North West in R4m-per-month rent scandal

DIANNE HAWKER AND CANDICE BAILEY

THE North West’s Health department will spend nearly three times more than it should if it honours its lease agreement on a R600 million head office space in Mafikeng.

But, according to the North West Department of Finance, the Health Department did not have the authority or money to authorise the lease in the first place.

This is contained in an affidavit by North West Finance MEC Paul Sebegoe as part of his argument that there is no valid and binding lease agreement between Gauteng property developers Peolwane Properties and the health department.

The provincial health department had signed, in November, a lease of R3.9 million per month for the expensive office park, but has since refused to move in.

For the past eight months, it has has been stuck in a legal wrangle with Peolwane Properties’s owner Reggie Kukama.

Kukama is asking the Mafikeng High Court to get the department to honour its lease obligations and move into the state-of-the-art office building and pay it the back rental which has accumulated to over R35m since November when the lease became effective.

The matter will be heard next week.

But in papers submitted by the provincial treasury department to the Mafikeng High Court earlier this week, Sebegoe argues that by entering into the lease, the department will spend more than it would to rent premium office space in Sandton – SA’s most expensive suburb.

Sebegoe submitted an independent property evaluation carried out for the department, showing the replacement value of the building as R261m, and not R600m.

The top rental for exceptional buildings in Joburg – labelled pioneer rentals – stood at R172.50/m2. This was the highest in the country.

But, according to property valuator Eben Zietsman, who did the valuation, the building was not a “pioneer grade” office space.

Zeitsman said the rental of R181/m2 agreed upon for the first year, is “way above” the market norm and did not include value added tax and operation costs.

According to Zeitsman’s report, a rental in Sandton last year was R132.50/m2. Similar space in Bloemfontein and Polokwane, which could be compared to Mafikeng, was between R115/m2 and R125/m2.

A fair market rental for the property would be R135/m2 – with its value as an income producing property at R264m.

“The building will cost the first respondent more than a pioneer grade office building in the Sandton CBD. The office building will indeed be one of the most expensive, if not the most expensive, buildings per square metre in the republic of South Africa,” says Zeitsman in his report.

He said the property was over designed for the purpose of the health department and was typical high density design with basements, which was needed when space was limited and expensive.

In his papers, the MEC also damned the actions of several high level staff members in the departments of Health and Public Works, saying they did not have the authority to act on the lease.

The provincial treasury was responsible for the budgets of each of the province’s departments and the Department of Health needed to present its need for a new accommodation as part of its departmental budget.

The health department, said Sebegoe, could not commit the provincial revenue fund to an expenditure for which no funds have been assigned.

“In 2008 no funds had been appropriated for the lease. At the time of the tender and at the time of the signing of the lease agreement no money had been appropriated for this purpose,” he said.

He contends that the lease entered into was a financial lease and that the head of department at health had no authority to enter into a financial lease.

Sebegoe said it was clear that the tender process was rigged because Peolwane had inside information as they were consultants for the department, through a company known as Tau Pride.

Sebegoe contends that Peolwane Properties was known as Tau Pride until 2011 and, at the time, were appointed in terms of a service level agreement as capital expenditure consultants for the Department of Health.

Tau Pride had implemented a project management unit where it co-ordinated all capital projects of the health department.

Sebegoe said it was apparent from the agreement between Tau Pride and the department of health that it was privy to, and in charge of, all major capital expenditure projects of the Department of Health.

“This (lease) would obviously have included the procurement process of the new office building for the department of health. This building was one of the largest – if not the largest – capital expenditure project undertaken by the department of health in 2008.”

He contends that the health department’s decision to remove the pre-bid meeting as a requirement to qualify for the bid favoured Peolwane, as it had not attended this compulsory meeting.

“The bidding process was rigged to accommodate a specific tenderer, who had inside knowledge.

This bidder, in another disguise, was the consultant to the very department who went out to tender.”

The lease agreement and the tender has been the subject of a forensic investigation since 2010.

The investigation was commissioned by the Department of Public Works to by auditors Gobodo Inc.

candice.bailey@inl.co.za

dianne.hawker@inl.co.za