LEASE MANAGEMENT Purpose: To provide and manage Real Estate Portfolio in support of Government social, economic, functional and political objectives.

Lease Management – Recovery Process State of Leased Portfolio INDEX LEASE MANAGEMENT – PROCEDURES AND CHALLENGES Lease Management – Recovery Process State of Leased Portfolio Current Procedures Current Challenges Action Plan - Lease Framework: Panel of Landlords Action Plan - Lease Renegotiations

1. RECOVERY PROCESS – AUDIT OUTCOMES Audit qualification on leases Disclaimer audit opinion Incorrect allocation of refurbishment cost to lease rentals No sufficient appropriate audit evidence. Amounts disclosed on the AFS were based on PMIS which did not agree to lease agreements Some of the lease agreements were not available for audit purpose. Qualified audit opinion The Department could not provide sufficient appropriate audit evidence to support transactions Manual lease schedules used to support the figures on the annual financial statements did not in all instances agree to the signed lease agreements. 2012 2013 2014 Audit qualification on leases The Department did not have adequate management systems to manage and account for leases hence the adverse audit opinions on leases from 2012 - 2014 Audit opinions

1. RECOVERY PROCESS – TURNAROUND STRATEGY STABILISATION EFFICIENCY ENHANCEMENT SUSTAINABILITY & GROWTH TRANSFORMATION AND CHANGE MANAGEMENT 2012 2014 2019 2016/17 TURNAROUND STRATEGY Stabilisation of DPW due to historical poor performance and lack of adequate management and financial controls CHANGE MANAGEMENT

State of Leasehold Portfolio

2. STATE OF LEASED PORTFOLIO Types of accommodation leased by the PMTE include but not limited to: Commercial Offices Parking Specialised Assets Police Station Kennels Courts Prisons Laboratories Industrial Archives Workshops Warehousing Residential

2. STATE OF LEASED PORTFOLIO Leasehold Portfolio status as end of 2015/2016 FY Total # of Leases: 2617 Annual Expenditure: R3,8 billion Leasehold Portfolio status as end of 2015/2016 FY Total # of Leases: 2617 Annual Expenditure: R3,8 billion LP MTEF BUDGET: 2016/17 FY: R 4 billion 2017/18 FY: R 4,4 billion 2018/19 FY: R 4,8 billion MP MTEF BUDGET: 2016/17 FY: R 4 billion 2017/18 FY: R 4,4 billion 2018/19 FY: R 4,8 billion NW GP NC FS KZN EC WC

2. STATE OF LEASED PORTFOLIO Distribution by Client Department 11 out of 47 clients departments shown in graph Top 11 client departments account for 85% of space and 81% of total rent Total space: 3 144 764 SQM Total annual rent: R3 903 470 070

Lease Contract Management 3. CURRENT PROCEDURES Procurement of Leases Lease Contract Management Implementation of SCM procedures to procure leases The procurement process is initiated for the clients needs and request for accommodation (Procurement Instruction). The Department has established a NBAC:L focusing on adjudication and awarding lease procurements Can take up to 18 months to conclude procurement of accommodation. Once the lease is concluded, the tenant installations project will commence with the client, landlord & the Department signing the space plans. Client department will confirm the funds for the tenant installation project. Handover certificate is signed by the Department, landlord and client department once the keys are handed over by the landlord when the property is ready for occupation. Inspection of the leased properties. Snag list will be developed as a result of inspections. OHS unit will perform Health & Safety report on leased buildings (there is a capacity limitation). There are quarterly Client forum meeting, where all complaints are raised by the clients and action plans are developed to address those complaints Site visits and issue letters to landlords to urgently address maintenance complaints raised by clients. Lease Management System (PMIS/Archibus) to capture all leases. Use the lease management system to monitor lease that are expiring in 18 months time in order to initiate the process of consulting with client departments as to whether leases should be renewed/ terminated/ procure alternative accommodation. Extension of lease before expiry in line with the internal Department guidelines.

4. CURRENT CHALLENGES – SPECIAL INVESTIGATING UNIT (SIU) Investigations in terms of proclamation R. 59 of 2014 published in Government Gazette No 37946 dated 27 August 2014. SIU is investigating 2 162 leases concluded between the Department and various landlords. 861 leases are currently under investigation. SIU has instituted civil proceedings against two landlords A landlord has instituted two actions against the Department for the payment of outstanding rental. The SIU has been joined as a co-defendant in one of the actions. SIU has intervened in such proceedings on a basis that its investigations reveals that the Department has a substantial counterclaim against the landlord. GENERAL AREAS OF CONCERNS: Leases are continually renewed without first testing the market, the renewals over the years eventually became long term leases. This renewal process may be construed as a circumvention of section 217(1) of the Constitution; Unsatisfactory condition of the leased buildings, which don’t comply with the relevant prescripts of the Occupational Health and Safety Act, No.85 of 1993 ; Fraud Risk – landlords submit false tax clearance certificates (TCCs); Fraud Risk - The Department is paying for more space than what is actually available in the leased building; and Fraud Risk - The Department is paying for more parking than what is actually available at the leased building. INVESTIGATIONS

4. CURRENT CHALLENGES The current leasing process is inefficient and ineffective; Leases are procured on a reactive basis vs. strategically; Can take up to 18 months to conclude procurement of accommodation; Procured space is not optimally utilized (archaic norms and standards); Current rates are expensive and out of line with the market; Current rates not related to age and condition of buildings and facilities; Insufficient contract management; Inadequately equipped facilities procured; Lack of commitment to transformation by industry; Market sell-off to new entrants at inflated prices; Sale of buildings that undo transformation initiatives of government; Fronting; Poor maintenance of leased properties; High tenant installation costs; and Landlords not complying, e.g. not registered on Central Supplier Database

5. ACTION PLAN - LEASE FRAMEWORK (PANEL OF LANDLORDS) Leasing Framework (Panel of landlords): PMTE in collaboration with the Office of the Chief Procurement Officer, National Treasury have embarked on SCM reforms from which a leasing framework was developed which will be used to: reduce government rental expense, achieve effective and efficient delivery of accommodation to User Departments, shorten turnaround time on delivery of accommodation as well as to comply to the Constitution and National Treasury prescripts on procurement. Province Application Received & Evaluated Mpumalanga 34 North West 16 Gauteng 76 National Landlords 7 Free State 29 Western Cape 26 Northern Cape 2 Limpopo 28 Eastern Cape 127 KZN 91 Total bids 408 Landlords to be Registered on a Lease Portal Some landlords submitted bids per each province. National landlords submitted one bid covering all provinces, where they have footprint.

Phase 1 5. ACTION PLAN - LEASE FRAMEWORK (PANEL OF LANDLORDS) The Leasing framework will be approached in two main phases. The first phase will involve registration on the Panel and the 2nd phase will involve procurement of accommodation from the Panel. These phases are as follows: Phase 1 An expression of Interest/request for proposal is advertised inviting Landlords to apply for registration on the PMTE Lease accommodation register All proposals received will be processed and successful applicants will be registered on PMTE IT Portal/Accommodation register Successful Landlords will be required to upload information of available accommodation to the Portal on a regular basis The panel will not be restricted to Private Landlords and will also include State Owned Entities, Tribal Land & Trusts

Implementation Timeframes for Phase 1 5. ACTION PLAN - LEASE FRAMEWORK (PANEL OF LANDLORDS) Phase 2 Procurement from the panel shall be on a competitive basis Client needs will be matched against available listed accommodation Landlords with accommodation that meet requirements will be invited to participate in a competitive bidding process Functionality, Price and Preference shall be used as evaluation criteria Implementation Timeframes for Phase 1 Advertisement (EOI/RFP) Dec 2016 Closing of advertisement February 2017 Evaluation and Adjudication of proposals July 2017 Pre-qualification of properties and registration on panel August 2017

6. ACTION PLAN - LEASE RENEGOTIATIONS Problem Statement: The Department has identified various deficiencies in the current manner in which buildings are procured and the excessive rates that the State is paying. In some cases the State pays up to 45% more than the market rates. The Department has embarked on leasing reform process together with National Treasury and has halted signing renewal of leases irrespective of whether the leases have expired. This was done in order to get a better understanding and grip of the current situation. As part of achieving efficiencies within the procurement of leased, the Department established the Technical & Executive Negotiation Teams . 2. Averages space utilised per full time employee and associated cost is significantly above prescribed norms and significantly above international and local industry benchmarks. Therefore property and leases has been identified as a commodity to be procured in a strategic manner to improve outcomes and achieve value for money.   3. The project on expansion of leases will target landlords on a portfolio by portfolio basis (across multiple buildings) to reduce cost by approximately R800 million per year towards market related rates and/or below. The Department has set a target of R100 million savings for the 2017/18 financial year. .

6. ACTION PLAN - LEASE RENEGOTIATIONS Activity Responsibility Due date Lease Renegotiation letters to Top 30 landlords were issued on the 4th April 2017, which is covering approximately 500 leases. Due to the volume of the lease portfolio an extension was given to landlords until 12 May 2017 to submit their detail lease portfolio proposals requesting the following: Property Description; Current Lease Details New Proposal Proposal from landlords should be clear how the they will assist the Department in implementing the following prescripts: The Preferential Procurement Regulations 2017 (PPRs) came into effect as at 1 April 2017. It is therefore mandatory that the department subscribes to the regulations. To this end, the following will be considered; B-BBEE status level of contributor; or Enterprise type (Exempted Micro Enterprise (EME) and/or Qualifying Small Enterprise (QSE)) and or Designated groups which are at least 51% owned REMS May 2017

6. ACTION PLAN - LEASE RENEGOTIATIONS Activity Responsibility Due date SCM is currently finalizing the guide/circular which encapsulate how the approved National Treasury’s approvals will be implemented. SCM May 2017 A Legal opinion on the National Treasury approvals REMS Done Appointment of valuers to perform due diligence PMO/REMS Receive offers, perform due diligence and negotiate with landlords May - August 2017 Confirm funding and Sign new lease agreements UDM/REMS June – October 2017

Thank You Thank You National Department of Public Works (NDPW) Head Office: Public Works CGO Building Cnr Bosman and Madiba Pretoria Central Private Bag X65 Pretoria 0001 Website: http://www.publicworks.gov.za