Infrastructure and economic growth are inextricably intertwined
Your convention occurs at a critical time for our country when we seek to advance radical socio-economic transformation.
It is taking place straight after the National General Council (NGC) of the ANC where some very strong statements and commitments were made. Indeed in this province it coincides with a provincial conference that starts tomorrow.
The NGC gave us some very strict marching orders in terms of government policy. So our whole role remains guided by the National Development Plan 2030 Vision, our long-term blueprint for the development of our country. Our strategic focus remains that of rebuilding and developing our country for the benefit of all people, especially the poor and historically marginalised.
But there has to be a new emergency in meeting this challenge. And I would like to think that in many ways you are at a critical coalface of that challenge. The state is a key instrument in advancing this transformation. The National Development Plan details massive industrialisation and infrastructure development, but central to this is the building of a capable state.
That is our responsibility and we will not be able to do it if we don’t have power partnerships with organisations such as SAIBPP.
KZN’s budget for the year 2014/15 financial year was R96,7-billion. Of this roughly 20% – R19,2-billion – related to goods and services. And about R8-billion directly to a capital infrastructure spending as well as various repairs and maintenance programmes. The total spend in procurement was R26,6-billion. That has been central to driving empowerment, job creation, empowerment, skills development and socio-economic programmes.
We are convinced that government spend on procurement is a fundamental catalyst for this transformation aimed at creating a demand-driven education system functional and expanding job markets coupled with a skills transfer for our sustainable future.
But the economic downstream has hit hard. Some of the stresses you see in society, and in KZN in particular, is directly related to that downswing. When that happens, fault lines in our society, a historical legacy, are sharpened.
Our challenge is to manage it. Be firm on principle but not forget the underlying issues that require a real response from us. And that’s why you find that we had a very strong Procurement Indaba about two months ago. At some point maybe you will need to have access to those resolutions because they talk directly to your agenda.
Coming back to infrastructure development, South Africa regards infrastructure programme as key. South Africa is not alone in this thinking. It is useful to point out that government procurement in the European Union has been regulated and harmonised since 1970 and today accounts for more than 2-trillion Euros.
In the United States it accounts for about $7-trillion annually. So, there’s a world body of experience that’s out there and available. In the way we have implemented it, we don’t claim to be perfect and I would like to think that we have a remarkable capacity for self-criticism and, more importantly, self-correction.
And you have no doubt followed the President’s frank progress report in early August on the progress that we have made since the February State of the Nation Address. Implicit in that was the acknowledgement that the best laid development plans can be derailed by factors within or outside our control.
And primarily that is the aftershock of 2008 crisis. But let’s give ourselves credit for being able to cushion South Africa from the worst ravages of that crisis. It was done through astute domestic financial and fiscal discipline. Nevertheless, the 5% growth rate target for 2019 is unlikely to be realised.
The challenge for us is to say how close to that can we get to that percentage. This scenario can either bog us down or give us new energy and determination to catapult ourselves to seek out new opportunities.
So how then do we build that inclusive economy? In KZN and as well as nationally, public works is central to the realisation of that vision. We believe that the roll-out of the infrastructure will provide tremendous opportunities for your organisation and for your members.
Infrastructure and economic growth are inextricably intertwined.
Three years ago Public Works in this province was mandated to become the implementing agent of choice for all government departments. You’ll understand that all departments have their budgets.
The Department of Health for clinics and hospitals. The Department of Education for schools and other facilities as well other departments. The Department of Economic Development for facilities.
And COGTA (Cooperative Governance and Traditional Affairs) at local government level for a whole range of infrastructure. And we took a decision that Public Works within government must formulate the implementation of all that infrastructure.
Until then the various departments would use various private sector operators, even semi-private operators, to do that. We took a decision that Public Works must become the implementation agent of choice. Currently, we are about 70% of that target.
So we don’t only deliver infrastructure such as office buildings, schools, clinics and hospitals, but we also now involved with the coordination and longer-term planning. We’ve now set up a provincial infrastructure work group. This is very exciting work that seeks to achieve coordination of all infrastructure delivery in the province.
For the first time we not only have provincial departments but also key stakeholders Eskom, Transnet, Water and Sanitation, Umngeni Water and the Provincial Planning Commission serving in one work group.
For those of you in Gauteng we are not shy to say we don’t want Transnet or any of the other state-owned enterprises that have their head offices in Gauteng implementing and spending billions of rands in KZN but parachuting in without coordination with the local people. We are quite firm about that. We want local people to get their fair share of that particular cake.
Of special interest to you will be the property management dimension of our work. That is to provide and facilitate the provision of accommodation and management services to our client departments through planned property lifestyle.
These are basic things but it is a skill that needs to be understood and developed. How to require property? How to maintain it? And how to dispose of it in the best interest of the state or any department that owns it. Skills around land valuation, fixed assets registers, property rates.
All these are skills of property management that we sometimes take for granted and then we need to build that skills base.
This also includes the lease of buildings. Now, if you want to speak about an opportunity in that terrain. In KZN we spend about R270-million a year paying rental to private land owners across the province. And we’ve been rightly criticised both within our own organisation and the sector.
Not so much the private sector but within the sector. Voices have been asking why are we doing that? Who are the beneficiaries of this massive spend? And the truth is that there is a very small group property owners, a cartel if you like, who have closed that market and there is no real competition. These things go on tender, of course.
There is no effective competition because it’s just a few groups of families sometimes that own the properties that can be available for that tender that went out.
So attempts to transform have been difficult. In fact, I would go far as saying they’ve not produced effective results. From national Public Works there’s been an initiative to say let’s have something radical to show our determination to break this.
And the initial seriously prohibiting factor was that to finance an operation like that you will need to go to the bank and the bank would say you’ve got bankable lease and yes we are prepared to put money behind you. Apart from the other credit criteria, of course. The difficulty was that we would by and large not know a lease that’s more than five years.
So we now taking the decision that we’ll go more than five. We’ll go with 10 years and even 12 years at times so as to give black entrepreneurs something really feasible to go to the bank with as a bankable lease agreement.
There is one contradiction in our approach because we also taking the decision that it doesn’t make sense for us to be continuously spending R270-million a year renting property from the private sector. It’s a long-term thing but it doesn’t make sense. So we’ve also taken the decision to build a government precinct in Pietermaritzburg which will locate all the provincial departments in Pietermaritzburg even those that might be elsewhere. Linked to that is the building of a new provincial legislature.
So, the legislature plus the government precinct will be a project that will be in excess of R5-billion. We don’t have the money to built on our own steam. We will follow a public private-partnership model. And in that will be enormous opportunity for the practitioners such as yourselves.
Of course, it’s a question of linkages and synergies with the players that can make that kind of deal happen but we are determined that the final model must be something that doesn’t result in one big company becoming rich.
It must be a model that brings onboard a broad base of emerging entrepreneurs. Let me just say two things not directly related to Public Works. As property practitioners we need to articulate more strongly not just the need but the opportunities available in operations and maintenance.
Not only must you be able to manage property you must be able to maintain that property. And I’m sure there is a scientific way to determine the percentage of your operations budget that is required to maintain a property effectively as a sustainable asset up to 50 to a 100 years.
Some might even have a longer timeframe. Within the government sector we’ve conceded that we have not given that enough attention. Even at local government level, there is a temptation to raid the maintenance and repairs budget whenever resources are short. But that’s being short-sighted.
Whether it’s in regards to roads or to a building not using maintenance funds as planned for is short-sighted. In fact, we are quite pleased that soon it will be compulsory for property owners to set aside 7% of their operational budget for maintenance. And there will be monitoring.
Let me just say a little bit about human settlements. We’ve been in a good space for the past three years. In fact, for the past two years we’ve been the best-performing province in the country. We produce just under 30 00 houses a year. But we won’t continue achieving this number.
It’s not sustainable. Budgets have been reduced firstly. We’ve also been building bigger and better houses. But those bigger and better houses cost more as the budget shrinks. There is building cost escalation that is roughly around 6% a year. So we need debate what a more sustainable model would be.
There are two levels of opportunities I want to mention which are directly relevant to your field of operation. The first is the gap market. That refers to those who earn more than R3500 a month and do not qualify for the RDP house and nor a bank bond to be able to built a house or buy a house.
Two incentives are in place to address this challenge. The first one is FLISP (the Finance Linked Individual Subsidy Programme) which is a subsidy on a sliding scale for those who earn up to R15 000 a month.
So, if you are the lowest end of this scale, your subsidy could be as high as R110 000 for a housing unit that costs R400 000. On average even if it’s a R50 000 subsidy that’s like having a 10% deposit on a house which should be a seriously mitigating risk factor in a normal credit application with the bank.
The other incentive that we as KZN are seriously pursuing is through identification of all our land holdings. We advertised already and prepared to do a new advertisement where we saying you as a property developer we inviting you to come with your own land or even with land that we own so that you explain the type of development you can put up within the gap market range.
In fact, it’s even beyond that market range if it’s broadly commercially viable. We even encourage mixed-use developments. And we are prepared to negotiate and incentivise terms for the land. It’s not for free. Some of the land we have is pretty well located that could capture the market’s imagination.
The other category where there is opportunity is in the rental market. So far, the state-driven rental market is implemented by social housing institutions.
They are, by and large, Section 21 not-for-profit companies, but it requires a serious business skill to manage them. In this province, for example, we’ve had SOHCO, which is a national player with several projects.
We’ve got First Metro Housing, which might be biggest in the province. And then we have Msunduzi Housing. Between them they probably have about 6 000 or 7 000 units under rental management.
With that social housing programme its effectively subsidised rental because you get an individual subsidy from the provincial department. This is a serious of opportunity. In fact it’s part of the National Development Plan and the National Housing Policy that we must build these rental components because that’s the trend all over the world.
We are worried about government subsidised space in terms of this rental social housing. There’s too easy a tendency for people to mobilise under the slightest of pretexts and boycott the rent and so on.
People would claim that the arrangement is rent-to-buy and create all kinds of pretexts for starting a rental boycott to create pressure. We have to hold firm on the disciple of that.
Otherwise it threatens the entire social rental sector.
In fact, in one case we literally had a hijacking of a building with 330 units. A criminal syndicate started with the boycott and afterwards took over and started collecting rentals.
We took a firm stand and said we not gonna allow it. The project belonged to SOCO. They used the legal space. Very creatively. One would think these are genuine cases where they are fighting for a better life for the poor. Right up to the Constitutional Court where the eviction order was confirmed.
And when we had to implement the eviction order we literally faced petrol bombs. But we had to take a strong stand on that because if we undermine the discipline of the rental system we are going to undermine that whole sector as far as government’s involvement is concerned.
The other space where opportunity exists is the land generally. Not just land for a specific housing project. We are open to suggestions to how state land can be used as a catalytic way for economic development.
We also want to use this to talk to our transformation agenda. We are busy establishing some base lines on what we are going to measure ourselves.
What is the percentage of developments owned by black practitioners? What is the baseline now? What is our target for the next three years and so on and so on.
So let me conclude with a final word on the government precinct in Pietermaritzburg.
Until that happens there will still be space in the property rental market. We want it to be a catalyst for the development of the city as whole. It’s a pretty historical location.
No doubt this project will give tremendous boost to the construction and property management industry and I urge you to be alert to the opportunities that will flow from that. I thank you and wish you well.