MINISTRY OF HOUSING: PARLIAMENTARY BRIEFING WEEK

(Incorporating comment received on the draft report released in October 1996; Final Second Report of the Ministerial Task Team on Delivery to the Minister of Housing: November 1996)

SUMMARY

Since the publication of the Task Team's First Report, steps have been taken which have led to a consistent and positive trend in the delivery process. Any interventions should seek to consolidate and facilitate this process.

At the same time, however, there has been insufficient engagement by the private sector in certain parts of the housing programme, with the more significant players focusing their attention on more profitable and less painful avenues for investment. However, it is important that the state should resist the temptation to merely attack and scapegoat the private sector while it still has too many deficiencies of its own to resolve. Indeed, the past few months have seen some significant shifts within the private sector where a greater willingness to engage and take higher levels of risk have been displayed with commendable results.

To add impetus to increasing existing delivery trends, and to introduce incentives and finance mechanisms which would enable mass-housing projects, a number of initiatives are proposed in this Second Report. These include:

adjustment to the Institutional Subsidy Regime to provide a greater incentive towards the promotion of a range of delivery mechanisms within the ambit of social housing and the building of suitable institutional capacity to manage such housing;

a R350m increase in the financial capacity of the National Housing Finance Corporation Ltd to specifically promote and finance a range of innovative schemes providing alternative tenure and finance options in the absence of readily available private sector finance for such initiatives and the placing of a further R75m fund under its management to promote institutional capacity building through equity funding;

the creation of a special RlOOm programme to promote larger scale development projects through Joint Venture partnerships between the public and private sectors; and

the commencement of a programme to make the housing bureaucracy more efficient and responsive to the needs of the public (giving meaning to the term civil service).

1. BACKGROUND

In its first report, the Task Team was fulfilling a mandate to identify practices and policies that were blocking delivery. Partly as a result of the implementation of the bulk of those recommendations, there has indeed been a positive and consistently improving trend in delivery throughout South Africa. This process is being strengthened through the completion of all of the tasks recommended in the first report. The Task Team also proposes to make further comprehensive recommendations in a Third Report, dealing with the majority of the homeless and the promotion of a Peoples' Housing Process.

This, the final Second Report submitted to the Minister, incorporates valuable input received since the release of the first draft in October 1996, and makes a number of specific proposals designed to consolidate and enhance delivery within the framework of existing national policy. In particular, this report identifies the need for a greater and more pro-active role for the state to speed up the delivery process of affordable housing, while recognising the need to sustain and increase the momentum already achieved in mobilising non state capacities and resources

This overarching recommendation is made on an analysis of the current delivery situation:

• subsidised housing delivery is now showing a marked increase with +10 000 end-user subsidies being paid out monthly by the state;
• in the period 1 June 1995 - 31 August 1996 banks made credit available in the amount of R4,039 million in 52 000 new loans in MIF areas, of which 39 000 loans to the value of R1,74 billion were provided in the subsidised market. New loans under this scheme are being granted at a level of +4 000 per month presently and still increasing;
• in the product price range +R18 000 up to +R50 000 very little product is being offered. The majority of delivery is being based on the subsidy alone, with very little in the way of non-state resources being mobilised. This is particularly true when developers drive in the process. This had led, in many instances, to widespread disaffection with product being viewed as substandard;
• large private sector developers and the banking industry remain largely uninvolved in the delivery of housing in this particular price range, due to identifiable risk and financial constraints and often blaming each other and the state for their non-involvement; and
• the R18 000 - R50 000 price range represents a very significant and affordable level of housing for a large portion of households with stable incomes, eligible for state housing subsidies, largely in the R1 000 - R2 5 00 per month household income range.

In addition, the Task Team underlines many of the environmental features that affected delivery as identified in the first Report, as still being prevalent in the market. These include:

• political risks such as interference on projects, interference with legal process continuation of a culture of non-payment and recent calls for repayment boycotts;
• crime and violence related risk in many areas where such housing is most needed,, are still at levels inhibiting engagement by the private sector in development or leading to withdrawal by developers from approved projects;
• administrative risks including risks related to social compact procedures, subsidy allocation and draw down procedures, local authority approvals and administrative procedures coupled with high service standard requirements and unpredictable time delays in obtaining decisions and approvals;
• commercial risk where there is a disjuncture between the needs of the majority of the population and their ability to afford such product. It is worth repeating, in this regard, that the single biggest challenge to the housing process remains the poverty of the majority of the population requiring housing.

The combined effort of these main areas of risk results in a situation where any housing development activity in this particular segment remains a high risk low return venture.

It is clear that private capital is seeking alternative avenues where risk/reward relationships are more favourable. The present state subsidy and policy regime does not provide adequate incentive for large scale delivery capacity to be mobilised on a sustained basis, especially in the R17 500 - R50 000 house price market.

In addition, and partly as a consequence of these risks, housing production has not been directed to undermining the effects of decades of apartheid and the urban inefficiencies associated with racial segregation. There is still a tendency - sometimes fuelled by local politicians - to perpetuate the one-family-one-plot delivery approach which, in planning, terms, is undesirable. In many ways, the affordable housing market is being hampered by a shortage of creative options and of choice.

Combined with the negative and sometimes violent reaction of existing communities to the location of the poor near their neighbourhoods, it is clear that there is a very real danger of the patterns of apartheid settlement being repeated under a different guise. The policy challenge is not to hide the poor, but to take steps to bring them into the mainstreams of settlement and economic activity.

This tendency is also reinforced by the inadequate range of tenure options currently provided in the delivery process. In particular, the need for security of tenure needs to be emphasised as the policy objective, rather than any one given form of tenure. To date, the process has allowed for individualised home ownership to be the de facto only option available at any scale.

2. PROPOSED INTERVENTION BY THE STATE

Points of Departure

In adopting a particular recommended approach, the task team identified a number of points of departure:

• measures should aim to gear non-state investment to the greatest possible extent;
• measures should be designed to enhance the functionality of the urban form, with a particular emphasis on achieving significantly higher densities where appropriate;
• the state's involvement should be structured to challenge non state capacities start to increasingly respond to the needs and requirements on-the-ground;
• financial exposure to the state should be clearly identified, quantified and contained in a manner which can be effectively managed and capped. Moral hazard associated with state funding/guarantees should be minimised;
• measures introduced should not constitute an additional subsidy and the principle of full cost recovery should apply;
• creativity and innovation must be actively encouraged and rewarded, requiring flexibility in the application of these interventions;
• measures introduced should complement and strengthen existing delivery capacities;
• measures introduced should entrench savings as the primary mechanism for prioritisation of access to housing opportunities created.

Against the background of these points of departure, the Task Team makes recommendations for four broad interventions. These will be presented and discussed in turn.

INTERVENTION ONE :

Introduction of Enhanced Subsidy Assistance and Finance for Social Housing and Innovative Institutional Housing and Finance Delivery Mechanisms

As indicated elsewhere in this Report, there has arisen a tendency to promote individual ownership as virtually the only available tenure option under the subsidy scheme in South Africa. This has the effect of inhibiting certain types of housing delivery. The whole range of options captured under the generic of 'social housing' need to be actively supported and promoted by the state.

Thus far, the only available route has been offered within the institutional subsidy scheme. This has met with only limited success, due to the absence of suitable institutions and the complicated nature of the policy rules. The Task Team is, however, of the view that the Institutional Subsidy approach is correct, but that certain adjustments need to be introduced with immediate and retrospective effect.

The intention here is to standardise and simplify the subsidy, standardise the subsidy level and create a mechanism which will allow for a contribution from central government to the capitalisation of housing institutions to be matched by partners - either within the private sector or at sub-national government - and utilised to provide a whole host of options for housing on a more socialised basis.

The aim is to promote the establishment of creative institutional and managerial solutions rather than the sterile internationally and locally discredited approach of the past wherein the local authority merely acted as landlord to masses of undifferentiated tenants.

This will require significant effort and initiative -both within and without the public sector.

2.1.1 Part A: Adjustments to the Institutional Subsidy Regime

In order to stimulate creative housing initiatives using different and innovative approaches to institutional form, management, financing and tenure; such as deferred sales (by deed of sale), rent to buy, rental and other arrangements, it is proposed that:

• the institutional subsidy be standardised at R15 000;
• the stock created with subsidy assistance to be made available to those with monthly household incomes below R3 500 per month, but with particular emphasis on households in the below R2 500p.m. income category;
• the standardised subsidy be made also applicable to projects already approved by Provincial Housing Boards subject to applications being submitted demonstrating how and for what purpose the supplementary amount will be used to the satisfaction of the relevant Provincial Housing Board;
• the subsidy rules for institutional subsidies be reviewed to ensure maximum flexibility of application and the promotion of innovation in the delivery approach;
• beneficiary and other stakeholder participation be introduced to democratise the process of housing management; and
• all available financial resources both on budget and from foreign donors be mobilised to launch an extensive technical assistance programme to support and promote the rapid establishment and development of appropriate institutional capacities in this sector.

In adjusting this subsidy in such a manner, the Minister of Housing should be sending a signal encouraging creativity and innovation, particularly in the larger urban areas. A whole range of social housing options can now be opened up, whether by private sector employers or local authorities willing to create new housing opportunities and enter into partnerships with Tenants Associations. The Department of Housing should be tasked to ensure the mobilisation of skills and support to make social housing a realistic option.

Institutional subsidies should constitute a cornerstone on which housing institutions which are sustainable in the long term can be built

2.1.2 Part B: Equity Challenge to Local Promoters of Housing Institutions

In order to encourage the creation and appropriate capitalisation of innovative housing institutions, it is proposed that the government allocate an additional R75m to the Equity Fund for Housing Institutions already under management of the NHFC.

This fund will thus be enabled to match investment by local promoters of an institution (such as local/metropolitan or provincial authority, employer(s) or any other party). It is proposed that:

• such investments be made on condition that the local promoters at least match the investment on a rand for rand basis;
• both start up institutions (such as housing associations, etc.) as well as established institutions should qualify;
• the investment should take the form of quasi-equity requiring a long term return to the Equity Fund, although appropriate capital and interest repayment concessions should be allowed in accordance with the viability and cashflow profile of the institution;
• only institutions targeting the market as defined under Part A above in terms of the institutional subsidy should qualify for such investment;
• investment by the Equity Fund should be conditional on demonstrable long term sustainability of the institution without recurrent subsidisation by the state at any level; and
• the eligible institution agrees to contractually commit itself to a set of Statements of Sound Practice for the governance and management of housing institutions, to be introduced by government.

It is vital that local promoters and stakeholders will have a real financial and ownership stake in their housing institutions and that these institutions are modelled on the best international and local experience.

INTERVENTION TWO

Enhancement of NHFC Capacity to Fund Housing Institutions

Private sector investors and financiers remain reluctant to finance innovative new approaches to housing delivery. Finance for housing institutions which own and manage and/or innovatively finance residential stock, is not available at present, and in absence of such available finance, such initiatives are not coming of-the-ground. It is believed important that, government should take the lead in order to ensure finance availability in the short term and demonstrate long term viability, in order to increasingly unlock non-state finance for this purpose.

In order to further facilitate the rapid establishment of institutional capacity to fund; and manage alternative tenure and finance delivery processes, it is proposed that:

• government should allocate a further amount of R3 50m to the National Housing Finance Corporation Ltd in order to increase the capacity of its finding programme for housing institutions;
• mandate the NEC to use these funds to provide finance directly or leverage finance from the private sector, for innovative schemes;
• the intervention be aimed at rapid institutional capacity building, in order to challenge private sector developers to respond to the opportunity to produce stock for such institutions, which potentially are future bulk buyers and/or financiers of residential stock; and
• the NHFC be mandated to ensure that finance provided to institutions is structured and priced in such a manner that increasing involvement of non state financiers will be possible, as the viability and sustainability of such investments become apparent.

Sustained access to appropriate funding constitutes a cornerstone of the development of sustainable institutional capacity which South Africa's housing sector needs to meet the challenges of the future

2.3 INTERVENTION THREE :

Public/Private Development Partnerships

Since the introduction of the new housing subsidy scheme some years ago, the rate of investment and engagement in affordable housing by the private sector at large has steadily increased. The sometimes sterile and unimaginative products and processes being propagated by some developers and financiers in the affordable housing market however, in many cases reinforces the marginalisation and stigmatisation of the poor. Given that the state does not have enough resources to house the nation itself, and consequently needs to mobilise non-state resources to the greatest possible extent, the increasing . engagement of active and innovative private sector partners remains vital to success.

As far as the larger players are concerned, there currently exists a rather uncreative deadlock involving mutual recrimination. The banks claim that they are unable to meet their agreed lending targets due to the non-provision of new stock whereas developers and contractors claim that their desire for larger volumes is being constrained by limitations on working capital, the availability of credit and other risk factors in the environment.

If it is likely that the truth lies somewhere in the middle of these positions, then it is the view of the Task Team that this middle should be the locus for intervention by the Department of Housing. It is vital to address legitimate concerns of the private sector rather than its their weak engagement to increasingly force the state to shoulder the full burden. Indeed, there are already signs of a more nuanced approach to some of the risks in the market by significant players within the private sector.

The proposed intervention, described below, is for central government to invest in public/private development partnerships to deliver housing stock at scale. This intervention should also create the space for a broadening of the options and choices to be made available in partnership with the poor and the homeless.

However, the Task Team envisages that for this programme to succeed the state - either at provincial or local level, will have to play a key facilitative if not leading role.

This intervention is explicitly targeted at addressing some of the inefficiencies of the urban form bequeathed by apartheid. Partnerships will have to satisfy the following criteria to qualify for investment by government:

It is proposed that the state establish a development fund under professional management.

This fund, which should be capitalised in the amount of up to R 1 00m, will seek to invest in joint ventures with private developers and where appropriate metro, local or provincial authorities, in order to expand delivery capacity in the targeted market segment.

This will give the state the opportunity to:

• influence the nature and scale of delivery of such ventures;
• encourage private sector and sub-national government involvement on a competitive basis;
• introduce rules desirable from a policy point of view; and
• expand the delivery capacity deployed.

In addition, the capacity of NURCHA should be supplemented and deployed to underpin the working capital requirements of these joint ventures.

The following broad criteria are proposed for investment by the fund:

• the fund would match but never exceed the investment of the private partner either on the project specific or in an ongoing delivery joint venture;
• access to investment should be on a competitive basis to maximise the delivery benefit obtained by the state, and would seek to leverage at least an additional three rand of working capital for every one rand invested by the state (at the national level);
• continued access to investment from the fund should be linked to relative delivery performance;
• projects should achieve increases in density in developments undertaken (a benchmark of 50 units/ha on average is suggested) aimed at enhancing urban efficiency without sacrificing quality of the urban environment and giving due regard to social and economic sustainability; and
• integration of the urban form must be promoted by such joint ventures by:

o ensuring that the projects form part of local development frameworks which promote more efficient land-use in a way that reduces the need to commute between work and residential areas and supports public transport (linkages with the corridor initiatives of the Department of Transport will be very important in this regard;

o promoting a mix of social and economic residential types;

o state investment should rank equal with private sector equity investment in such joint ventures, both in terms of risk and returns.

Ideally, the Task Team envisages a minimum of a dozen or so large projects or initiatives in the major urban areas around South Africa, with a combined capacity to deliver some 150 000 low-cost, high density units over the following four years. While these are to be designed as joint ventures, combining the best features of the respective partners, it is envisaged that the government - be it provincial, metropolitan or local - will play a key role and contribute to the financial capacity of these partnerships.

Joint ventures may either be project specific or of a longer term nature, and should aim to undertake scale delivery projects with delivery of 100 -300 houses per month. These projects should provide an excellent opportunity for creative partnerships between existing and emerging contractors. Such an approach should be a condition for participation.

The state should utilise the financial leverage obtained through investments by this fund to promote desirable and sustainable changes in approach to new housing development.

2.4 INTERVENTION FOUR :

The final intervention related to the public sector and the service it provides to the general public. It is common cause that the public sector is parodied as inefficient, and that it serves itself rather than the public, and seldom with civility.

Given the important and very public nature of the issue of housing, the Task Team is of the opinion that those institutions charged with overseeing the state's involvement in the process housing delivery should commit themselves publicly to a set of minimum performance and behavioural standards. This should commence at national level with the Department of Housing and the National Housing Board being required to make public commitments in respect of delivery standards.

Such standards could, in the case of the Department of Housing, relate to:

• response times to policy issues raised with the Department;
• timeous announcements of policy changes;
• the publication of housing statistics and progress reports on its various programme;
• the management of inter-departmental co-ordination; and
• the securing of similar commitments from national Departments
• affecting housing delivery.

In the case of the National Housing Board:

• the setting of deadlines for dealing with issues referred to the Board; and
• the publicising of Board decisions.

The Task Team is of the view that this general approach would help strengthen the accountability and transparency of public representatives and servants who are charged with acting in the national interest. It is, however, clear that the delivery process is significantly impacted upon by other national departments, and to a much greater degree, at the provincial and especially local government levels.

Accordingly, the task team proposes that the Minister of Housing challenge these respective department and tiers of government to:

• identify key areas of performance impacting on delivery;
• set performance parameters for each and publicise such standards, and
• implement appropriate measures to monitor and manage performance in each of these critical areas.

3. RECOMMENDATIONS

The proposals in this report have the potential to add to the range of housing options being made available in the affordable housing market and allow creative scale delivery ventures. It must be stressed that, like so much else in housing, results will only become evident after much more work, particularly at the provincial and local government levels.

We recommend that the Minister:

• again, make public this final Report;
• consider the adoption of the proposals under 2.1 - 2.4 as policy and, if found acceptable, initiate the necessary steps to enable implementation; and
• mandate the Task Team to urgently proceed on a Third Report focusing on progress with the implementation of the Housing Support Programme through the People's Housing Process, aimed at those in need of housing who are unable to afford the benefit of the various housing credit initiatives launched by government to date.

Issued by the Ministry of Housing,
13 February 1997