Acting CFO: Rural Housing Loan Fund
‘Empowering rural home owners. With capital of over R400 million, the Rural Housing Loan Fund services a niche sector by providing short-term loans to rural home owners.’
CIARAN RYAN: This is CFO Talks, it’s a pleasure to have Bruce Gordon with us today. Bruce is the acting chief financial officer at the Rural Housing Loan Fund, which was merged with the National Housing Finance Corporation and the National Urban Reconstruction and Housing Agency in 2018, so Bruce is the acting CFO for the merged entity. Among Bruce’s achievements at the Rural Housing Loan Fund are a R33 million tax refund as a result of tax restructuring, better risk management resulting in R100 million being freed up for the business and negotiating much lower lending rates from intermediaries. He also got a commendation from Parliament for good management of the group funds. Welcome, Bruce.
BRUCE GORDON: Thank you.
CIARAN RYAN: I think it would be a good idea to explain to listeners what the Rural Housing Loan Fund is, why it exists and what impact does it have on the economic life of the country?
BRUCE GORDON: The Rural Housing Loan Fund was set up to enable people in rural areas to improve their housing. When it started, if you lived in a rural area, you got a house and you couldn’t borrow money, you had to earn money and use what you earned, so it was set up to enable lending in rural areas. It started operations in about 1998 and it lent its first money out in 2001. Over the years it’s got a capital of about R400 million now, started by the initial investment by the German Development Bank, which gave it a grant of R150 million, and then we got about another
R150 million from the Department of Housing and then we’ve grown the fund since then.
CIARAN RYAN: Give us an idea of how many loans have been made and how many houses have been built with this funding.
BRUCE GORDON: What we do is with the lending we have lent out…with using the R400 million by rotating the funds we have lent about R2 billion out over the years. At the moment we target about 40 000 loans a year, ranging in size from about R2000 up to about R100 000. We do it through intermediaries, we don’t actually lend…do retail, National Treasury gets a bit uptight with government trying to do retail and I can understand why. So we lend to intermediaries that then lend on in terms of the National Credit Act and what we try to do is ensure that they lend at much lower rates than allowed by the National Credit Act. They call housing lending development lending and they allow repo plus 27% as a maximum interest rate, which is about 34.5% at the moment.
CIARAN RYAN: That would be unaffordable for people.
BRUCE GORDON: People do borrow at those rates, it’s legal but Parliament, if you go and talk to them they get uptight if we are allowing lending at those rates but it’s their legislation.
Completely unsecured lending
CIARAN RYAN: Is it like a mortgage loan, is there collateral, do you have title deeds involved here?
BRUCE GORDON: No, in the rural areas there are no title deeds, so it’s completely unsecured, which is why those high rates are there because of the risks. Most of the loans that are funded through Rural Housing are issued at about 15%, so less than half the legal rate and we find that most of those borrowers are actually state pensioners, so they use their state pension to borrow money and improve their houses, make sure they’ve got decent living. Some of them will build their houses from scratch and about 6% or 7% of our loans are used to actually build houses from scratch, which won’t normally be pensioners, pensioners will take an existing rondavel or even an RDP, if they have managed to get one, and improve those. So often in rural areas you’ll have a grandmother who is looking after five or six grandchildren in either a small rondavel or an RDP house and they then improve those to enable them to look after the children and make sure that the children have decent accommodation, whether it’s building extra rooms or installing a JoJo tank or connecting to some sort of power, some of them will install a small solar panel on the roof so that they have decent lighting at night. So that’s what the money is used for.
CIARAN RYAN: What’s your default rate?
BRUCE GORDON: As Rural Housing we would charge prime plus 4% to someone charging the maximum rate, we don’t have anybody at that level anymore. Scarily, the last client we had at that rate was actually an NGO, a non-profit organisation, they were charging maximum. None of the commercial ones charge maximum. The highest rate currently is about 25% that an intermediary charges to an end user, about 70% of the loans go at about 15% and there are a few at 22%, so there is substantially below what is legal.
CIARAN RYAN: But if it’s unsecured lending is there a risk of default and what is that risk? How do you quantify that?
BRUCE GORDON: We lend to intermediaries, nearly all of whom are commercial.
CIARAN RYAN: So your risk is really with the intermediaries, they then have to manage the book.
BRUCE GORDON: They manage the book itself, so if somebody defaults, the ones that target pensioners specifically, they will write-off if the pensioner dies, they won’t look for it. In fact, some of them will actually write off automatically rather than trying to go the legal route, they feel that it’s not worth the cost trying to take legal action against someone. The bigger loans, people will go to legal if they’re not getting paid. But we find that pensioners are probably the best payers, I think the collection rate is about 98%.
Pensioners prompt to pay back loans
CIARAN RYAN: That’s very good.
BRUCE GORDON: It’s quite funny because when talking to other intermediaries and saying to them, why don’t you lend to pensioners, they say it’s too high-risk [laughing], they don’t look at the stats. Pensioners pay back almost always. What we find is the higher the loan and if a loan is longer than two years, what they call borrower fatigue starts to set in, so we try and encourage loans for two years maximum, so that people don’t then start to get tired of paying back.
CIARAN RYAN: What’s your average size of loan?
BRUCE GORDON: About R6000.
CIARAN RYAN: And typically you would expect payment within two years, yes?
BRUCE GORDON: Yes.
CIARAN RYAN: How many units would you say have been built? You did say that it’s not necessarily always fresh houses that are being built, sometimes they are just additions but how many dwellings would have been impacted by this?
BRUCE GORDON: That I wouldn’t be able to tell you but, like I said, we do about 40 000 loans a year, maybe 6% of those would be new dwellings, so 2400 a year probably for the last ten years and then we had less funding then, so fewer loans, so, say, 24 000.
CIARAN RYAN: Of course, a lot of the people living in the rural areas who were building additional rooms are doing that as a source of income; they’re actually renting out those rooms, aren’t they?
BRUCE GORDON: There are a few of them that are rental but rental accommodation would usually be more in a small town, our definition of rural is fairly wide, so we say outside of metropolitan areas. So backyard rentals would be more in small towns, rather than in deep rural areas, where nobody goes there to rent, people try to move away from there.
CIARAN RYAN: So if you’re living in a town like Ficksburg, Free State, and you want to add a couple of rooms, they could approach you and you would look at this?
BRUCE GORDON: Yes, we’d refer them to an intermediary or what we also do because the industry, if you look at it, is very much still white male-dominated we try to help people to start-up businesses. So we’ve got a few start-ups, we’ve got one in Harrismith, we’ve got one in a little village beyond Zeerust, which are both black women-owned and there we would refer people in those areas. Sometimes we’ll actually have someone saying I want to start this or I like the idea, can I start, then we look at ways of setting it up and we’ve got systems in place for supporting them, which we’re constantly trying to improve because we do believe that the industry does need to get transformed.
CIARAN RYAN: I see there’s been quite a lot of success that you’ve had at the Rural Housing Loan Fund, you got a tax refund of R33 million, you freed up R100 million for the business through better risk management, so you were getting better rates from your suppliers of funds, I guess, and you got commended by Parliament. Just explain how that was achieved.
BRUCE GORDON: I think Parliament likes the fact that we…one of the questions they always ask us is about interest rates, as you can imagine they know where we are targeting and they know that a lot of their constituents are in deep rural areas. So they ask us about interest rates and we now present on interest rates every time we go there. With having a clean audit report we see a lot of people saying target a clean audit report, our attitude is a clean audit report is your start, you don’t target it that must be a given, you can’t target a basic. It’s like setting a target to put your shoes on in the morning…
Staff needs to learn to say no
CIARAN RYAN: If that’s the top of your mountain, you’ve got a long way to go.
BRUCE GORDON: So that is a given and then after that, well, Rural Housing before it merged had a clean audit every year it existed. There’s a very strong board that is committed to that clean audit, a CEO and CFO who are committed to clean audit. I think one of the things that I encourage is that staff must be able to say no.
CIARAN RYAN: Say no to what?
BRUCE GORDON: To their boss. I think that is critical, I think it’s one of the areas where we have a problem in this country coming from apartheid and a struggle, where I am in charge, the military attitude from the people who were in the struggle, we were leading a struggle, we needed to have someone in charge. The apartheid government had a strong paternal idea that there was a boss, so people were very scared of saying no and so my view is to teach your staff to actually say no. They’ve got to be able to say no because sometimes you do have, as we’ve seen, CFO’s or CEO’s overriding the staff and the staff, you hear them testifying at the Zondo commission, they were too scared to say no to the boss.
CIARAN RYAN: That’s a quality that should be required of everybody who’s involved in finance, is the ability to say no because everybody is trying to spend the money and if you give them the opportunity they’ll spend everything and try and spend more.
BRUCE GORDON: Yes that’s one of the targets, I was at Legal Aid previously and one of the goals when you’re providing a service, obviously in Rural Housing we try to save money, but when you’re providing a service your job is to spend your budget, so you’ve got to make sure that budget is spent appropriately. Not, as we found with Treasury a few years ago, they had to start putting in controls because everyone was having massive workshops in March to make sure they spent their budget.
CIARAN RYAN: Of course, if you don’t spend your budget it gets returned to Treasury and then you’ve got to re-motivate the next year to get that money back.
BRUCE GORDON: Yes, I think one of the problems in government is that people do get worried about that. I think also sometimes it’s a lack of planning, where we’re going to build a million houses, therefore, can we have the money for it. When you look at the plan the construction is only going to start in 18 months’ time because you’ve got to go through all the processes. I think sometimes that lack of planning leads to money being given back and now you’re ready for the construction – I’m talking construction because I’m in human settlements – but in a lot of the areas and you don’t have the money anymore because you didn’t specify those plans upfront.
CIARAN RYAN: One of the big problems that you find in the public sector and it comes out with the Auditor General Report, which they release every year, is fruitless and wasteful expenditure, and that seems to be a massive item in the public sector. It’s got various different categories of wasteful expenditure but that seems to be the one that’s really causing a lot of trouble. How do you prevent that from happening? How do you prevent wasteful expenditure?
BRUCE GORDON: Wasteful expenditure, you need to make sure you’re doing things correctly, you need to keep an eye on areas and you need to make sure that there are proper consequences if that does happen. I think also part of it is having someone saying no. So all those aspects do help towards stopping irregular or fruitless is the biggest one obviously because that shouldn’t have been spent. Irregular, which is probably the biggest amount, which is where money is being spent without going through proper processes.
CIARAN RYAN: It doesn’t necessarily mean it was stolen, it just didn’t follow process.
BRUCE GORDON: It didn’t follow process, you might have overpaid, it might have been a process that wasn’t quite in line with Treasury. I have seen some comments on irregular expenditure, where I have thought, hang on, the AG is being a little bit over the top on that one. But that’s what they do, the one report I saw said there was irregular expenditure because they complied with the spirit of the law and not the letter of the law. I thought, well, the spirit of the law is actually what we should be doing in a constitutional democracy but that’s the AG, a little bit over-strict there.
CIARAN RYAN: The AG being the Auditor General.
BRUCE GORDON: Yes.
CIARAN RYAN: I noticed in 2010 you were involved with the Metolong Authority in Lesotho. For people who are overseas and having trouble finding Lesotho on the map, it is completely surrounded by South Africa but it is a source of water for the area of Johannesburg in the province of Gauteng. Now, that was a US$500 million dam construction project in Lesotho that was funded by ten international donor and loan organisations, this would have involved issuing tenders to suppliers and contractors. I see the project went virtually without a hitch, it was a great success. Listening to the Zondo commission of inquiry, which is happening in South Africa at the moment into state capture, it’s clear that our public sector has a deep-rooted problem when it comes to tendering. What’s your advice in handling this and just explain how this dam-building project in Lesotho went so smoothly?
BRUCE GORDON: I think with the dam-building project, I was there setting up systems and things, and once those were in place I left – I assume the systems must have worked – making sure that tenders happened, we had large consultancy groups in a tender process, you didn’t have just our employees, you had an American consultancy company, you had the government employees and you had the Metolong Authority employees all on the tender committees, which meant that there were people pulling in different directions and I think that helped the tender processes. When you put out a tender for a dam you’re expecting prices of over $100 million to come in, so you do have a fairly robust process in place. In terms of the Zondo commission, I think one of the things I like is what Barbara Creecy, the Finance MEC in Gauteng, is doing, having open tender processes, where your tender opening and tender discussions are held in public so that people know what’s going on. I think it’s a good short-term solution. I think in the long-term you’ll have people losing confidential information, proprietary information but right now it’s necessary that we do have that in place to get away from the problems with tender fraud and tender irregularities.
CIARAN RYAN: So one of the suggestions you would have is to have this open tendering process, where everything is aired in public?
BRUCE GORDON: I think that is something that I think we need to have probably for the next five or six years until we get more comfortable with the process. It does mean that some people won’t bid because of proprietary information that would come out in that but I think that’s just the risk we have to take.
BEE doesn’t impress international donors
CIARAN RYAN: Just before we went on air we were talking a little bit about this project and you mentioned how one South African company, I think it was PwC, tendered and on their tender documents they talked about their black economic empowerment credentials, which didn’t impress the international donors at all and, in fact, made them a little bit nervous. Now, of course, in South Africa you don’t get any public sector work unless you can show that you have these credentials for black economic empowerment. But you just step three hours outside of Johannesburg into Lesotho and you find it’s a completely different environment, just explain that a little bit.
BRUCE GORDON: I think the issue there is not so much a Lesotho issue, it’s the funder issue, European funders have a lot of legislation in their countries about non-racialism and they enforce it as we don’t want race to appear anywhere. I think that’s what caused that issue. I think in Lesotho itself there is probably a need for local people to be involved but obviously if you’ve got a dam construction project there are not many people in Lesotho, just given the size of it, who could construct a dam. We did have a lot of…on the PwC tender for consulting work there were Lesotho-born civil engineers but they had left the country to get work, rather than staying behind there.
CIARAN RYAN: Is the dam built?
BRUCE GORDON: Yes, it is.
CIARAN RYAN: Is it north of Katse Dam or upstream of Katse Dam?
BRUCE GORDON: No, the Metolong Dam was built to supply Maseru, it’s about 30 kilometres outside Maseru on a small river.
CIARAN RYAN: Give us a sense of life as the acting CFO at the Rural Housing Loan Fund, where do you spend most of your time, is it one board issues, negotiating with funders or is it people issues, what gives you the most headaches?
BRUCE GORDON: Most of the time it’s dealing with intermediaries, with clients, some of them will get into trouble with being too enthusiastic about growth and they land up having a lot of bad debts and you’ve got to go and help them restructure. So that’s probably where the most work goes is dealing with clients, persuading them to comply with governance about interest rates and negotiating. In terms of funders, because of us being a Schedule 3A entity we can’t really borrow much ourselves, we need to go through Treasury. So in that regard we don’t really deal with funders much. Where I did have to do it was one of our funders had a requirement that we keep 30% of our funds as cash and I negotiated that down to 10% and that’s where I freed up the R100 million. But that was a once-off issue there.
CIARAN RYAN: Who takes the risk then if there is a default, is it the intermediary or is it you?
BRUCE GORDON: The intermediary takes the risk of default on a loan. So if a person in a rural area doesn’t pay, the intermediary will write that off or if they’ve got credit insurance they’ll use that.
CIARAN RYAN: So these intermediaries that you’ve got, do they have to have fairly substantial balance sheets or how do they protect themselves?
BRUCE GORDON: We deal with start-ups, initially when we started we started up a whole lot of companies, we helped Bayport start out, which then became part of Transaction Capital, and is now independent again. The start-ups didn’t have strong balance sheets but they gradually build up those balance sheets over time. We do like them to have…even a start-up we give them a period of time to which they need to have a strongish balance sheet to affect our risk, otherwise we land up taking the risk of their business operations.
CIARAN RYAN: What’s your view on garnishee orders if somebody defaults, there has been a lot of controversy in South Africa about garnishee or emolument attachment orders, as they are also called, where the lender goes to the court and he asks for an order to have that amount that is owed deducted from your salary or your pension every month?
BRUCE GORDON: I think the way they were implemented was very poor, where there was a lot of shopping for venues…
CIARAN RYAN: Just explain what shopping for venues means?
BRUCE GORDON: Someone living in the Western Cape would be issued a loan by a company in the Western Cape and when a garnishee order was issued it would be issued out of the court in Kimberley.
CIARAN RYAN: Right, that is illegal.
BRUCE GORDON: Totally illegal and luckily I think it was a Western Cape court ruling a few years ago that made it clear that it was illegal. There were a couple of other issues where the clerks of the court were issuing. They picked up a whole lot of things out of Kempton Park, where there was one firm of attorneys who would arrive with a pile of documents and the clerk would just stamp them and all the acknowledgement of debt had the same signature on them. So I think there is a need for something like that, so there is some sort of security but I think what we are doing is similar to what they are doing in Germany now, where no more than 25% of your salary can be garnished, whereas what was happening is you could actually land up going home with nothing and that was legal if it was done through the right process in the court.
CIARAN RYAN: Well, of course, that was one of the reasons behind the Marikana massacre in 2012 when 34 miners were shot, they were rioting or striking for higher pay but the real problem behind that was that they were so indebted that they were getting these month-end loans at ridiculously high interest rates, they had nothing left. That was the problem, it was excessive lending, it was predatory lending that was behind that. So it can very quickly escalate once you have a portion of your salary garnished that it can escalate into something. Now, of course, as you said, the court has issued rules on that, it cannot be more than 25%.
BRUCE GORDON: Not the court, Parliament has actually changed the rules, I’m not sure if it’s been finalised and signed into law yet but that’s what was going through Parliament to resolve issues like that because if someone is over-indebted it’s a problem. We found that if you look at the National Credit Regulator stats there was a huge problem with over-indebtedness throughout the country.
Whistleblowers tend to get fired
CIARAN RYAN: Can we return for a moment to the Zondo commission, we’re starting to see how chief financial officers are critical to the upholding of the reputation of an organisation, be it the private sector or the public sector, in many cases finance executives allowed criminals to take over and in the process destroyed the reputations of so many good organisations. What do you think is the reason behind that, why is this happening?
BRUCE GORDON: I think when you say the chief financial officers are allowing this, I think they are almost partaking in it and that’s an issue. I think there’s a lot of greed and I think we need to address how to resolve that. As I said earlier, staff needs to learn that they can say no and whistleblowers need to be allowed more freedom, I think we are finding that whistleblowers tend to get fired, rather than the ones who are actually are awarded. When you’ve got a board that is doing that and you’ve got management involved it becomes very difficult for an organisation and we need to have a lot better boards and a lot more consequences quickly.
CIARAN RYAN: Have you seen this in practice, the whistleblower protections in an organisation? For example, at Rural Housing Loan Fund do you have a whistleblower hotline, do you have a whistleblower channel, has it been utilised, how do you respond to these things?
BRUCE GORDON: Rural Housing was a bit small, so we didn’t have our own individual one, so we basically said the one for the Department of Rural Settlements could be used, we’ve never had anything come through. At the National Housing Finance Corporation there’s a whistleblower line run by Deloitte, the reports of that go straight to the audit committee and management never sees those. I think that sort of thing is something that is important to have, you can’t track where it came from once you get it, as management all you are getting is – I have never seen one – but my understanding is you will get something on a Deloitte letterhead saying this was reported and you don’t know whether it came by phone, email or anything.
CIARAN RYAN: What advice would you have for finance executives facing challenges of corruption or let’s say a loose interpretation of the law? It may seem trite to say that zero tolerance to corruption should be the bottom line for any executive but there are cases of auditors from the Auditor General’s office being brutally attacked and even killed in one instance, what’s your view on that?
BRUCE GORDON: Chief financial officers need to take cognizance of their responsibility as professionals, whether they are charted accountancy or any other qualification, they need to know that they have that professional duty and they have a personal duty to themselves and their families not to be engaged in criminal activities because that’s where they will lose credibility. I can’t imagine what someone like Anoj Singh says to his kids at night when all this criminality comes out in the press and media. Does he go and say to them no, it’s all a lie, does he say don’t do this yourselves or, hey, I’ve given you a good education. I know that if this came out about me, my kids would probably chuck me out the house.
CIARAN RYAN: We’ve got a couple of minutes left, I just want to wrap it up with a few quick questions, what books are you reading and what would you recommend?
BRUCE GORDON: I’ve just finished reading a book called Guns, Germs, and Steel: The Fates of Human Societies by Jared Diamond, it’s a study on how we got to where we are today from being hunter gatherers and why Africa didn’t develop and why Australia didn’t develop, and why Europe and China did develop. It gives a good analysis of the advantages that nature gave to those areas…
CIARAN RYAN: And in a nutshell what are they?
BRUCE GORDON: Look at all the domesticated animals, they all originated in Turkey and the Middle East, we’ve never been able to domesticate a large animal outside of those areas. We haven’t domesticated rhino, eland here, even with the knowledge that animals can be domesticated. Of the grains that are large enough to cultivate I think the book said there are 35, and 30 of them occur in Europe and Asia. Then also the climate, if you find something fantastic in North Africa you can’t really move it down to South Africa because the climates change because of the north, south, whereas across Europe and Asia the climate stays constant.
CIARAN RYAN: Tell us about which business icons you admire, leaders you admire?
BRUCE GORDON: I looked at that question when you posed it to me and it’s a difficult one because every time you start thinking someone is a great businessman, something seems to go wrong. Possibly Jack Ma because it looks like he’s resigning from Alibaba to go back into teaching, so he’s made money and he’s said, well, I prefer teaching to making money and I am going to do that. I heard that and I Googled before I came and I couldn’t find it that that was happening but I’ve heard that that is what his goal is. So that would be, to my mind, something great.
CIARAN RYAN: So he prioritises public service over his own financial interests. I would tend to agree with you, people who do things that are motivated not by money but by public service are very admirable and there are many of them, unsung heroes in this country and elsewhere. However, we tend to get a little bit mesmerised with the finance engine of the economy and who’s making the money and, of course, they are worthy of admiration but there are a lot of people below that working in the service of the country and in NPO’s, non-profit organisations and that sort of thing. Last question, what do you do with your spare time?
BRUCE GORDON: That’s an interesting one, a couple of things, I live in KwaZulu-Natal and work up here in Gauteng, so I spend a lot of time driving up and down every week but then when I am up here I actually war game and play with toy soldiers…
CIARAN RYAN: Really?
BRUCE GORDON: Yes.
CIARAN RYAN: Do you paint them?
BRUCE GORDON: Yes.
CIARAN RYAN: Do you reenact battles?
BRUCE GORDON: Yes.
CIARAN RYAN: What battles are you doing at the moment?
BRUCE GORDON: I’m currently doing an army of Alexander the Great.
CIARAN RYAN: How many troops did he have?
BRUCE GORDON: Probably between 20 000 to 30 000.
CIARAN RYAN: And he conquered the world with 20 000 to 30 000.
BRUCE GORDON: Yes.
Acting CFO: Rural Housing Loan Fund
“With capital of over R400 million, the Rural Housing Loan Fund services a niche sector by providing short-term loans to rural home owners.”
CIARAN RYAN: That’s quite an extraordinary story. How do you reconstruct that in a way that is historically accurate?
BRUCE GORDON: You decide where you are going to start because obviously once you start doing the reenactment you start playing the game and competitively you tend to then do things differently, so it’s really about setting the scene to start with and then trying to do better or worse.
CIARAN RYAN: And you’ve been doing this since when, since you were a child?
BRUCE GORDON: I started in 1979 when I started at Wits
CIARAN RYAN: My goodness that is interesting. Okay, Bruce, we’re going to leave it at that. That’s Bruce Gordon, the acting chief financial officer for the Rural Housing Loan Fund.