stage. Presently, the comments of the state legal adviser were being implemented, and the Act should be with the Minister soon. The organisational structure had been put in place for the HSDC, and specialised skills were being sought. The NHFC had to conduct a market test before it revived mortgage insurance, as new entrant commercial banks such as Capitec Bank had not been operating at the time the programme was designed. This test would also ensure that this arm remained profitable if new entrants came on board.

Ms Mamatela said the differences between the ENE and the APPs would be aligned when the APPs were adjusted. The targets for internal audit report plans would not be fully implemented in both quarters. The strategies being considered and implemented to improve its financial resilience and the profit margins of NHFC, and the information on assisting the low-income category on housing loans, would be shared with the Committee when it presented its full report.

Mr Viwe Gqwetha, Manager: Incubator Programme, said the NHFC was investing in incubator programmes that serviced previously disadvantaged groups. The three entities that had merged would leverage their experiences on incubator programmes. The NHFC was in the process of collaborating on incubator programmes that had been initiated by the SHRA, and was presently collaborating with it to finance SHIs. It was engaging strongly with stakeholders to refine available programmes. A structured programme had been implemented to develop the skills of strong contractors. Engagements were ongoing to strengthen advocacy and the framework for partnering with developers.

Ms Sambo said that strategies being considered and implemented to improve its financial resilience, profit margin and sustainability, included the balancing of its portfolio, increasing the size of the NHFC's book to more of the fixed costs on fluctuating loans, and entering into interest rate swaps.

SHRA's response

 

Ms Bathabile Dlamini, Board chairperson, SHRA, said the entity followed the mandate of the government on human settlements, and the regulation arm of social housing needed to be strengthened. Social housing institutions had to have clear and transparent ways of operation. Bills for water and electricity in social housing units must come directly from the municipalities, not from third parties. Previously disadvantaged groups were challenged with filling in the forms for social housing units because the process was cumbersome. The SHRA had a memorandum of understanding with Women in Construction, but presently there were no women SHIs.

Ms Puoane said SHRA's engagements had been extensive, and it had established that there was a need for restructuring zones to establish projects, but it was waiting for rental demands. It had had online sessions with municipalities to organise strategies for social housing in their areas. Feedback received from the sessions with seven municipalities showed that the filling of social housing unit forms was complicated, as mentioned by the Board chairperson. There were very few established social housing operations in these municipalities, and there was a need to address the feedback on the land housing packaging support.

Progress on SHRA housing units had been stalled because SHIs had challenges with funding social housing. SHIs such as the National Housing Finance Corporation (NHFC), ABSA and Nedbank were supposed to provide debt funding because of the class of people that needed the funds. SHRA was engaging with the financiers to make them aware of its offerings.

The Committee should note that social housing regulating authorities were unable to work alone, and needed the assistance of financiers. Also, municipalities needed to assist SHRA with land to build social housing units. SHRA trained applicants through an incubation process pipeline so that when these applicants were ready, they were moved to the next stage. Municipal approval had been a challenge, because municipalities did not understand the process, but SHRA was making them aware through meetings.

SHRA was reviewing its organisational structure, and this would be completed in June. It had identified a few critical posts, but still needed to discuss this with the Executive Committee (EXCO). It would continue with funded critical vacant posts and service the other vacant critical posts later.

Operating expenses (OPEX) had surpassed the annual OPEX budget, but this was being addressed by reprioritising spending.

Ms Pam Tshwete, Deputy Minister, DHS, said the Act for the HSDB had been drafted and sent to the state legal adviser for scrutiny. It would then go for public comment, as this was a vital component.

The NHFC incubation programme for emerging contractors should be developed for women, because women were more disadvantaged.

The NHFC had an acting CEO because the contract had expired,. The process of recruitment was ongoing, as the advertisement had been published and applications would close on 3 May. The process would be finalised soon.

Ms N Sihlwayi (ANC) said the programme to provide social housing to low-income people should be appreciated, because they had previously been neglected. It should be noted that poor people were bankable. She asked the SHRA to mention the efforts it used to mitigate social housing unit challenges and ensure that if corruption was involved, strong systems to address it were put in place upfront. She asked how individuals could apply for social housing, since the land had to be available to build social housing units.

Ms Mokgotho reminded the NHFC that it had not explained why the informal settlement upgrading programme (program three) was included in the APP, but not included in NHFC's outcomes. She also reminded SHRA to clarify if additional funds would be appropriated for programme four in the next budget.

The Chairperson asked both entities to respond.

Ms Mamatela said there had been a policy shift for rapid land relief that would assist individuals to build through access to pieces of land. Social housing units were presently been built for informal settlements through incremental housing. This was not being monitored in the past, but the NHFC would begin to monitor it now.

Ms Puoane said SHRA had fraud prevention strategies in place. However, because of the current issues that had occurred, the fraud management plan was being reviewed to ensure each official in SHRA was accountable. The plan to automate processes was to ensure that contact was limited among applicants and SHRA staff, so applications would be considered only if they were submitted electronically. The process of decision-making would have an electronic footprint, and such decisions would be made by two or more SHRA officials. If an individual applied for housing units on land that was not regulated, SHRA would approach the municipality to assist, as this would be classified as unauthorised expenditure if the application was processed. Additional funds would not be appropriated for programme four in the short run, but may be appropriated after engagements with the DHS.

The Chairperson appreciated the engagement with the Deputy Minister, the DHS and both entities, and commented that the Committee would continue to support the goals and objectives of both entities.

The meeting was adjourned.