Contents

1: Introduction
2: Mandate and method of reporting
3: Nature and extent of the audit
4: Audit findings
5: Conclusions
6: Recommendations
7: Appreciation

1. Introduction

1.1 On 24 April 1997 the former Director-General of the National Department of Housing informed the Auditor-General of certain alleged irregularities concerning the approval of a subsidy-linked project for the development of affordable housing in the Mpumalanga Province, granted to an entity styled Motheo Construction (Pty) Ltd. This was one of the biggest contracts in low-cost housing awarded by the government, and it was for 10 500 houses at a total cost of R190 890 000.

1.2 On 6 May 1997 he requested the Auditor-General to audit the approval process followed in granting a subsidy-linked project to Motheo Construction (Pty) Ltd. This request was agreed to.

1.3 The purpose of this audit was to establish whether there was:

1.  proper approval for the project at national and provincial levels;
2.  any misrepresentation;
3.  a proper agreement between the Provincial Housing Board and Motheo Construction (Pty) Ltd;
4.  compliance with the relevant Acts and regulations.

1.5 The purpose of this Report is to convey the findings of the audit so that timely corrective steps could be taken where necessary.

2. Mandate and method of reporting

2.1 The content of this Report is based on the requirements of section 188(1) of the Constitution of the Republic of South Africa, 1996 (Act No.108 of 1996) and sections 3 and 5 of the Auditor-General Act, 1995 (Act No.12 of 1995). In compiling the Report, where possible the emphasis was placed on the more material aspects.

2.2 Owing to- the fact that there are two Accounting Officers involved in the Housing Subsidy scheme - one at national level and the other at provincial level it is envisaged that this Report will be tabled both in Parliament and in the Mpumalanga Legislature. I am of the opinion that it should first be dealt with at provincial level.

3. Nature and extent of the audit

3.1 The findings of this Report are based on information gained from files, from reviewing documentation submitted to this Office as well as from a variety of other sources and interviews. Where possible the validity of information was verified. Where parties were not compelled by the Auditor-General Act, 1995 (Act No.12 of 1995) to supply information, but indicated their willingness to assist this Office, such information was obtained and analysed.

3.2 Owing to the nature of some of the aspects involved, for instance the fact that parties outside the Government are involved in this project, it was not always possible to obtain all the information and documentation required. Because of the inherent limitations of any audit, this Report does not purport to have identified all the shortcomings and/or irregularities that may possibly have occurred.

4. Audit findings

The key findings set out below are based on a detailed report that was forwarded on 17 July 1997 to the Acting Director-General of Housing, the Director-General of the Mpumalanga Province and the Head of the Department of Local Government, Housing and Land Administration in the Mpumalanga Province, who is the Accounting Officer for housing subsidies in the Province.

The above parties' comments were received on 23 July 1997 and 14 August 1997 and are taken into account in this Report, where it is deemed appropriate.

The key findings of the audit are briefly as follows:

4.1 General

4.1.1 Proper approval for the rural housing project was not obtained. Although the Mpumalanga Housing Board took a decision in this regard, this decision is considered to be invalid as there was no quorum at the particular meeting, the information needed to make a proper decision was largely lacking and no funds were available to finance this project. In fact, the funds for housing projects were already overcommitted to a considerable extent.

4.1.2 Conclusive evidence that any misrepresentations took place could not be found. There is, however, a reasonable possibility that misrepresentation concerning the assumed involvement of a financial institution did occur.

4.1.3 Whereas there is a written agreement between the Mpumalanga Housing Board and Motheo Construction (Pty) Ltd. it was not necessarily signed with the proper authority of the Board nor did it comply with the terms and conditions usually applicable to the housing subsidy scheme.
4.1.4 There was almost complete disregard for the due process and proper procedure in terms of the requirements of the National Department of Housing's implementation manual. For example, the proposed project was for the largest part not assessed in accordance with the fifteen evaluation criteria contained in that manual.

4.2 Approval of the Motheo Construction (Pty) Ltd project by the Mpumalanga Provincial Housing Board

4.2.1 As the main board, the Mpumalanga Provincial Housing Board has an Executive Committee to assist it. All the proposed projects are initially reviewed by the Executive Committee, which makes preliminary decisions on such projects, "hereafter such projects are submitted to the main board for one of three decisions, being:

1.  Confirmation of the decision of the Executive Committee;
2.  Rejection of a project; or
3. Approval of a project in principle.

1.  No exact details of the proposed project were disclosed.
2.  The role of the financial institution that was supposedly part of this project was not defined.
3.  No information about Motheo Construction (Pty) Ltd and it capabilities was disclosed.
4. Site information was sketchy and clarity was apparently not obtained on the ability of the selected sites to carry development.
5.  No proposal was placed before the Executive Committee.
6.  No indication of any financial implications was given.
7.  It is not clear whether the Provincial Housing Board made its decision based on an evaluation of the size of the top structure, the delivery programme and the support of the local community as was indicated to the Portfolio Committee on Housing of Parliament on 3 June 1997 by the former Chairman of the Board, as no indication could be found that information relating hereto had been presented to the Executive Committee.

"4. Ratification of the 18th Executive Committee meeting The Board ratified the Minutes of the 18th Executive Committee meeting."

According to the contents of the minutes of the 18th Board Meeting of the Mpumalanga Provincial Housing Board, it is clear that the approval of the rural housing project is deficient. The reasons for this are the following:

1.  In ratifying the Minutes of the 1 8th Executive Committee Meeting, it is not clear whether the Board in fact approved the proposal of Motheo Construction (Pty) Ltd. This Office was, however, advised that the proposal had in fact been approved, even though the minutes are not clear on the facts.
2. The Minutes of the 18th Board Meeting do not disclose whether the Board in fact applied its mind to the proposal concerned.
3.  Most significant, however, is the fact that - according to the minutes - the membership of the Board consists of eleven people, six of whom are indicated as having been present, two of whom are indicated as having been absent and three of whom are indicated as having extended their apologies.

It was established that seven Board members had in fact been present at the meeting concerned. In documentation relating to the identity of the Board members, it was noted that the Board had originally had sixteen members, "hereafter it had been reduced to twelve with effect from 1 February 1997. Section 11 (7) read with Section 7(3) of the Housing Arrangements Act, 1993 (Act No. 155 of 1993) states that the quorum of the meeting of the Provincial Housing Board shall be two thirds of its members. There was thus not a quorum at this particular Board Meeting. Consequently, any decision taken at this meeting would have been ultra vires as no proper Board was constituted at the meeting.
4.  There were no funds available for this project, since the Department of Local Government, Housing and Land Administration in Mpumalanga had already overcommitted itself to fund projects to the amount of R313 467 230 as at 29 April 1997.

At the commencement of the 1997/1998 financial year, the Department had funds totalling R158 181 665 available for housing projects. As at 29 April 1997, the cash flow information provided to the National Director-General of Housing indicated that the Department's commitments for the 1997/1998 financial year amounted to R471 648 895.
This estimate includes an amount of R143 451 963 relating to rural housing initiatives. It is thus evident that the Department had totally overcommitted itself, even without the addition of further rural housing initiatives.
The funds available at the commencement of the 1997/1998 financial year, being R158 181 665, do not include the national allocation to the Mpumalanga Province for the 1997/1998 financial year. This amount was, however, still unknown at that stage.

4.2.7 The following observations on the above position can therefore be made:

1.  Cancellations of unproductive contracts would not necessarily have a positive effect on the cash flow of the Department of Local Government, Housing and Land Administration because of its significant over commitment on available funding;
2.  It is evident that the cancellations were not a certainty when the contract was signed, and the Department of Local Government, Housing and Land Administration committed itself to the expenditure concerned;
3.  The budget allocation to Mpumalanga for the 1997/1998 financial year was also uncertain when the contract was signed.

4.3 The proposal of Motheo Construction (Pty) Ltd

4.3.1 The above proposal appears to have been published, at least in draft form, late in 1996, although officials of the Department of Local Government, Housing and Land Administration informed this Office that it was first presented at the briefing meeting held on 24 February 1 997.

4.3.2 A significant feature of this proposal is that it refers to a joint venture between Motheo Construction (Pty) Ltd and a financial institution as regards the provision of rural housing. It is further evident from reading this proposal that the intention expressed is that Motheo Construction (Pty) Ltd was to enter into a development undertaking with the assistance of a financial institution.

4.3.3 The proposal also provides for a number of requirements to be met in order to comply with a fast delivery schedule. These requirements included the following:

1.  "All subsidies of R17 250 and provision made for this amount to be increased in accordance with the inflation rate";
2.  "Bulk and connector infrastructure grant funding for enviroloo".

1.  The government subsidy scheme for housing does not provide for a subsidy of R17 250 per se as the maximum subsidy available is R15 000. Furthermore, the subsidy scheme does not make provision for inflation.
2.  It is not clear why bulk and connector infrastructure grant funding would be required for the installation of an enviroloo, since such installation would entail that no services in the sense of sewerage lines et cetera would have to be provided. The cost of installing an enviroloo could therefore have been funded by a saving on the cost of such services. Bulk and connector infrastructure grant funding would then also have been unnecessary.

4.4.1 The National Department of Housing's implementation manual sets out a number of requirements which an application for a project linked subsidy must meet before the Provincial Housing Board can approve it. However, no formal documentation constituting an application by Motheo Construction (Pty) Ltd could be found. The following are the more material procedures that have not been adhered to:

1. The developer is required to satisfy a Provincial Housing Board that it has sufficient access to financial resources and managerial competence in order to undertake the proposed projects successfully.

No evidence could be found that any financial information relating to Motheo Construction (Pty) Ltd had been placed before the Provincial Housing Board. The fact that Motheo Construction (Pty) Ltd maintained in its proposal that it was in a joint venture with a financial institution created the possibility that if the Provincial Housing Board had applied its mind, it could have reached the conclusion that Motheo Construction (Pty) Ltd would be financed by the financial institution.
It is quite possible that such an understanding could have existed within the Department of Local Government, Housing and Land Administration.
2.  If a development is undertaken as a joint venture, the legal competence, financial position and technical expertise of the parties to the joint venture as a whole should be assessed by the Provincial Housing Board in order to ascertain whether the developers concerned are financially, technically and managerially capable of handling the proposed project successfully.

Motheo Construction (Pty) Ltd clearly insisted that it was involved in a joint venture operation with a financial institution. However, no copy of an agreement specifically entered into between Motheo Construction (Pty) Ltd and the financial institution to substantiate the representation that the proposal was a joint venture between a financial institution and Motheo Construction (Pty) Ltd could be found.
The Provincial Housing Board appears not to have been concerned about this specific requirement and as such it did not assess the legal competence and financial position of this joint venture. The decision-makers in the Province indicated that they were satisfied that it was not necessary to determine the legal competence and financial position of Motheo Construction (Pty) Ltd. since a financial institution was involved in the joint venture.
This understanding appears to have resulted from the knowledge of the Provincial Housing Board and the Department of Local Government, Housing and Land Administration of the underlying memorandum of understanding between the Mpumalanga Province and the financial institution concerned. It is, however, clear that in this instance neither the Provincial Housing Board nor the Department had specifically assessed the legal competence of the ostensible joint venture between a financial institution and Motheo Construction (Pty) Ltd. Furthermore, it can be mentioned that the financial institution concerned denies being involved in the proposed project.
3. Any application submitted for approval by the Provincial Housing Board in subsidy-linked projects has to be accompanied by, inter alla, the following:
1.  In the case of an application being made for an increase in the amount of the subsidy in order to compensate the  for costs incurred as a result of abnormal geotechnical and locational factors, the amount of the increase for which application is made should be indicated, and that application should be motivated fully. In the present instance, it was noted that Motheo Construction (Pty) Ltd had effectively applied for a subsidy in excess of the maximum subsidy allowed. No detailed motivation for such an increase in the subsidy was provided in the proposal.
2. A copy of the social compact agreement between the community-based partner of the developer and other stakeholders in the project has to be submitted. No copies of social compact agreements between Motheo Construction (Pty) Ltd and any community based partners were submitted.

The Head of the Department of Local Government, Housing and Land Administration explained to Audit that the concept of social compact agreements is outdated and not in use, especially in view of the emphasis on delivery.
3. If a copy of the agreement between the developer and any particular stakeholder has not been obtained at the time of submission of the proposal, a summary of the steps taken to obtain the stakeholder's approval and the motivation for nevertheless undertaking the project has to be supplied. No summary of the proposed steps detailed in the Motheo proposal regarding the involvement of a financial institution and how it would be procured was submitted.
4.  A locality sketch, a preliminary lay-out plan and proposed house plans or sketches with full specifications for top structures should accompany the proposal. A perusal of the proposal submitted by Motheo Construction (Pty) Ltd indicates that none of the aforementioned items accompanied the said proposal. Nor were these items available to the Provincial Housing Board when it ostensibly made a decision on the Motheo project. The version of Motheo's proposal provided to this Office on 10 June 1997 does, however, contain such information. This appears to have been made available to the Head of the Department of Local Government, Housing and Land Administration on 24 February 1997.
5.  The proposal has to be accompanied by details of quality control measures that have to be adopted and details of warranties in respect of building defects. No evidence of such details could be found in the proposal forwarded by Motheo Construction (Pty) Ltd. The Department of Local Government, Housing and Land Administration usually also insists on retentions and professional indemnities. There were, however, no retentions provided for in the subsidy agreement nor in the Certificates of Progress Payments.
6.  A list of names of all the professional consultants and contractors that will be utilised to plan, design and execute the project has to be supplied. No such information was supplied in the proposal of Motheo Construction (Pty) Ltd.
7.  A programme for the implementation of the project has to be supplied. The proposal submitted by Motheo Construction (Pty) Ltd contains no programme for the implementation of the project. The proposal subsequently handed to this Office by representatives of Motheo Construction (Pty) Ltd contains only a theoretical time schedule.
4.  According to the Manual, applications will be accepted upon submission within a programme of publicly-specified dates. Projects submitted by such closing dates will then be evaluated on a comparative basis. However, no such actions took place and it is thus evident that the Motheo proposal was considered in a manner contrary to the aforementioned prescriptions of the Manual.
5.  The Manual prescribes that no projects will be approved unless funds are allocated to the project. However, it is evident from the above that on the one hand no funds were allocated for the purposes of this project as at the date of its ostensible approval by the Mpumalanga Provincial Housing Board, being 30 January 1997 and on the other hand the Mpumalanga Provincial Housing Board did not apply its mind as to whether there were funds allocated to the project or not.
6. The Manual requires that the Secretariat of the Provincial Housing Board has to assess an application in accordance with the evaluation criteria contained in the Manual. Such criteria include the following:
1. The degree to which all relevant stakeholders are included in the social compact agreement underlying the project proposal, and the significance and possible impact on the project of the exclusion of any stakeholders from it. This does not appear to have been considered.
2.  The extent to which the project satisfies the housing needs of an identified and defined target market and the relative urgency of such needs. No evidence that this was considered could be submitted.
3.  The extent to which the project contributes to the gainful employment of community members through the use of local small building contractors and labour intensive building methods. This aspect was apparently addressed only in a superficial manner.
4.  The extent to which minimum norms and standards regarding health and safety are met and are acceptable to the client community. This aspect was apparently only addressed in a superficial manner.
5.  The extent to which innovative and well-considered planning and design contribute to a wholesome living environment that will instil pride and a sense of belonging among residents. This aspect was not dealt with when the Mpumalanga Provincial Housing Board considered the application.
6.  The extent to which the targeted market and community will be able to afford the costs of residential property, ongoing maintenance and related services and facilities. No evidence was provided to indicate that this aspect had been considered.
7.  The extent to which the project is integrated and compatible with surrounding development in a manner that impacts positively on natural and built-up surroundings. No evidence was provided to indicate that this aspect had been considered.
8.  The extent to which construction methods employed in the project are effective, viable and practical in relation to the physical, climatological, geo-technical and topographical characteristics of the project site. There appeared to be no evidence that this aspect had been considered.
9.  The extent to which methods employed are replicable, thereby contributing to a comprehensive, sustainable housing delivery process. There appeared to be no evidence that this aspect had been considered.
10. The level of accountability and gearing of public resources. Although the Motheo proposal attempts to address this requirement, no evidence was presented that it had been considered properly.
11.  The capacity of the relevant local authority to deliver and perform effectively and productively. No evidence was found that this aspect had been considered.
12.  The contribution that approaches adopted in the project will make towards optimising the longer term social and economic benefits of the project to the target community. This aspect appears to have been considered, albeit in a superficial manner.
13.  The extent to which the project affords the beneficiary a choice in satisfying the housing needs. No evidence could be found that this aspect had been considered.
14. The extent to which stakeholders support the project and the extent to which they have agreed to co-operate in its implementation. No evidence could be found that this aspect had been considered.
15.  Value for money to be received by beneficiaries in terms of the pricing of the products to be offered. No evidence could be found that this aspect had been considered.
7.  Subsequent to its assessment of a project, according to the criteria referred to above, the Secretariat, if satisfied, has to prepare a motivated recommendation to a Provincial Housing Board for consideration. No evidence of such a motivation having been provided to the Mpumalanga Provincial Housing Board could be found.

4.5.1 The Agreement with Motheo was signed on 14 March 1997. With regard to the Agreement and the signing of the Agreement, the following audit observations are made:

1.  The Mpumalanga Provincial Housing Board did not authorise the Chairman to enter into the Agreement. It is, however, possible that there might have been a general mandate to that effect.
2.  There were no funds in place when the Agreement was signed.
3. There were still various problems with the contents of the Agreement on the date on which it was signed.
4. Notwithstanding the fact that the Agreement refers to a financial institution as well as a draft agreement to be signed with a financial institution, there was no such draft agreement and yet the parties signed the Agreement.
5.  The contract was signed for a subsidy of R15 000 each for 10 500 houses plus an additional 15% geo-technical allowance and a R930 bulk and connector infrastructure grant for all 10 500 houses. This could not have been done since each individual erf had to be evaluated in order to qualify for an additional subsidy to the maximum of 15% of the original amount of the subsidy. Thee bulk and connector infrastructure grant of R930 was evidently not to be derived from subsidisation by the National Housing Hoard but from a different source, and should therefore not have been included in this particular contract.

4.5.3 The Manual dictates that progress draws can be made in the following manner:

1. 1 st draw: Engineering design
2. 2nd draw: Town planning and land survey charges
3. 3rd draw: Total serviced site costs
4. 4th draw: On registration of transfer of any particular erf an amount equal to the difference between the infrastructure cost of that erf and the amount already paid in terms of the first three draws.
5. 5th draw: Upon completion of the top structure, the balance of the subsidy will be paid to the Developer.

4.5.4 It has further been noted that in terms of Clause 3.8.5 of the Agreement, the 5th draw for final infrastructure costs on hand-over of the improved site will be paid on the basis of 50% of an amount of R2 325 on completion of each individual top structure and 50% of the amount of R2 325 on the completion of transfer to the beneficiaries of each completed top structure, but not later than 30 days after the top structure has been handed over to the local authority concerned. The effect of this is the following:

1. The Department of Local Government, Housing and Land Administration agreed to pay an effective subsidy of R17 250 per site. The total amount payable in terms of this, excluding the bulk and connector infrastructure grant, amounts to R181 125 000. Given the structure of the 5th draw, this would translate into an amount of R24 412 500 being advanced by the Department as an interest-free loan facility of R24 412 500 to Motheo Construction (Pty) Ltd. This is contrary to well established principles of government funding, which provide that no payment be effected until value has been received and furthermore that no loans be granted by the government to private individuals without proper and specific authorisation thereto, and pursuant to an agreement being reached upon any interest payable.
2.  In the event of the contract being construed as providing only for a subsidy of R1 000 per unit, the specific structure regarding the 5th draw still provides for a loan advance of up to R24 412 500.

"The contract has been signed subject to an amicable resolution of the points raised in paragraphs 1 and 2 of this letter. This letter should thus be regarded as an Addendum to the Contract herein enclosed".

"This Agreement, (including the Appendices hereto) correctly reflects the intentions of the parties and constitutes the entire Agreement between the parties. No variation of, or addition to, or cancellation of this Agreement and no notation of this Agreement and no waiver by any one party of any of its rights hereof shall be of any force or effect unless reduced to writing and signed by the parties hereto or their duly authorised agents; provided that the Board shall be entitled, by means of notice to the Developer to amend, vary or substitute the subsidy procedures in ways not inconsistent with the eventual receipt by beneficiaries of the benefit of individual subsidies and not inconsistent with the Developer receiving payments as specified in Clause 3."

4.6 Miscellaneous findings

4.6.1 It appears that three houses had to be demolished in Hazyview owing to a dispute regarding the relevant area, since the relevant tribal authority had not been consulted about the development of such area in Hazyview.

4.6.2 The first payment of R9 240 000 had already been made to Motheo Construction (Pty) Ltd. notwithstanding the fact that no application for the change of land use in Hazyview, Tongaat and Badplaas had been received as at 6 June 1997 for the Nelspruit area by the Local Authority concerned.

4.6.3 There are two accounting officers involved in the delivery of housing by means of the Housing Subsidy Scheme, the one being the accounting officer of the South African Housing Fund. The other accounting officer is in a Province for which money is made available to him/her in terms of section 13(1) of the Housing Arrangements Act, 1993 (Act No. 155 of 1993) for the performance of the functions of a Provincial Housing Board, which include the payment of subsidies. 
This situation creates some difficulty, especially since the funds for the housing subsidies are not provided on the vote of a Province, but are made available to a Province from the South African Housing Fund for the payment of subsidies. Furthermore, only one official in a Province, who does not necessarily have to be the Director general of the Province, is made accountable for these funds. There are thus two levels of accountability and the question arises as to what extent the accounting officer of the South African Housing Fund is accountable for the housing fund money spent by the accounting officer in a Province.

One way to resolve this problem would be to make the funds for housing subsidies available directly on the relevant vote of the Province.

4.6.4 Section 11 (3)(b) of the Housing Arrangements Act, 1993, determines that one third of the members of a Provincial Housing Board should be nominated from the sectors or subsectors supplying and financing housing goods and services in the provinces. This stipulation in the Act may have the effect that the appointment of certain members of the Board may result in a conflict of interests. This appears to have been the case with the Mpumalanga Housing Board.

5. Conclusions

5.1 It is evident from the findings in paragraph 4 of the report that important rules and regulations were not adhered to by the Mpumalanga Provincial Housing Board as well as the Department of Local Government, Housing and Land Administration in the Mpumalanga Province.

5.2 Furthermore, it is possible that the members of the Mpumalanga Housing Board as well as officials of the Department of Local Government, Housing and Land Administration had been influenced by the possibility of a financial institution being involved, because they were under the impression that financial institutions had been involved in similar projects in the past.

5.3 The contents of this Report clearly indicate substantial disregard for the due process and proper procedure by individuals in positions of public trust. It is evident that the interests of the taxpayer and the principles of good governance have not been served in this instance. The contrived nature of the agreement is clearly evident, but the reasons and full implications thereof are not.

6. Recommendations

6.1 The National Department of Housing indicated that the subject of possible misrepresentation by certain individuals would be discussed with the Public Protector for possible action by him.

6.2 This Office is, however, of the opinion that the most appropriate manner to address all the uncertainties that still exist is to appoint a Commission of Enquiry to establish, inter alla, the following:

1.  Whether any misrepresentation was made by any individual or organisation to the Provincial Housing Board or the Department of Local Government, Housing and Land Administration or any other party to this project.
2.  Whether there were, in view of the allegations that were made in the public media, any family or other close relationships involved in the awarding of this project to Motheo Construction (Pty) Ltd.
3.  What the reasons and full implications of the contrived nature of the agreement with Motheo Construction (Pty) Ltd were.

I should like to express my appreciation of the courtesy extended, and assistance rendered, by the staff of the various entities visited during the audit.

Pretoria, 28/08/1997

H.E. KLUEVER 
Auditor-General.