Construction Charter and Property Charter: Department briefings

Meeting report

PUBLIC WORKS PORTFOLIO COMMITTEE
14 September 2005
CONSTRUCTION CHARTER AND PROPERTY CHARTER: DEPARTMENT BRIEFINGS

Chairperson: Mr F Bhengu (ANC)

Documents handed out:
PowerPoint presentation of the Transformation Charter for the Construction Sector
PowerPoint presentation of the Property Sector Transformation Charter

SUMMARY
The Committee heard briefings from the Department of Public Works (DPW) on the Construction and Property Sector Transformation Charters. The scorecards had been drawn up with weightings and targets across all elements and had been agreed to by all parties. The scorecard elements covered were:
- direct empowerment (which included ownership, control and management);
- human resource development (which included employment equity and skills development);
- preferential procurement;
- enterprise development, and
- residual (which included Corporate Social Investment).
The high scores for ownership in both sectors was a result of so little existing black ownership.

The Committee debated the importance of ownership and skill development in the construction industry, as well as accessibility and control of construction equipment. The unwillingness of materials suppliers to be involved in the Charter process was of great concern. Transformation in the property sector needed to be escalated, with government starting by leasing properties to black companies rather than established companies, and using black service providers in the industry to manage and service their properties. Financial institutions’ unwillingness to support emerging contractors and property owners needed to be challenged.

Lastly, the Chairperson announced that he had written to the Speaker of Parliament because the Committee had exhausted its R560 000 budget, and he was awaiting a response.

MINUTES

Construction Sector Transformation Charter: Department briefing
Ms L Mabuntana (Department Director: Construction Industry Policy and Monitoring) explained that Minister Sigcau had launched the Charter initiative in October 2004. All construction sector stakeholders were invited to participate in the process, which began in July 2005. An Integrated Management Committee (IMC) lead by the Department oversaw the process and included the major trade unions, business associations and women’s groups. The IMC established technical committees to provide research that informed proposals for the Charter. Provincial roadshows, workshops, the April 2005 Construction Indaba and parliamentary briefings all provided useful feedback which helped develop the Charter’s framework.

The Charter Framework had laid a foundation for the Charter and a vision for the sector for the next seven years. The scorecard had been drawn up with weightings and targets across all elements and had been agreed upon by all parties. Once the text had been finalised and legally checked, the Charter would be signed off and submitted to the Minister. The Charter Framework contained the following: preamble; status quo of the construction sector; commitment of stakeholders to the Charter; application and reporting; components of the scorecard, definitions, and scorecard.

The scorecard elements covered were direct empowerment, which included ownership, control and management; Human Resource development, which included employment equity and skills development, preferential procurement, enterprise development, and residuals that included Corporate Social Investment.

The highest weightings in the scorecard were for ownership at 25% with preferential procurement at 20%, followed by skill development and enterprise development at 15% each. Built Environment Professionals (BEPs) had agreed on higher weightings for skill development and lower weightings for enterprise development due to the nature of their companies.

The process had yet to finalise the text, resolve the issue of interim four-year targets and investigate the practical details of how the charter council would be constituted. Once the draft Charter had been signed off by all stakeholders, it would be handed over to the Minister of Public Works. Once satisfied, the Charter would be submitted to the Department of Trade and Industry. That Department’s date for submission to Cabinet was 31 December 2005.

The Charter was in line with the Broad-based Black Economic Empowerment Act, Section 12 (a) to (g). It demonstrated a commitment to racial transformation, growth and development and enhancing the skill base within the sector.

Discussion
Mr L Maduma (ANC) asked what had informed the seven-year vision and whether the figure was linked to other government programmes. Ms Mabuntana said that initially a five-year target had been suggested, but that was changed to seven years. Transformation took at least ten to twenty years, and a seven-year target was seen as a realistic period in which tangible change could start to be seen. The interim four-year targets had been proposed by business as a more achievable goal. That would be discussed with constituencies, but the Department did not want an interim scorecard.

Mr Maduma noted that the construction industry remained a white male dominated one. While the participation of women at 40% was pleasing, the target of 50% needed to be secured. Ms Mabuntana felt that it was an achievable target. Mr E Magubane (ANC) stated that he had come across very few women working on construction sites. Ms Bici responded that the industry was seen as dated, corrupt, and not ‘sexy’ enough. A new profile needed to be built to improve its image.

Mr Mashile had not heard a commitment to youth in the Charter. A percentage of youths needed to be targeted in order to ensure their participation. Ms Mabuntana responded that youth had been catered for in the Charter as part of designated groups where the youth target was 10% and would enable them to buy shares in companies. Skill development had also targeted youth in the form of learnerships and bursaries.

Ms T Nwamitwa-Shilubana commented that during road shows, the Committee had found some contractors had not been informed about the Construction Charter and wondered if monitoring had been done to ensure the information was disseminated. Ms Mabuntana explained that two methods of communication had been used. One had been to contact all relevant organisations and the other had been to place newspaper advertisements announcing the workshops. In cases where the Department found no small contractors in attendance, they went back to locate them.

Mr Blanché argued that his experience in the industry had been very different and he was not satisfied with the Charter scorecard. The scorecard placed a damper on smaller companies in the industry and inhibited the transfer of skill to black people. The Charter had all the major companies negotiating for the best deal. The weighting of 25% for ownership would result in any smaller company posing as a threat to larger companies being put out of business. Front companies were being created that were 50% black owned, but manufacturing took place in China with all jobs being created there rather than locally in South Africa. This was what happened when multinational corporations helped write such a Charter. Small companies were critical to the industry, and the Charter needed to be developed where those small contractors operated. Skill transfer needed to take place in regions where people were doing the work and thereby help develop black people economically.

Ms Mabuntana noted that 25% was viewed as weighting and not considered a target for ownership. Established listed companies had questioned the possibility of finding black people to buy shares and the government had responded that there were such people. The Charter was aiming to address issues of economic entitlement and voting rights in companies. The DTI was developing a separate scorecard for small companies so that they would not be disadvantaged.

Ms L Bici (Department Deputy Director-General) noted that after eleven years of new government only 10% of the construction industry was black-owned and ownership was therefore an emotional issue. The high score for ownership was a result of so little movement in the transformation process. In addition, ownership drove patterns of behaviour within companies and it did not mean skill development was regarded with less importance. If the Skills Development Act were implemented correctly, with its one-percent skill levy from payrolls, major changes would be seen in the industry.

The enhancement of the skill base had been taken very seriously in the Charter with a figure of 2.5% taken from an enterprise’s payroll as a skill levy. A checklist had been developed to ensure larger companies would not dominate smaller companies. On the issue of enterprise development, measures had been taken to ensure large companies could not buy more than a 20% share of smaller companies.

Mr G Anthony (ANC) argued that the Charter was linked to the other Charters that had been developed and it would be a problem to allow inconsistency in terms of weighting and targeting. He disagreed with Mr Blanché about ownership and argued that the Charter was moving in the right direction. Empowered ownership was necessary in order to close the gaps in terms of skill development. The Charter had everything in place and Mr Blanché’s proposal could be seen as moving backwards.

Mr J Maseko (Department Director-General) noted that ownership and skill development were not mutually exclusive and one should not be carried out at the cost of the other. It would not be useful to have great numbers of skilled workers and no owners. Patterns of ownership had to be changed from a situation of white male control. The scorecard covered Mr Blanché’s concerns when viewed as a total package.

Mr K Moonsamy (ANC) asked what the response of those controlling the industry had been to the Charter. It was essential that the Charter be in the interest of the previously disadvantaged majority as South Africa was one of the most unequal countries. While the presentation had been good, the report lacked statistical information on how many people were in the industry and a breakdown of their professions. Ms Bici noted that Multi-National Corporations had to comply with the Charter until the DTI developed a scorecard for MNCs.

Ms Mabuntana acknowledged that there were different interests with established business wanting to maintain the status quo while black business was being facilitated into the industry, yet all had participated positively in the process. The Department had in fact managed to move established business on targets. The Construction Industry Development Board (CIDB) produced very detailed annual status quo reports on industry statistics, which could be circulated to the Committee.

Mr Maduma spoke of the accessibility and control of construction equipment in the industry. During an oversight visit in Queenstown, Members had been told of inspectors from the Queenstown Regional Office giving preference to white established contractors when the Office had auctioned equipment. Black contractors had to continue hiring the equipment from the established companies at exorbitant rates. Ms C Ramotsamai agreed with the equipment concerns and suggested black people should be encouraged to venture into the equipment hiring business.

Ms Bici noted that the Charter alone would not address all problems in the industry. Suppliers were invited to participate and had refused. Due to deadline constraints, the process had had to move forward without them. Manufacturers supplying the industry claimed they fell under the Mining Sector Transformation Charter. However in as far as they related to the construction industry, they remained the responsibility of the industry and needed to be addressed. Ms Mabuntana added that companies favoured the Mining Charter because their scorecard had lower targets. Other than the Health Charter, the Construction Charter had proposed the highest targets.

Ms Bici said that through enterprise development it was envisaged that there would be a mid-term relationship of three years between emerging contractors and big business, after which the emerging contractors should have the necessary equipment. On the issue of equipment auctions, the National Department had no equipment, but the provincial offices did. The Department was working to influence provinces to drive an empowerment programme for emerging contractors.

Mr Maduma expressed concern at material suppliers not willing to be part of the Charter and argued that the situation was unacceptable. He raised the critical issue of black contractors not being regarded as creditworthy by financial institutions and argued that the Charter must address that issue. Ms Mabuntana responded that links needed to be made to the Financial Services Charter in order to empower black contractors.

Mr Moonsamy suggested that when large contracts such as dams, bridges or large buildings were awarded to large companies who had the capacity, such as Murray and Roberts, they be required to utilise emerging contractors to do aspects of the construction such as plumbing, window and cupboard installation. He asked when emerging contractors would be fully-fledged companies. Ms M Ntuli (ANC) agreed that emerging contractors needed to be empowered by having a percentage of tenders if their resources were too limited to manage the entire contract.

Ms Mabuntana responded that the Department had begun to do that. Large companies had made commitments to provide 10 to 30% of big contracts to black contractors. The results might have been less positive than expected due to inadequate monitoring, but the Department intended to improve that situation. Ms Bici added that the Department was developing programmes between large and small contractors, which would begin addressing those concerns.

Mr S Opperman (ANC) felt that the ANC Members had misunderstood Mr Blanché’s viewpoint. In areas such as Delmas where skill development had been neglected, problems now existed. Skill transfer had a long-term impact.

Mr Moonsamy noted that the Committee should have an opportunity to study the Charter and provide input. The Chairperson agreed that the Charter needed to be debated further. Ms Bici responded that other than legal changes, the framework would not change substantially. Copies would be circulated to the Committee as the process continued. The Chairperson requested a full copy of the Draft Charter, as the slides were limited.

Ms Mabuntana explained that there was some leeway allowed in the Charter regarding the use of utility companies, as there was only one Eskom and one Telkom. Equipment manufacturing needed to take place in South Africa as far as possible; however concessions had been made for products not produced locally. It was hoped that through enterprise development that situation would correct itself in the future with more products being produced in South Africa.

The Chairperson enquired if municipalities had been responsive to the Charter. Ms Bici responded that they had, and had raised serious issues around procurement. The Public Sector workshop held in June had been very well attended.

The Chairperson stated that the overlap of the Construction Sector Conference and the CIDB conference was unfortunate. Ms Mabuntana agreed, but explained that the industry was trying to unify organisations with a view to one future structure. Dates had already been set for all the AGMs, which would end in that conference and the CIDB would have representation at the conference.

Property Sector Transformation Charter: Department briefing
Ms Bici explained that the same team had been responsible for driving both Charters’ processes and both were moving in a similar direction. No unions were involved in the Property Sector Transformation Charter, as there were none in the industry. There had not been as much participation and consultation during the road shows as would have been preferred. The structure of the document was very similar to the Construction Sector Transformation Charter. The team had been faced with many challenges, as industry information was not consolidated but rather resided in particular companies.

Historical factors such as the 1913 Land Act that had excluded black people from property ownership for so long continued to have an effect. The property industry was sophisticated and difficult to break into. In areas such as Constantia, property served two parallel functions of accommodation on the one hand and a capital asset that served as bank collateral on the other. In Soweto, however, a property usually served only the function of accommodation and the Charter needed to address that.

There were many property service providers. Owners often did not manage the property, security and cleaning themselves. There were also many permutations of companies. Financial institutions for example, had sizeable divisions dealing with property. All who engaged with property needed to comply with the Charter, not only property companies.

White women had insisted on being included in the Charter though by definition the Charter addressed black people in terms of the B-B BEE Act. The issue had become a ‘deal-breaker’ and had therefore been agreed to, though no targets had been given. Property companies had been encouraged to develop their own gender transformation programmes. The Minister had since stated that such an agreement was ‘out of line’ with the Act and a meeting was to be held to discuss the matter.

Under the Residual category, Corporate Social Investment (CSI) needed to address properties in underdeveloped areas by investing directly. The Minister had challenged the industry to stretch the targets to 30%, but after negotiations, the result had been lower. The Minister also felt that the five-year time-period could be bettered.

The ownership target was very high given that black property ownership was almost non-existent. Enterprise development would involve three-year agreements between established and protégé companies. When an established company sold property, 30% of sales within a year had to be sold to black companies. Large companies should use black service companies instead of their own subsidiaries.

Government alone had a property portfolio estimated at R300 billion and needed to develop empowerment strategies to take the Charter forward by employing black companies in property and facilities management.

Discussion
Mr Moonsamy raised concerns about the large amount of foreign ownership of South African property.

Ms Ramotsamai noted that little transformation had taken place in the government’s leasing of properties to black companies rather than established companies. Property leasing would be a good starting point and government had many residential and commercial properties that could be opened up. Ms Bici responded that government owned properties had not been used effectively in the past. The size and valuation of the portfolio was being investigated in a consolidated manner. The Department needed to develop its own strategies along with strategies already in place in provinces. A disposal strategy needed to be developed.

Ms Bici acknowledged that 100% of properties leased by the Department were white owned. This was due to the physical location of properties needed for the Department’s work to be effective.

Mr Maduma commented on the consultation process not being wide enough, noting the importance of including rural areas. Ms Bici responded that the property industry did not have such strong communication within its organisations as the construction industry. Mr Maduma asked if traditional leaders had been taken on board and Ms Bici admitted that the team had not targeted traditional leaders and needed to do so.

Ms Bici stated that the ownership issue had been brought to Cabinet’s attention by the Department of Land Affairs and a policy gap was found to exist regarding regulation of property ownership. PWD and Land Affairs needed to develop policy to address that.

Ms Ramotsamai raised the problem of financial institutions not being willing to assist emerging property owners. Ms Bici responded that those institutions had been invited to participate in the workshops and conference to begin talking about the problems. Most argued that they had programmes for black economic empowerment, but on the ground, they were absent. The Department would call a meeting with them to discuss the 'stumbling blocks' in detail.

Ms Bici added that one idea was to form a Property Fund with the National Treasury dedicated to transformation in the property industry, where people would only have to meet one set of criteria unlike the many different sets of requirements found in the various banking institutions. Mr Opperman noted that the financial support received from institutions of having to repay a home loan over 20 years presented a problem for many people.

The Chairperson concluded that the Committee wished to be part of each process of the Charter formation and wanted to see it approved.

Announcements
The Chairperson announced that he had written to the Speaker because the Committee had exhausted its R560 000 budget and was awaiting a response. Funds were needed for the Committee’s ongoing work such as attending the Construction Conference on 9 – 11 October.

The meeting was adjourned.