VZCZCXRO0653
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2746/01 1871351
ZNR UUUUU ZZH
R 061351Z JUL 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4361
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHTN/AMCONSUL CAPE TOWN 3032
RUEHDU/AMCONSUL DURBAN 7925
RUEHJO/AMCONSUL JOHANNESBURG 4802
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 PRETORIA 002746
SIPDIS
SENSITIVE
SIPDIS
DEPT FOR AF/S (MTABLER-STONE)
DEPT PLEASE PASS TO DEPT OF HUD (JGERAGHTY)
DEPT PLEASE PASS TO OPIC (JSIMON AND DERB)
E.O. 12958: N/A
TAGS: EFIN EINV PGOV PREL EAID SF
SUBJECT: SOUTH AFRICA: POLITICS STALLING LOW-INCOME HOUSING
FINANCE INITIATIVES
REF: A. PRETORIA 2022
B. PRETORIA 347 (NOTAL)
C. 05 PRETORIA 2621 (NOTAL)
D. 04 PRETORIA 4503 (NOTAL)
PRETORIA 00002746 001.2 OF 002
(U) This cable is Sensitive But Unclassified. Not for
Internet Distribution.
1. (SBU) Summary. The ANC's Tripartite Alliance with the
Congress of South African Trade Unions (COSATU) and the South
African Communist Party (SACP) has slowed down low-income
housing finance initiatives, according to the Banking
Association. The Housing Ministry sidelined a bilateral MOU
concluded last year with the Banking Association due to
complaints from COSATU and SACP. As members of the Black
Economic Empowerment (BEE) Financial Sector Charter Council,
COSATU and SACP would like any negotiations handled by the
entire Council. Frustrated by the stalled progress, banks
issued R17 billion ($2.4 billion) in low-income loans on
their own accord. The Council must now decide if these loans
will count towards the BEE-sanctioned target of R42 billion
($6 billion) by 2008. A Banking Association official
criticized government for not offering incentives to
contractors to assist with the short supply of low-income
housing and encouraged U.S. partners to assist South Africa
with financing through individual institutions. End Summary.
Tripartite Alliance Slowing Housing Finance Reform
--------------------------------------------- -----
2. (SBU) According to Banking Association official Jopie van
Honschooten, the Tripartite Alliance effectively negated the
MOU between the Housing Ministry and the Banking Association
last year. This MOU included areas to work on collectively
to deliver on the Black Economic Empowerment (BEE) Financial
Sector Charter target of delivering R42 billion ($6 billion)
in low-income housing finance by 2008 (Refs A and D). The
five MOU areas involved: (1) consumer education; (2) housing
subsidy amounts; (3) fixed-rate mortgages; (4) risk
underpinning; and (5) other impediments such as slow deed
transfers. Under this MOU, the South African Government
(SAG) would have had to assist the banks with risk insurance
and hedging of any fixed-rate mortgages. Getting wind of
the MOU, Tripartite Alliance members -- namely the Congress
of South African Trade Unions (COSATU) and the South African
Communist Party (SACP) -- balked at this bilateral agreement,
saying that as members of the Financial Sector Charter
Council, they should have been a part of the negotiations
(Ref D).
3. (SBU) Last year's uproar from its Tripartite Alliance
members forced the Housing Ministry to back down and sideline
the MOU. The parties abandoned plans altogether for a
government-backed mortgage insurance institution (similar to
the U.S.'s Fannie Mae), but continued discussions on other
matters. Frustrated with the stalled progress of talks,
banks started offering low-income home loans on their own
accord, totaling nearly R17 billion ($2.4 billion) thus far.
These loans, however, are currently "unsanctioned" by the
Financial Charter Council and it is unknown if these loans
will qualify under the BEE Charter. Van Honschooten thought
that these loans should qualify as the loans' average
interest rates have been prime plus 2.5% or about 13%, less
than the 20% maximum allowed under the Charter.
4. (SBU) In May, COSATU and the SACP stalled progress once
again with complaints about negotiations between the Banking
Association and Housing Minister Lindiwe Sisulu. In her
budget speech to Parliament, Sisulu announced that the
Housing Ministry, the Banking Association, and the Financial
Charter Council had finally agreed to move forward in terms
of the 2005 MOU. She went on to say, however, that the
Banking Association and the Housing Ministry were having
ongoing discussions on the size and risk sharing of a second
tranche of low-income home loans beyond the original R42
billion. (Note: Banks will assume all the first tranche's
risk, but are looking to government to shoulder some of the
risk for those who earn R1,500 to R5,500 ($200 to $800) per
month in the second tranche. End Note.) COSATU's and SACP's
complaints about these discussions have stopped these
negotiations dead in their tracks. The parties have since
PRETORIA 00002746 002.2 OF 002
shifted their focus on working through the Financial Charter
Council to establish defined financial standards for BEE
Charter "sanctioned" loans. Only time will tell if the
banks' R17 billion in loans outstanding will be "sanctioned"
by the Council and count towards the R42 billion. (Note:
Van Honschooten also pointed out that the original target
loan issuing amount was R50 billion, which would amortize to
the R42 billion target. The new goal, however, has been
revised to R40 billion issued, to amortize to R30 billion.
End Note.)
SAG Housing Policy Critiques
----------------------------
5. (SBU) While supportive of the SAG's housing policy, van
Honschooten offered critiques on its focus on the eradication
of informal settlements, its economic viability, and the need
to engage residential contractors (Refs B and C). According
to van Honschooten, the Housing Minister is too focused on
the goal of eradicating informal settlements by 2014. He
said that this goal is a simplistic one that ignores the
ongoing urbanization phenomenon and condemns the communities
that exist. Allocating local government the budgets they
need to gradually enhance informal settlements would be a
better approach, said van Honschooten.
6. (SBU) Van Honschooten believes that the current housing
policy contains socially desirable goals, but does not offer
financial incentives that make business sense to engage the
private sector. If this policy continues, contractors will
continue to focus on the high-end and commercial markets,
ignoring the short supply of low-income housing. Currently,
South Africa is only building 15,000 houses per year to
accommodate those that do not qualify for the full government
subsidy, but do not make over R7,500 per month ($1,100).
Contractors need to build 135,000 units per year to meet the
current demand for 600,000 units for this segment. One
incentive that government could offer would be to speed up
the pace of the building approval process. (Note: About 4
million households earn the "middle" range of income from
R1,500 to R7,500 per month ($200 to $1,100), another 4
million comprise the "high-end" market while about 7 million
households require fully-subsidized housing. Of the 7
million, a housing backlog of 2 million exists. In total,
South Africa's housing backlog is about 2.5 million (Ref C).
End Note.)
How the USG Can Help
--------------------
7. (SBU) According to van Honschooten, U.S. partners could
best assist South Africa with additional low-income housing
finance guarantees through individual institutions, whether
it would be the banks or residential contractors. In his
opinion, while the SAG and the Banking Association have not
resolved the risk sharing issue on the second tranche of
financing, this should not hold up outside assistance with
the first tranche (Ref A). U.S. partners -- such as USAID,
OPIC, or a private sector entity -- could approach
associations such as the Banking Association
(www.banking.org.za) or the South African Property Owners
Association (www.sapoa.org.za), which includes the
Residential Property Owners Association (RESPOA). U.S.
agencies could also expand upon existing relationships with
South African financial institutions.
TEITELBAUM