Property Management Trading Entity (PMTE) turnaround programme: Public Works status report, with Minister

Meeting report

Minister’s overview

Mr Thulas Nxesi, Minister of Public Works, said he always preferred to take a long view of the Property Management Trading Entity (PMTE). The entity was not dreamt up by a Minister of Public Works, but was born of a 2005 Cabinet decision that the DPW had to professionalise and control the state’s massive property portfolio. Unfortunately, the PMTE had been run like a “general state department” until 2013, when its operationalisation became one of the crucial pieces of the DPW’s turnaround plan.

In 2015, a business case for the PMTE was made before Cabinet, which not only bought into the plan but also enlarged upon it, proposing that the eventual destination of the PMTE should be a more appropriately named a “state property management agency” as opposed to a “trading entity,” which provided no clue as to the specific nature of the business of the entity to be established. In 2017, the then Minister of the DPW updated Cabinet on the operationalisation of the PMTE and again full support was given and the DPW was urged to double efforts to ensure that this goal was achieved. It was therefore to this end that the operationalisation and financial sustainability programme (OFSP) was established to come up with a business and finance model, including processes and support systems for the PMTE.

The Minister asked Members to see the PMTE as part of a bigger picture in which the leveraging of a massive state property portfolio fed into the country’s socio-economic imperatives of job creation, training and land reform. The PMTE was also a way of transforming the property and built environment sectors by providing access for previously disadvantaged and marginalised groups - blacks, women, the disabled and youth. The Minister also urged that the Committee be seized with the debates on land expropriation, which had particular relevance for its role as oversight to the mandate of the DPW as custodian of state land. He said the debate was picking up speed and had become more focused.

The Chairperson expressed appreciation for the Minister’s comments, but raised a concern that the DPW was increasingly failing to respond or act on issues brought to its attention by the Committee. As an example, he cited the case of a clinic in Centule in the Eastern Cape, which had stood completed but unused for over a year allegedly because of a payment dispute. The Committee had reported the matter to the DPW, as well as Parliament, yet nothing had been done about it. He said there were other instances, like the 89 houses standing empty at Kuilsriver, Cape Town. The facility had been handed over to the South African Police Service (SAPS).

The Minister replied that it was important to guard against extending the mandate of the DPW beyond its designated limits. He said the houses were not a DPW problem – they were either a Department of Human Settlements problem or a SAPS problem. To further illustrate, he made the example of military facilities which the army had abandoned without informing the DPW. It was the same with parastatals – they had abandoned a lot of buildings and when these stood empty, people turned around and blamed the DPW. Sometimes provincial administrations built clinics and when things went wrong people put the blame on the DPW.

Worse, it had become quite a complex and contentious matter to determine the extent of powers and responsibilities between the national and provincial spheres of government. Much more clear was that the DPW built and handed over facilities to other state entities – what those entities did with the buildings was something the DPW had little control over. As a last example, the Minister said the current state of hospitals was bad, but he was clear on one thing: the DPW would not touch a single hospital until the Department of Health gave money and permission to renovate. However, it was very easy for people to point the finger of blame at the DPW. The Minister suggested that when calling the DPW to account for matters at the provincial level, the Committee should also ensure that the Minister of the user Department was present as well. 

The Chairperson was insistent, however, that the DPW respond to the Committee’s oversight visit report. He reiterated that the Committee could not allow facilities built and paid for by taxpayers money to stand unused, nor could it be content with departments pointing fingers at each other instead of solving problems. He agreed with the suggestion that Ministers and Members of Executive Councils (MECs) of client departments be called to account, but he also believed that the DPW had its own part to play because of its custodian role.

Ms C Madlopha (ANC) said she agreed with the Minister that some of the responsibilities ascribed to the DPW were not really part of its mandate, and she believed the idea of calling other Ministers to account was a good one. She wanted to find out from the Minister what the envisaged role of the sector charter councils was in ensuring that women and youth became important players in the property sector. She also asked for more clarity on the progress made since 2013 on the operationalisation of the PMTE, especially the proposed formation of a “unit” that was supposed to take the process forward. 

Mr M Filtane (UDM) said he wanted to “clear his chest” on a matter he had been pondering for some time, and which the Minister’s comments had brought to the fore. According to him, the tension between the national and provincial spheres of government underlined the fact that South Africa was an unacknowledged federal state. That was why a number of issues kept being laid at the Minister’s doorstep when in reality they did not belong there. He therefore urged the Minister to take up the matter with his Cabinet colleagues with a view to coming up with a comprehensive solution, even if that meant a constitutional amendment.

Switching to an entirely different matter, Mr Filtane said that he had information that 1 500 appointments had been made at the DPW during the short space of time Minister Nxesi had been serving elsewhere. If true, what had been the purpose of these appointments in light of the still ongoing shortage of critical skills at the DPW?

Mr D Ryder (DA) said he was in sympathy with the Minister’s position, and understood where was coming from regarding the comments in response to the Chairperson. Indeed, the DPW’s reputation lay in tatters, and was most probably through no fault of its own. His suggestion was that a more vigorous intergovernmental relations approach to service delivery could clear much of the confusion that still plagued both government and the public. He admitted that after eight months as a Member of the Committee, he was still not sure of the exact delineation between the role of the DPW and that of its counterparts in some instances. He told of an instance at Thaba Tshwane, Pretoria, the previous week where he had found himself bothered by the state of the roads. Replying to his questions, the municipal councillor in the area had told him that the roads in question were not city roads, but the responsibility of the Department of Public Works! Clearly there was a need for a wide ranging public education or communication campaign filtering down to the local level to explain “who fixes the light bulb, or the leaking tap.”

Minister Nxesi replied to Ms Madlopha by saying it was precisely because of her question that a briefing was being held, and the delegation would outline exactly where the process was regarding the unit in question. On Mr Ryder and Mr Filtane’s questions and comments, he said it was clear that some of what had been raised needed to be discussed at Cabinet level, and indeed some of it had been debated already.

The Chairperson said the Minister’s comments were worrying, as they implied that the Committee’s oversight visit to the clinic and other places in the Eastern Cape had been mistaken. This was “news to him”, as DPW officials had been present to officially receive the Portfolio Committee at the site. An exchange then took place between the Minister and the Chairperson on this issue, with the former maintaining that the DPW did not spend money on the building of clinics. However, it emerged that the Expanded Public Works Programme (EPWP) was involved in such projects, meaning that the DPW was also involved as the EPWP was funded by the Department. The upshot was that the matter was shelved for further discussion and follow-up, to allow the meeting to proceed to the main agenda of the day.

Operationalisation and financial sustainability of PMTE

Mr Jacob Maroga, Acting Head: PMTE, traced the contextual background to the formation of the PMTE, and said it was important that Members understood that the journey to its final destination as a fully fledged state property management agency was of necessity a journey in phases, which therefore accounted for some of the setbacks and delays that marked its growth and development. The main current challenges facing the entity in its efforts to make the next transition were:

• a growing funding gap of R11.8 billion, which had serious implications for financial sustainability going    forward;
• inability to achieve full cost recovery because of a very low user charge model;
• a shortage of critical, technical skills relevant to the property sector, leading to the undercapacitation of the PMTE in managing the state’s large asset portfolio.

To address the above challenges, the PMTE had put together an operationalisation and financial sustainability programme, charged with developing a sound financial model together with a funding strategy. The OFSP had already achieved or begun work on the following:

• a complete and accurate Immovable Asset Register (IAR);
• entered into negotiations with the National Treasury on a review of the user charge model on leasing out to government departments;
• a financial model centred on the componentisation of the IAR to unlock more value;
• a funding strategy composed of short-term quick wins worth over R1 billion, and long term value creation scenarios.

The identified short-term quick wins included the disposal of non-core/high value surplus property and non-core residential units, the sale of advertising space, review of commercial occupancy efficiencies/densities

and current commercial letting out leases, and optimize value in strategically located assets.

Discussion

Ms P Adams (ANC) was keen to know what time frames were in place leading up to National Treasury signing off on the PMTE as a fully operational trading entity, in full compliance with the conditions expected of a government component. Further, she asked for clarity on how “non core” assets were defined and what criteria were used in the disposal of such assets. Regarding leases, she asked whether market-related pricing applied, both when the state leased buildings from private landlords and when landlords leased from the state. She liked the idea of generating revenue by letting out advertising space on state buildings, and remarked that a good starting point for this could be South Africa’s ports of entry. She also asked the PMTE for the definitive word on the asset register – was it finally complete, or could it ever be finally complete?

Mr Ryder pointed out that even at market rates, the 7% of government property standing vacant could never generate the R11 billion plus needed by the PMTE to operate at full cost recovery, The fact that the buildings were vacant also raised the question of the condition in which they were currently. He suspected that their condition was not commercially attractive, which begged the question of how much financial investment was needed to address that particular problem alone, as it was clear that “you can’t put lipstick on a pig.” Regarding the user charges issue, the NT’s view on the matter would be crucial as it knew that protecting, and growing the value of state assets depended on the PMTE being able to charge reasonable rates on those assets. All of this had huge implications for the allocation of budgets across the board – what was the NT’s thinking on this? Clearly the NT had to be on board if the expectation was that the PMTE would fund itself through user charges, otherwise the whole exercise was unsustainable.

Mr Ryder also touched on the huge number of vacancies in the Department, and asked for suggestions on how the matter could be addressed to promote efficiencies at the PMTE. The doubts around the asset register had been caused by statements from DPW officials who had come before the Committee, saying the register was not “lekker”. Now the Committee was being told otherwise, and he reiterated his usual comments that if one did not know what one had, one did not know how to manage it. By way of adding more to the list of suggestions for monetising the state’s property portfolio, he urged the PMTE to look into the practice by some user departments of sub-leasing part of the property space allocated to them at commercial rates. Another potentially good idea would be the establishment of roof gardens and solar panels on state buildings.  

Ms E Masehela ANC) also asked for a further explanation on how the sourcing of expertise was being done and how the vacant posts would be filled at the PMTE. She urged the PMTE to look into the practice of leasing out property at “next to nothing” while paying market rates to the private sector.

Ms Madlopha, echoing her colleagues, asked whether the PMTE was confident that it had the relevant people in terms of skills and expertise. Citing an oversight visit to some of the country’s harbours, where the Committee had learned that state property was leased at “minimal rates”, she asked Mr Maroga whether this had been taken on board for when the PMTE negotiated leases with the private sector the next time. Regarding the suggested disposal of non-core residential, high value surplus assets, she asked how many of these had been identified and what criteria had been used. She warned against the danger of the state selling off property, only to turn around later and find itself leasing or renting the same at a much higher cost than before.  

The Chairperson also had concerns about the changes to the vision and mission of the PMTE, which had been made without the Committee being consulted. He felt this was sign of disrespect, and pleaded that the DPW should make it a point that the Committee was made aware whenever changes were made.

As with his colleagues, the Chairperson was keen to know how the PMTE proposed to deal with staff vacancies and property leases. He welcomed the fact that the presentation had mentioned a skills development programme targeted at young people, and requested more information on how many were involved and at what stage of implementation the initiative was.  

DPW’s response

Mr Maroga said that with regard to the final establishment of a government component, Minister Nxesi had indicated that one of his priorities was to have the PMTE fully compliant with NT regulations to ensure that sign off on it as a trading entity was obtained. The plan was that all the necessary conditions for the establishment of the PMTE as a government component should be met by November 2018. However, he did point out that discussions on these issues were still ongoing and a formal position would be available only at the conclusion of that conversation.

He assured the Committee that a list of non-core assets earmarked for disposal would be made available. An instance of non-core assets was residential property inherited by the post-1994 state from the homelands and other self-governing areas, as well as residential property that had been used by the police and the army.

Mr Cox Mokgoro, Acting Chief Financial Officer: PMTE, replied to Ms Adams’s suggestion on using government buildings at ports of entry to sell advertising space, and said plans were at an advanced stage to take advantage of a relatively easy method of income generation.

On the issue of leasing in and leasing out of buildings, he said the DPW had done a study three years ago on buildings leased from the private sector by the Department in the Tshwane central business district (CBD). The outcome was that the DPW had been paying a high premium on the leases, and consequently the Minister of Finance had given instructions that the leases be renegotiated. His estimation of the monetary value retrieved from that cost saving was that it was over a billion rand over the Medium Term Expenditure Framework (MTEF) period. He told the Committee that the PMTE was as seized with that objective as the DPW had been three years earlier.

Mr Mokgoro was firm in his assertion the asset register was indeed complete. The PMTE had confirmed that what it had on the ground was what it had on its records, and vice versa. In reply to Ms Adams, he said the register did change every year, either through transfer (to other provinces or departments), disposal or acquisition of property by building new structures.

The calculation was that the deemed cost value of vacant state property was around R7.4 billion. The PMTE had a list of those properties and was currently ascertaining the exact condition of those assets.

Referring to concerns around the user charge model and ongoing discussions with the NT, Mr Mokgoro said indications were that the NT was prepared to accede to the PMTE’s arguments for increasing user charges to client departments.

Regarding Ms Madlopha’s question on the harbours, he said a dedicated unit was already up and running in order to deal specifically with renegotiating the “cheap” lease agreements entered into with the private businesses in the harbour space. An investor conference for the coastal economy was planned for later in the year and this would be an opportunity for the PMTE to showcase its assets and extract more value in the maritime sector.

Mr Maroga proposed that the PMTE arrange a separate discussion with the Committee focused on skills development and the acquisition of expertise towards better capacitation of the entity.

Mr Clive Mtshisa, Deputy Director General: Corporate Services, DPW, gave a brief explanation on the vacancy rate at the PMTE, which he confirmed stood at 38 percent. However, this was the result of the wholesale migration of a previous establishment, consisting of both funded and unfunded positions. This meant that a final clean-up of the establishment would yield a different picture from the current one. The total number of permanent employees at the PMTE was 4 013. 683 employees were on contract, and consisted of two categories – those linked to vacancies, and those additional to the establishment. This had emerged out of a situation where a unit or programme did not have the sufficient number of positions, and therefore the appointed person was additional in that sense.

He argued that this had no adverse effect on the budget, as those appointees had been shifted from other units. He also confirmed that in the last ten months, 1 014 posts both from the main vote and the PMTE had been advertised, out of which 683 appointments had been made in various categories in both the core and support areas. A more comprehensive report on the matter could be put together if the Committee so wished. He offered the same with regard to the DPW’s skills development programme.

Mr Ryder made a request that when the PMTE came back for a briefing on the entity’s organisational structure, the report should show where everyone sat, starting from national government all the way to the provincial level, and also show what specific functions were being performed.

Ms Madlopha seconded Mr Ryder, and said there was a need for the PMTE to return for a comprehensive briefing on the issue.

Ms Masehela said it was true that the asset register would keep changing, but she wanted to know if the verification process regarding unidentified state properties had been completed.

Mr Maroga said the major challenge was to to take the asset register to a more enhanced level of efficiency, where each building or facility was broken down into components in order to extract as much value as possible.

The Chairperson commented that Members still had lots of questions on the vacancy situation and other related matters with respect to the PMTE, and therefore suggested that these questions be sent to the relevant officials at the PMTE for detailed responses. He asked that a full reply be made available to the Committee not later than 8 June 2018. Depending on the availability of time, a briefing on those responses could then be arranged.

He also announced that the following day the Committee would be visiting an allegedly unused but well maintained SAPS residential complex in Kuilsriver, Cape Town. He asked that the DPW furnish the Committee with a handover report on the complex to assist it in getting to the bottom of why the site was not being utilised.

The minutes of the last Committee meeting on 8 May 2018 were considered page by page and adopted without amendments

The meeting was adjourned.