North West Human Settlements

Winding down of the North West Housing Corporation

Contents

• Section 2 – Technical

• Section 3 – Financial

• Section 4 – Legal

• Section 5 – Other matters

• Section 1 – Introduction

Page 2

Section 1 – Introduction

Considerable progress has been done, in a very difficult operating environment

Page 3

Intro - Background

• Premier State address – wind down NWHC 2009/2010

• Service Provider was appointed in November 2010• Key objectives of the assignment:

– Complete an Asset Register (incl. verification, valuation)– Due Diligence reports– Finalisation of the audit (incl. Revenue Management)– Legal close of the NWHC– Transfer of assets (to Province or other departments)

Page 4

Intro – End onjective in mind

• In terms of the ‘Repeal Bill’• Wind down of the NWHC will be achieved through

the enactment of the disestablishment bill of the NWHC, also giving effect of– Asset side: Transferring all rights and assets of the NWHC

to the North West Department of Human Settlements, and – Liability side: Vesting the obligations and liabilities of the

NWHC to the Department

• Our strategic approach therefore looks into the asset side & liability side

Page 5

Intro - Wind down process & scopeTe

chni

cal

Tech

nica

l Fi

nanc

eFi

nanc

eLe

gal

Lega

l

General Public

General Public

Reconstruct asset registerReconstruct

asset register

Forensic review NWHC

Forensic review NWHC

Property Verification (Desktop)

Property Verification (Desktop)

Legal claim NWHC properties

Legal claim NWHC properties

Communication & awareness

Communication & awareness

Help Desk – Asset Verification

Help Desk – Asset Verification

Property Verification (Physical)

Property Verification (Physical)

Property Valuation (Desktop)

Property Valuation (Desktop)

Complete Asset

Register

Complete Asset

Register

Help Desk – Manage Liability

Help Desk – Manage Liability

Residents dispute

resolution

Residents dispute

resolution

Validity liability, litigation & contingency

Validity liability, litigation & contingency

Transfer of assets & Liabilities

Transfer of assets & Liabilities

Legal wind down of

the NWHC

Legal wind down of

the NWHCLegal Revenue

recoveryLegal Revenue

recovery

Fair value assets and liabilities

Fair value assets and liabilities

Revenues - Cash flow analysis

Revenues - Cash flow analysis Audited FinancialsAudited Financials

Cut-off wind down

values

Cut-off wind down

values

Revenue Potential Surveys

Revenue Potential Surveys

*

* *

*

- Included in the scope of Service Provider - Revenue enhancement portion

Overall audit preparationOverall audit preparation

Point of wind downBefore wind down

*

* * * *

Page 6

Intro - Progress

• Considerable progress has been done to date• Technical

– 24 753 desktop verifications, 13 663 asset files captured, engaged with 9 municipalities

• Finance– Financial due diligence, pre-audit started, financial close

strategy presented

• Legal– Draft repeal bill, understanding of litigation, Legal due

diligence

Page 7

Intro – Environment & Challenges

• Institutional knowledge – no existing staff or documentation

• Key Service providers – non-cooperation, non-payment• Financial statements – qualified audits, lack of reliability• Communities – disgruntled, need property transfers, in

the dark• Municipalities – disputes on properties• Audit – lack of sign-off for go ahead

Page 8

Section 2 – Technical Section

Reconstructed an asset register, based on a combination of property files at the NWHC and information from Municipalities. Data desktop

verified around 24 753, files captured around 13 663

Page 9

Approach to property registerMultiple sources of information, with a view of corroboration in

complete preparation of an asset register

24753 properties

13 663 properties10 171 properties

12 390 MAP estimateMicrozone – 8000 guestimate

Page 10

The Technical Framework• The reconstruction of the NWHC Asset Register revolved around 9

Local Municipalities and one Metropolitan Municipality.• 9 municiplaiteis have been visited thus far, with a view of obtaining

corroborating information

Property information (municipal sources)

1.Tshwane 13 813 2.Rustenburg 1,6963.Moses Kotane 1,1114.Ramotshere Moiloa 8965.Ditsobotla 1,6156.Greater Taung 2177.Mafikeng 28038.Tswaing 8059.Mangaung 1143

24753 properties

14 291 new stock9 832 old stock

5 863 still with municipality

Page 11

Property capture from files

Property physical files•A total population of about 22 136 files, of which 13663 have been converted into an asset register database

Files from the NWHC•Vacant sites – 3 560•Rental Stock – 2 767•Old Stock – 3 844

Note: the above is a combination of summaries and property lists

10 171 properties

13 663 properties

Page 12

• Lack of information from prior year Service Providers (MAP, Microzone)

• No financial closure with respect to a help desk to obtain tenant corroboration and property verifications

min 12 277 MAP properties estimated

6518 – 4959 installment stock913 Vacant site2539 Old Rental Stock3866 New Rental Stock

8 000 Microzone - guestimate

8000 - 12000 properties

Dependent on call centre

2009 Physical files

Page 13

The Way Forward

• Cleans all lists and cross reference for accuracy• To expedite the desktop verification (24 753 desktop

verification have been conducted for Tshwane) with the aim to identifying properties that are still held in the name of the respective municipalities.

• Review information request from municipalities, drive continuous and timeous cooperation with respec to property lists

• Assitance through Help Desk to perform the physical verification

Page 14

Challenges

• More property individual files are being found across regions– Another estimated 8700 at Head Office– Indication of addition files at regional offices

• Concern from residents of the occupancy process and timing• No clarity on the legal authority of the NWHC over properties

categorized under various municipalities• Misrepresentation letters purporting to be the NWHC Service

Provider and property verification agents• Outstanding tenant property transfers, for sales historically

made and paid for

Page 15

Section 3 – Financial Section

Conducted the financial due dilligence and developed a finance strategy that revolves

around finalisation of the audit process. Lack of supporting documentaiton and auditing of assets remain key areas of

contention

Page 16

Background• Conducted due diligence, reflecting historic financial affairs

– Due diligence depict decline in business activity– Debate around whether inherent value in NWHC (assets)

• Three years, 2009, 2010 and 2011 remain unaudited• The financial close strategy dependent on the reinstatement of

MAP system• Pre-audit has begun despite outstanding MAP, focusing on

obtaining supporting documentation for:– Assets and Income cycles– Liabilities, Contingencies and Expenses

• Auditor General would take 6 to 8 weeks to audit year fin. year• Pre-audit strategy to reduce this timeline, why cant the 2009

audit be conducted? Page 17

Assets (Financial side)

Assets•Book value has been decreasing 2007-2009 (reducing equity gap)•Balance as at March 2009 – R203mn (unaudited)•Book value just above R100mn significantly less after R99mn (Local Gov Houses)•Assets = Revenue Driver

-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

2009 2008 2007

Bala

nce

Shee

t Am

ount

Financial year

Reducing net worth - equity

Total Liabilities

Total Assets

R 19mnR 133mn

R 8mn

Strategy to determine fair value NB and coincides with Asset Register compilation process

Mismatch Book value and Fair value Receivables and property information

Understatement of assets (assets not recorded on balance sheet)

?

Page 18

Liabilities (Financial side)

Liabilities•4 creditors account for 61% of debt•Problematic creditors include:

– Suspense accounts– Sundry creditors– Interbank transfers

•Debt reduction strategies can reduce the gap between Assets and Liabilities•Liabilities linked to expenses, expense reduced as operations ceased

Understatement of liabilities (e.g. unrecorded sold properties)

?

Page 19

Revenue Collection

Revenue make-upSupported by•Installment debtors•Rental debtors

R'000 2009 2008 2007 2006unaudited audited audited audited

Government Grant 3 186.9 344.2 3 325.5 15 350.3 Interest Received 15 482.7 7 105.8 19.7 3 611.9 Fixed Asset sales 7 672.1 7 010.5 1 344.6 -41.8 Property Sales 43 206.6 2 642.8 7 922.2 1 377.9 Rent Received 24 657.5 12 058.3 17 326.1 17 043.1 Project sales - 16 146.1 30.0 65.0 Other 231.1 274.2 291.7 582.3

94 205.7 45 307.7 29 968.1 37 406.3

Cash Receipts 25 902.0 35 072.0 21 293.0 39 222.0

Cash conversion 0.27 0.77 0.71 1.05

FNB Account

Absa Account

Receipts FNB Account

Absa Account

Receipts

Apr-08 2 665.0 25.2 2 690.2 762.0 20.5 782.5 May-08 1 963.9 17.4 1 981.3 2 885.1 19.3 2 904.4 Jun-08 1 719.2 12.2 1 731.4 1 031.3 18.4 1 049.7 Jul-08 2 149.5 8.5 2 158.0 1 527.3 15.4 1 542.7

Aug-08 1 644.1 46.6 1 690.7 779.8 14.2 794.1 Sep-08 1 429.3 15.3 1 444.6 1 274.8 13.2 1 288.0 Oct-08 3 714.7 14.4 3 729.1 1 703.6 11.9 1 715.5

Nov-08 900.5 81.0 981.5 954.9 15.4 970.3 Dec-08 715.6 89.1 804.7 1 715.0 11.3 1 726.3 Jan-09 3 583.4 25.6 3 609.0 820.3 13.1 833.3 Feb-09 1 656.9 1 772.8 3 429.8 495.0 12.8 507.8 Mar-09 2 002.6 23.5 2 026.1 569.2 13.4 582.5

Total 24 144.7 2 131.7 26 276.4 14 518.3 178.9 14 697.2 Average 2 189.70 1 224.77

2009 2010

Monies collected•Mainly random deposits (some in suspense accounts & unreconcilled)•MAP key to determining pattern

Page 20

Status of pre-audit• Pre-audit has begun with initial information request on the Asset-Income

side and the Liability-Expense side• Lack of availability of supporting information still exists• Lack of availability of MAP audit of preparation of debtors book• MAP also key for rental and installment sale inventories, forming part of

asset register• Lack of supporting documentation from 3rd party sources, mainly internal

documents• Some assets and income transactions recorded off balance sheet, and

hence not recorded• Remaining lack of controls and non-compliance with PFMA, as compliance

documentation continues to exist

Initial indications are that most of the audit qualification points will remain up to the point of wind down

Page 21

Key Concerns

• No confirmation and resolutions with respect to MAP• Slow response rate with respect to request for financial

supporting documentation• Lack of 3rd party corroborating information (e.g. municipalities,

individual debtors statements)• Lack of co-operation from previous service providers. Some

transactions are off balance sheet• Existence of inherent prior year errors, audit qualifications and

suspense accounts• No resolution from the auditor general wrt. Finailisation of the

audit (disagreement with approach)

Page 22

Section 4 – Legal Section

Conducted the legal due dilligence, drafted the repeal bill and attended to litigation

matters

Page 23

Background• State owned entity – created in terms of an Act of

Parliament• In order to wind down

– Repeal of the statute– Disestablishment of the entity

• A Bill has been drafted and submitted to the Office of the State Law Adviser

• Depending on wind down strategy, The Assets and Liabilities of the Corporation as at date of wind down have to be transferred to a designated Department

Page 24

ChallengesIn order for the Bill to be passed: • an asset register needs to be completed• have to be clear on the liabilities as at date of wind

down• required in order to determine the liquidity of the

North West Housing Corporation – by determining the solvent or insolvent state of the Corporation

Page 25

Liabilities• Litigation ongoing – this may take at least 12 to 18

months to complete• This is being handled by more than one attorney• Challenge – The Corporation doesn’t have a

complete record of these litigation matters• We are currently attending at attorney’s offices in

order to determine the extent of the liabilities and compile a record, i.e. determine if the matter can be settled, prospects of success in each matter where it has been defended.

• Estimated time to completion – 2 months

Page 26

Liabilities• There are matters where the Corporation is being

sued and it has not defended the matter.• In some cases we find that there is no record of these

matters against the Corporation.• We have to go to the Plaintiff’s attorneys in order to

get this information• Estimated time to completion – 1.5 months

Page 27

Liabilities• We discovered that there are monies owed to private parties

in order to finance salaries amounting to R3,500,000.00.• In such cases:

– no loan agreement– no board resolution– non compliance with PFMA– payment of this loan is not clear– loan at a managerial level, not even at a board level– creditor is now claiming his money, and it is an issue that

needs to be resolved.

Page 28

Challenges in respect of the Act• In the North West Housing Corporation Act, procedures set out:

• Discovered that these procedures as outlined in the Act have not been followed

• numerous properties were transferred without following correct procedure• properties which should have been transferred have still not been transferred• no record of transfer exists in such circumstances• occupants of current stock are in some instances not the lawful occupiers of

the leasehold properties (Tshwane Municipality, Taung Municipality)• Miscommunication (e.g. unauthorised notices) in the communities, creating

tension between community members, the Department and the Service Provider (i.e. free transfer of properties without verification)

– disposal of assets– delegation of powers– how agreements should be

signed (2 persons)

– how tenders will be adjudicated

– matters related to board resolutions

– adjudication of matters

Page 29

Section 5 – Other Matters

Help Desk, Communication strategies, occupational surveys, project timelines and

delays

Page 30

Other MattersHelp Desk•Refine scope wrt supporting Service Provide Mandate•Need to establish a help desk to ease communities•Additional information source for preparation of asset register•Key component of Revenue enhancement strategyCommunication strategy•Co-ordination with Departments and wrt Service Provider Scope•Department of Human Settlements ownership as stakeholderOccupational Surveys - Tshwane•Priority, but not priced in current Bid•Can bolt onto the physical verification process

Page 31

Help Desk - Model

Share-Call Number 0861 100 1234

NWHC Contact Centre

Customer interaction

initial interaction and receipt of customers queries, plus related response

Mafikeng Head Office

Regional Offices

Page 32

Project Timeline and delays• Given the above challenges the project cannot be

completed by end of June 2011, • Key delays include:

– Efficiency in information flows– Factors outside the Service Provider scope

• payment for of MAP• Extend and costs of the Help Desk• Extent and cost for communication strategy

– No responses from the previous Service Providers (lack of cooperation, pending litigations)

– Times associated with engagement with municipalities– Delays with treasury regarding audit kick-off

Page 33