Funding and financing human settlement mega projects in Gauteng

• Oct 23, 2017
• mega projects, human settlements
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1. Mega projects are human settlement projects that consist of more than 10 000 residential units. In the words of Gauteng Premier David Makhura:

“Mega human settlements represent a decisive departure from uncoordinated, small-scale, low-impact, and sporadic as well as unsustainable housing developments. [The] goal must be to achieve diversity in human settlements by emphasizing mixed-income, high-density human settlements that place emphasis on social and economic inclusion, as well as promoting spatial justice. This is what we consider spatial transformation, wherein we transform and develop new cities.” (Speech made at the Gordon Institute of Business Science. 2016)

2. The adoption of mega projects as a means of human settlements emerges both as a corrective measure, but also as a means to redefine post-apartheid cities. As a corrective measure, it is informed by the following policy and implementation deficiencies of the post 1994 government housing programme:

2.1 The initial response to the challenge of human settlement was disintegrated, and lacking in integration and coordination.

2.2 It was focused on the erection of housing structures, ironically, within the land that was procured and set aside by the previous apartheid regime. In a way, it legitimised apartheid patterns of human settlement.

2.3 RDP houses were built away from the centres of economic activities. Beyond that, they were poorly connected to centres of employment. But then, they still reflected another version of migrant labour as people resided far away from places of economic activity and employment.

2.4 Post-1994 early versions of human settlement focused on redress and equity, and less on economic development, social cohesion, transformation and efficiency. Essentially, the early post-1994 approaches to human settlement were mainly “historically corrective”, rather than forward looking and progressive. Consequently, RDP settlements tended to mirror apartheid patterns, rather than being transformative and progressive.

2.5 Due to ensuing capacity challenges to deliver housing units, the second decade of democracy tended to focus on the acceleration of the delivery of housing units. Dealing with the backlogs has been the dominant preoccupation of the second decade of democracy government.

3. In short, the first 20 years of democracy has seen not only a weakness in RDP housing projects, but also a decline in the pace of delivery of such houses. Thus, there is, until today, significant decline in delivery of RDP house (these were primarily located on poor land); rising costs, regardless of the poor and shoddy quality of RDP houses; snail’s pace of delivery; and lengthy and tardy procurement processes. Collectively, these deficiencies have given rise to major socio-political protests that have led to instability in governance.

4. The inability of provincial governments has been another factor that has led to the conceptualization of human settlements mega projects. Housing projects in the past have witnessed major corruption, and sloppy supply chain management. This has led to the Human Settlements Department returning significant amounts of money to the National Treasury.

5. As indicated earlier, mega projects emerge as a corrective measure for the challenges encountered in the first 10 to 15 years of the democratic South Africa. The initiative seeks to close the gaps identified above, while redefining future cities in line with the dictates of the National Development Plan, and the Gauteng City Region (GCR) strategy.

6. The following are the key characteristics of mega projects:

6.1 Mega projects are big by size.

6.2 Mega projects are supposed to have a high impact socially and economically for the beneficiaries.

6.3 Mega projects must be highly coordinated among the relevant sister departments of the Human Settlements Department. These include the following departments: Roads and Transport; Education; Economic Development; Community Safety; Sport, Arts, Culture and Recreation; Health; and Social Development.

6.4 Mega projects are supposed to be coordinated as a sustained, long-term development of new cities that are intrinsically linked to one another both socially and economically.

6.5 Overall, mega projects’ resultant new cities must inform the essence of the Gauteng City Region.

7. The strategic outcome of mega projects is captured by Premier Makhura as follows:

“[The] better management of our human settlement delivery efforts … will promote social and economic inclusion. In our view, a post-apartheid city must mirror our overall commitment to a society that is truly equal, where there is expanded access to socioeconomic opportunities and where there is dignity and prosperity for all.”

8. In essence, there two strategic outcomes to mega projects: to accelerate a comprehensive human delivery; and to establish a new set of post-apartheid urban developments for Gauteng.

9. Other forms meant to deliver inclusionary human settlement for mega projects include:

9.1 Mixed tenure – This includes rental, freehold and social housing (communal ownership)

9.2. Mixed typologies– This is a departure from the traditional “one stand, one house”, and entails a design that accommodates both the gap and open market

10. In summary, therefore, mega projects will display the following aspects:

• Mixed-use development inclusive of housing, social amenities, open spaces, and economic, commercial and industrial opportunities
• Mixed-income housing inclusive of BNG housing, gap-market housing, and bonded housing
• Mixed-tenure housing inclusive of ownership housing, rental stock and social housing, and
• Mixed-typology housing inclusive of free standing and multi-story walk-ups, as well as development of smart cities, including but not limited to the implementation and use of gas reticulation systems, renewable energy, and solid-waste and waste-water recycling, along with broad band internet

Financing mega projects

11. The funding model that has been proposed by the Gauteng MEC responsible for Human Settlements, Paul Mashatile, primarily aims to enable the Gauteng Partnership Fund to meet the financial needs of mega projects. The Gauteng Partnership Trust (“the Trust”) was established in 2002 by the Gauteng Department of Human Settlements’ (“GDHS”) predecessor in title, the Gauteng Department of Housing, in terms of the Trust Property Control Act 57 of 1988. The Trust trades as the Gauteng Partnership Fund (“the GPF”), a provincial public entity that is listed under Schedule 3C of the Public Finance Management Act (“PFMA”). The GDHS has appointed the GPF to implement the provincial mega projects, which overlap with the National Catalytic Priority Projects of the Minister of Human Settlements, Ms Lindiwe Sisulu.

12. It is intended that the funding model for Gauteng mega projects is to, among others, provide a mechanism for raising upfront funding for mega projects’ integrated human settlements, particularly the residential (housing) component, including the Breaking New Ground (“BNG”, previously known as the Reconstruction and Development Programme) full grant “give away” housing to qualifying beneficiaries; social and rental housing (currently administered through the Social Housing Regulatory Authority – the “SHRA”); and the “GAP affordable housing” market (bonded and finance-linked individual subsidy programme – “FLISP”) for people earning between R3 500 and R15 000 per month, otherwise referred to as the “missing middle”. This is to be done while navigating around the numerous legislative and regulatory constraints in terms of funding bottlenecks and convoluted procedural requirements.

13. The model does not preclude the raising of funding for other aspects of mega projects, such as educational and health facilities; arts, culture and entertainment facilities; and retail and other commercial facilities such as offices, warehouses, industrial workshops and government precincts. On the contrary, the model envisages active participation in the commercial space for growth and sustainability of the funding instrument as a going concern.

14. The basic idea is that a fund manager would be procured and appointed through an open request for proposals (“RFP”), with a mandate to establish the proposed Gauteng Mega Projects Fund (“the Fund”). The Fund’s role and purpose is to serve as a vehicle for securing investor participation in the funding of individual mega projects. The proposed Fund would be established by the fund manager as an en commandite partnership. It is important to emphasize that this Fund is not a form of an SPV, as was contemplated in the French deal, which would have been governed by Section 38(1)(m) of the Public Finance Management Act.¹

15. The Fund is envisaged to be set up as an en commandite partnership, which essentially means that the Fund would become a partnership born purely out of a contract, and not out of legislation – thus the supply chain management (“SCM”) being the RFP process that was implemented that led to the appointment of a private company styled Third Way Investment Partners, a company led and managed by Mr John Oliphant, one of a very few young black actuaries in South Africa. The further statement of intent and assumption that is then made is that such a partnership would not be subject to regulation in terms of the prevailing public sector legislative and regulatory framework other than the normal SCM, procurement and contract management framework.

16. An en commandite partnership entails an arrangement where there are two sets of partners invested in the Fund, these being general partners, and en commandite, or silent, partners.

17. In terms of the generally accepted practice and established industry protocols, the funders or investors who opt to become “general partners” in the establishment of the Fund will have unlimited liability in terms of the partnership, and towards all of the creditors of such a partnership, while being actively involved in the business of such a partnership. In contrast, the partners en commandite enjoy limited liability in terms of their own investment toward the partnership, and are not actively involved and/or publicly disclosed as being partners.

18. There is no intention of making the GPF a general partner in the Fund; in any event, the PFMA classification of the GPF would not allow the GPF to accept unlimited liability. It thus goes without saying that the GPF participation in the Fund can only be that of an en commandite partner.

19. A number of questions were raised at the GPF Workshop held on 11 October 2017 at the Emoyeni Conference Centre in Parktown, Johannesburg – these questions are summarized below, with direct responses also provided based on the above proposal:

19.1 With respect to the en commandite partnership, how would practical questions of risk in respect of the formation of an SPV that must comply with the public sector legislative and regulatory framework, while, for all intents and purposes, being arguably ultra vires, be mitigated?

An important answer to this question rests in two issues:

• The Fund is not intended to be an SPV in the mould that was envisaged in the French deal
• Further, the answer lies in the question as to which institutions and/or entities are willing to become the “general partners”

19.2 The follow-up question to that is how it can be ensured that risk is adequately mitigated, and that a viable and solid business case is made for the involvement of the general partners?

The answer to this question is in point 18 above. Furthermore, point 17 above specifically states that “… the “partners en commandite” enjoy limited liability in terms of their own investment toward the partnership, and are not actively involved and/or publicly disclosed as being partners”.

20. As has already been articulated in paragraphs above, the main reason for the proposal of the en commandite partnership is for this Fund to be a creature of contract and not of statute. It is specifically argued that there are no registration requirements for establishing, and no legislation regulating, en commandite partnerships.

21. It is important to note that with respect to a scenario that is specifically not envisaged in this case, in the unlikely case where the GPF would be invited to become a “general partner”, there would need to be compliance with Section 54 (2) of the PFMA, which states that:

“Before a public entity concludes any of the following transactions, the accounting authority for the public entity must promptly and in writing inform the Treasury of the transaction and submit relevant particulars of the transaction to its executive authority for approval of the transaction: (a) establishment or participation in the establishment of a company, (b) participation in a significant partnership, trust, unincorporated joint venture or similar venture, (c) acquisition or disposal of a significant shareholding in a company, (d) acquisition or disposal of a significant asset, (e) commencement or cessation of a significant business activity, and (f) a significant change in the nature or extent of its interest in a significant partnership, trust, unincorporated joint venture or similar arrangement.”

22. As noted from the excerpt above, the requirements of sub-section (b) are a case in point, of a provision that must be complied with in order to pass muster – that is, if the GPF was to be a general partner.

23. Insofar as the issue relating to the invitation of the private sector “general partners” is concerned, the GPF would invite them on the back and/or strength of the viability of the investment and the seed capital that could be put in place. The GPF would simply need to follow its supply chain management and procurement processes, in order to conclude such arrangements. It is recorded that the Third Way Investment Partners were invited through an open RFP and the internal SCM policies of the GPF.

24. Notwithstanding the fact that the main reason for the proposal of an en commandite partnership is for the proposed Gauteng Mega Projects Fund to be a creature of contract and not of statute, and the fact that there are no registration requirements for establishing and no legislation regulating en commandite partnerships, it is specifically recommended that Sections 54(1) and (2) of the PFMA² be complied with only the transparency and openness.

25. For the purpose of point 24 above, the requirements of Sections 54(1) and (2) of the PFMA sub-sections (b) and (f) are a case in point, wherein provisions must be complied with by the Board of Trustees of the GPF in order to ensure transparency and openness. These provisions specifically state that … before a public entity concludes any of the following transactions, the accounting authority for the public entity must promptly and in writing inform the Treasury of the transaction and submit relevant particulars of the transaction to its executive authority (being MEC Paul Mashatile) for approval of the transaction: (b) participation in a significant partnership, trust, unincorporated joint venture or similar venture … (f) a significant change in the nature or extent of its interest in a significant partnership, trust, unincorporated joint venture or similar arrangement.

26. As a way forward the following is noted and the specific steps are specifically recommended:

26.1 I refer to the meeting between the Gauteng Department of Human Settlements (“the Department”) and the Public Investment Corporation (the “PIC”) on Monday 25 October 2016 at the PIC offices in Pretoria.

26.2 Present at the meeting on 25 October 2016 were the CEO of the PIC, Dr Dan Matjila, and all his senior executive managers, along with those from the Department; I also participated in this meeting as an advisor.

26.3 The purpose of the meeting was to afford the Department an opportunity to present our proposal to the PIC to partner us in finding innovative ways of funding the mega projects in Gauteng.

26.4 It was specifically recorded that the Department had appointed the GPF as an implementing agent to assist it with the implementation of mega projects.

26.5 In order to achieve the mandate effectively with the assistance of the GPF, and ensure the provision of housing services to the residents of Gauteng in a sustainable manner, the Department would capitalize the GPF in the sum of R3-billion over three (3) years through the Human Settlements Development Grant (“HSDG”) dedicated towards specifically identified mega projects.

26.6 This amount would be paid from the Department’s grant allocation and made available to the GPF in accordance with the Department’s normal budgeting processes and allocations as contemplated in the Division of Revenue Act (“DORA”).

26.7 Using this capital amount, the Department’s proposal was for the PIC to partner with the GPF by making a capital investment in the sum of at least R15-billion, and together with the GPF capitalisation leverage on the capital amount to raise R30-billion on the open market.

26.8 The PIC pointed out, however, that its budget allocation nationally for “developmental” investment projects over a period of five years was very limited and would therefore it not be in a position to make a commitment to the Department for the requested amount.

26.9 However, the PIC proposed an innovative solution of achieving the Department’s objectives, and proposed the establishment of a listed fund on the bond market, which instrument would be anchored by the PIC in order to attract private capital in order to fund mega projects.

26.10 It was pointed out that the PIC has vast experience in this regard and would be in a position to assist the Department in setting up the financial instrument, and commit resources to give effect to it.

26.11 It is thus proposed that the workshop of the Board of Trustees of the GPF scheduled on 24 October 2017 consider and apply its mind to the Gauteng Mega Projects Fund as an en commandite partnership in which the GPF is an “en commandite partner” and not as a “general partner”.

26.12 The Board of Trustees of the GPF, in its capacity as the accounting authority of the GPF, convene a special session at which a formal decision will be taken and its resolution properly recorded, approving the transaction and specifically the Gauteng Mega Projects Fund as an en commandite partnership with the GPF specifically not being a general partner.

26.13 The chairperson of the Board of Trustees of the GPF submit to the Gauteng Treasury its resolution as contemplated in 26.12. above as a Record of Decision (“RoD”)as contemplated in Section 54 (2) of the PFMA, which states that: “before a public entity concludes any of the following transactions, the accounting authority for the public entity must promptly and in writing inform the Treasury of the transaction …”

26.14 Parallel to 26.13 above, the chairperson of the Board of Trustees of the GPF submit the resolution as contemplated in 26.12 above the relevant particulars of the transaction to its executive authority (MEC Paul Mashatile) for approval of the transaction.

26.15 The Board of Trustees of the GPF to authorise the acting CEO of the GPF to negotiate and finalize the contract and service-level agreement with the fund manager (Third Way Investment Partners) for the establishment of the Gauteng Mega Project Fund, as described in detail in this discussion document, subject to further amendments and additions to be approved by the Board of Trustees of the GPF.