PRESENTATION TO THE SELECT COMMITTEE ON PUBLIC SERVICES

1. PRESENTATION TO THE SELECT COMMITTEE ON PUBLIC SERVICES INDIVIDUAL RURAL HOUSING SUBSIDY VOUCHER PROGRAMME 7 AUGUST 2012

2. BACKGROUND Programme Rationale: • Not many housing projects in rural areas • Rural development is a priority for government • Enable qualifying beneficiaries in rural areas to access government subsidy funds to purchase building materials and improve their housing conditions • Reach households in rural areas who are not reached by current subsidy programmes

3. OVERVIEW OF THE PROGRAMME Key Features: • Individual subsidy programme • Subsidy issues in the form of a voucher in exchange for building materials and services • The self-help concept is the fundamental requirement—leveraging local household capacity to build own houses • RHLF to act as Implementing Agent • RHLF to enter into service level agreement with Provinces

4. Land Rights • Programme applies to persons with informal land rights • Land rights must be uncontested • Traditional authority to confirm functional tenure • Programme does not apply where normal individual subsidies or project linked subsidies apply

5. Phased Implementation Process Pilot Phase - Discover what works - Reduce operational risk - Build organizational capacity Permanent Formalized Process

6. Risks associated with the programme and mitigating factors At the EMT meeting of the 28th of Sept 2009, RHLF was instructed to investigate the risks associated with the Individual Rural Housing Subsidy Voucher Programme, and to present any mitigating factors or procedures. Risks as identified by the Policy Directorate of the National Department of Human Settlements and RHLF management team: Possible funding misappropriation Possible conflict between parties Lack of service providers and subsidy administrators Lack of material suppliers Losses during transporting of materials Possible incomplete dwellings and possible inferior workmanship Geotechnical problems Lack of capacity of RHLF Funding

7. RISK: • Possible funding misappropriation: • Resulting from RHLF releasing funds in advance to non-traditional lenders. MITIGATION STRATEGIES: No funds would be paid to non-traditional lenders, other than fees for services rendered RHLF will pay directly to building material suppliers – based on POD All payments will be subject to current RHLF internal controls and procedures Internal controls and procedures subject to annual audit

8. RISK: • Possible conflict between parties: • Arising mainly from participation of range of players. MITIGATION STRATEGIES: Sound legal contracts – with an alternative dispute resolution process Education of counterparties to the agreements - parties must understand their rights, responsibilities and obligations During pilot phase of the programme a forum should be created where any disputes could be discussed and resolved in a timely manner.

9. RISK: • Possible conflict between parties (continue): • Possibility of acknowledging materials not actually received. MITIGATION STRATEGIES: Using only reputable building material suppliers -existing relationship with one of our current intermediaries The intermediaries’ role would be to educate the beneficiary beforehand Investigate the use of biometric fingerprint reader and scanners in the POD process The certifier / intermediaries will play a role in reporting any possible short deliveries

10. RISK: • Lack of service providers and subsidy administrators : • Would make the programme not feasible in all areas of RSA MITIGATION STRATEGIES: non traditional lenders not the only solution community based organisations (e.g. Co-operatives) – RHLF’s strategy to find and develop A successful pilot would go a long way in convincing other intermediaries about the financial viability of the programme

11. RISK: • Lack of material suppliers: • This could result in the exclusion of qualifying beneficiaries MITIGATION STRATEGIES: Negotiate with closest suppliers already serving the target market Rely on local knowledge - where they currently get materials from even though transport costs may be higher Consider appointing a suitable transport service provider to deliver all materials in certain province / area

12. RISK: • Losses during transporting of materials: • Non-delivery due to distance and inaccessibility and therefore relying on unsuitable own transport MITIGATION STRATEGIES: Rely on local knowledge - where they currently get materials from even though transport costs may be higher Consider appointing a suitable transport service provider to deliver all materials in certain province / area

13. RISK: • Possible incomplete dwellings and possible inferior workmanship: • Result of challenges pertaining to managing progress and quality MITIGATION STRATEGIES: RHLF experience – people achieved better quality house when using own money With public funds, possibility of laxity exists Consumer education of all beneficiaries Long term strategy to work with CETA to offer training Role of Certifiers and possibly building inspectors from the Province / Municipalities (where feasible).

14. RISK: • Geotechnical problems: • Soil problems may cause structural damage to houses MITIGATION STRATEGIES: Use Variation Manual which maps problematic areas Local knowledge will be critical as people will be building where they currently reside The programme provides for Provinces to appoint geotechnical engineers and land surveyors

15. RISK: • Lack of capacity of RHLF: • In its current form RHLF will not be able to deliver the required service MITIGATION STRATEGIES: RHLF will have to establish a new Division apart from its lending business in line with mandate broadening First position that we will need to fill is that of a programme manager – this could be a contract position for the pilot only Propose that consultants / interns with built environment qualifications be used where possible during the pilot Pilot phase - allows RHLF to build capacity as it goes along

16. RISK: • Funding: • The proposed fee of 5% might not be enough MITIGATION STRATEGIES: For the pilot, RHLF will utilise part of the Accompanying Measure form KfW, where possible First draft forecasts (based on 500 subsidies in pilot) 5% fee income = R1,5mil Cost to RHLF = R9,5mil Shortfall = R8mil on pilot Estimated total shortfall over 3 years = between R25m and R30m. Hence the application for R25mil additional funding Cost is not 5% of subsidy but closer to 20%

17. Previous Key Decisions • MINMEC HELD ON 21 AUGUST 2009: • Decision: • The meeting approved the Individual Rural Housing Subsidy Voucher Scheme subject to rural areas in all provinces being recognized and; • MINMEC on 30 Oct 2009 - Presentation by Department: • RISKS & COSTS FOR THE RURAL HOUSING SUBSIDY VOUCHER PROGRAMME & ALTERNATIVE MECHANISMS • Decision: The meeting deferred approval of the Document until the finalisation of the discussions with National Treasury on the Development Finance Institutions (DFIs) • Portfolio Committee on Human Settlements: • Advised DHS to proceed with the implementation of the pilot

18. How will the Process Work? • RHLF negotiates funding reservation with MECs over the MTEF periods • Conclude agreements and Province makes advance payment to RHLF to RHLF • RHLF evaluates and appoint subsidy voucher intermediaries—these were planned to be RHLF current intermediaries or community based organisations • VS • DHS advising RHLF to appoint NURCHA as a voucher intermediary (described below)

19. OPTION1: NURCHA AS VOUCHER INTERMEDIARY DHS’s PREFERENCE FOR NURCHA: • NURCHA has provincial infrastructure to act as voucher intermediary • This arrangement is a departure from original approved strategy of using various RHLF intermediaries • NURCHA assumes sole role of being a voucher intermediary, but at a higher cost than originally envisaged

20. Pilot Phase Implementation Timeframes(three municipalities in EC)

21. Cost Implications for NURCHA Implementation Model NURCHA determined minimum house cost as follows:

22. Proposed Subsidy Amount Based on the Current Hosing Subsidy Quantum (DHS)

23. The Implementation Fee • With NURCHA as voucher intermediary, implementation costs are as follows: • R16 080 amounts to 23% of based on subsidy amount of R69 360 • R1.8m RHLF management Fee • R6 240 000 covers NURCHA fees

24. Total Costs for Pilot Phase in NURCHA Model • Note is made that NURCHA model departs from MINMEC approved model • With implementation fee rising from R3 468 to R16 080 per beneficiary • R8m to facilitate construction of 500 units amount to cost of delivering 116 rural dwellings

25. Comments on RHLF/NURCHA Model • One-Stop facility of NURCHA model: • Ensures well co-ordinated drive for best possible implementation • Provides best option to address informal building practices associated with rural areas • But the model seems to be too costly for the government fiscus (R16 080/beneficiary) • Question is raised whether the Programme is in fact feasible

26. Option 2: Explore cost – effective implementation model? • The cost of implementing the pilot through RHLF/NURCHA model is not cheaper than the previous RHLF costing—which indicated a shortfall of R8m p.a.—clearly 5% is unlikely to cover costs if all risk issues are to be addressed • Following concerns raised on implementation costs, RHLF Board directed management to explore alternative implementation model that is cost-effective • Leverage the rural knowledge of building own houses • Undertake risk mitigation measures that are cost effective to ensure quality housing

27. Concluding Remarks • Implementation of the Programme needs to be revisited • Where the Province or participating municipalities can offer services, they should in order to reduce cost of implementation • Programme has potential to expedite delivery of houses provided beneficiaries are enabled to build their houses in the manner they have built own houses for generations, while • Human DFIs, Province and Municipalities provide support to mitigate risks—role clarification and commitment is key • Many positive spinoff's for rural development