Umgeni, Rand, Magalies Water Boards 2019/20 Annual Report; with Deputy Minister

Meeting report

Opening Remarks
The Deputy Minister, Mr David Mahlobo, introduced the delegation from the three water boards.

Umgeni Water 2019/20 Annual Report
Mr Thabo Tselani, Deputy Chairperson: Umgeni Water, said that Umgeni is liquid and solvent as emphasised by the Auditor-General giving the water board an unqualified audit opinion. Umgeni Water is a bulk water supplier in the uMkhanyakude area in KwaZulu-Natal with 70 water treatment works and 590 million cubic metres which is equivalent to 1 395 mega litres was supplied in 2019/20 by the water board. This is an 8% increase from the previous year. Sustainable and affordable water will continue to be supplied to the residents of KwaZulu-Natal.   

Ms Nomalungelo Mkhize, Acting Chief Executive: Umgeni Water, outlined the Umgeni Water supply area on a map; the reporting and staff structure at Umgeni Water and its five-goal strategy and the water and wastewater treatment process. On the performance of Umgeni Water, 88% of the key performance areas were achieved for 2019/20 and bulk water supply systems were excellent with customer satisfaction showing the water supply was successful. 55% of targets on water infrastructure projects were met and 35% of Contract Participation Goals (CPGs) were achieved. 268 temporary jobs were created through the Capex programme. Water loss was maintained well below the target of 5% with a recorded total of 2.91%.

Umgeni has five strategic risks identified under operational resiliency. Three risks: financial viability, compliance with laws and regulations and security of all assets, have been managed above reasonable response effectiveness. On water resource adequacy, there are three water resource dam developments in Smithfield Dam, Hazelmere Dam and Ngwadini Dam and work is in progress to complete the projects. R33 million was spent for training and development of the by Umgeni Water internal workforce. Financial viability has been maintained due to sound financial management in 2019/20.

Ms Kajal Singh, Umgeni Water Acting CFO, said the financial performance of Umgeni Water decreased by 5% as a result of the economic conditions caused by COVID-19 but the water board remains in good financial health. It obtained an unqualified audit opinion but there were findings including irregular expenditure of R713 million. A profit of R1.3 million was achieved which was lower than the previous year, revenue increased by 17%, bulk water sales increased by 7.9%, cost of sales increased by 9% with internal maintenance reduced by 6%, direct staff costs increased by 8% and raw water increased by 12%. The gross profit improved by 3% from the previous year and other operating and administration costs increased by 49%. Return on assets were reduced, the net finance income reduced by 16% and net income was 16% lower than the previous year. There was a 12% improvement on the balance sheet, R184 million was spent on rural development projects, investments increased by 47%, debtors days increased by 2 days and the borrowing limit for the financial year had not been reached. Cash flow improved by 20% and the focus for the next few years will be to preserve the financial resources for financial sustainability. 

Rand Water 2019/20 Annual Report
Ms Masaccha Mbonambi, Deputy Chairperson: Rand Water, said that 2019/20 was a difficult year for Rand Water due to Covid-19 which affected its operations and the Capex execution plan but a rollout is expected in 2020/21. Rand Water was appointed to implement the National Command Centre project on behalf of the Department of Human Settlements, Water and Sanitation. The Department of Basic Education had appointed Rand Water for its emergency water supply project. The projects were part of the initiative to fight against Covid-19 and the work of staff and management at Rand Water is commendable. The overall performance of Rand Water was 104% and it achieved an unqualified audit outcome with findings on non-compliance with supply chain management (SCM) prescripts which is concerning. Some of the audit findings came from the 2018/19 but were only noticed in the year under review which is a matter of concern. Another concern is the growing municipal debt balance which could affect the liquidity, credit rating and the ability to repay its debts. Rand Water has been trying to implement the credit management policy but the failure of municipalities to repay debt has put a strain on the liquidity of Rand Water and has delayed the rollout of Capex programmes. The matters require urgent attention with the help of the Portfolio Committee.

Mr Sipho Mosai, Chief Executive: Rand Water, outlined the strategic objectives of Rand Water as well as the area of supply. He gave a financial, environment, customer and operational overview. There was a decrease in credit quality of 72 days, a customer satisfaction rate of 89.5% and R79.5 million was spent on corporate social investment. He outlined the daily water consumption and its strategic pillars included Integrated Monitoring, Non Revenue Water, Waste Water Resources, Water Schemes, Waster Water Schemes and Vertical Integration. He listed the top ten risks in 2019/20 which included the failure of critical installations, disposal of water treatment residue, credit and debt management, capacity to supply sufficient quantity and quality of potable water to customers and the impact of climate change on future sustainability of the company.

Ms Matshidiso Nyembe, Rand Water CFO, noted a performance increase in revenue (6%), gross income (2%), EBITDA (3%), net income (8%), total assets (12%) and Capex (47%) and a decrease in total liabilities (3%) for 2019/20. She provided a cost breakdown and net operating expenses and said that interventions have been explored for credit management and debt collection. She outlined the fruitless, wasteful and irregular expenditure noting that irregular expenditure was R183.5 million which is an increase from the previous year. On consequence management, 55 employees had been identified to undergo consequence management . The SCM function has been developed to ensure that the operating model is functional. The five-year Capex activities were noted.

Mr Mosai highlighted a 5 step audit action plan and the root causes for the audit findings. He concluded with the five year strategy for the operations, compliance and governance environment and the innovation hub focus of Rand Water. 

Magalies Water 2019/20 Annual Report
Mr Thembinkosi Twalo, Deputy Chairperson: Magalies Water Board, said Magalies Water had performed well in both financial and non-financial aspects which is evident in the clean audit and the non existence of fruitless and wasteful expenditure. Challenges were experienced which affected performance such as population growth and the emergence of new settlements. Another important concern is the debt owed by municipalities to Magalies Water as well as the poor quality of the raw water treated as it requires a lot of work. Municipalities compromise the quality of this water from Magalies Water. The grading of municipalities is also a challenge as the last grading was done in 2014 which affects the valuation of Magalies Water.

Mr Psychology Mkhize, Chief Executive: Magalies Water, outlined the strategy of the water board. He provided a map of the areas of the water treatment plants and the key customers including the service limitations under Section 29 and 30 of the Water Service Act for municipalities. Magalies Water received an unqualified audit opinion with an improvement of performance and reduced findings for 2019/20. Non-financial performance was 93% with 38 KPIs achieved and he noted the performance achievements. On financial performance, 92% of targets were achieved and the only target not achieved was the average debtors’ days. Repeat audit findings were five instead of the targeted two.

Ms Matshidiso Tabane, Magalies Water CFO, said that the financial position increased in inventories (11%), receivables from exchange transactions (9%), cash and cash equivalents (25%) and property, plant and equipment (2%). Irregular expenditure was not incurred for 2019/20. R4.6 million was submitted to National Treasury for condonement and R1.2 million is still pending Board approval. There was also no fruitless and wasteful expenditure for 2019/20.

Discussion
The Chairperson appreciated the work done by the water boards and their presentations.

Ms M Mohlala (EFF) said that Umgeni Water irregular expenditure was R730m, of which R699m was from previously concluded contracts. There was a contract deviation of R14m. Irregular expenditure is serious misconduct that involves mismanagement of funds caused by corruption and looting and should not be taken lightly. She asked for the reasons for the contract variations and their outcomes. On the fruitless and wasteful expenditure for penalties of R15 000 paid for late loan repayments, she asked for mitigation strategies in place to address this. She also asked for the consequence management in place.

She noted that the Rand Water war on leaks trainee recruitments were 10 469. She asked for clarity on the war on leaks campaign was launched in 2015 when 15 000 unemployed youth were trained. She requested a report on the campaign. She asked how much debt was written off in 2019/2020 financial year and the financial implications for the water board.

Historically Rand Water financed its capital programme through debt including borrowing as well as cash generated from operating activities and the amount of capital funds has decreased over time. She asked if Rand Water can reduce its cash requirement in the coming years by increasing the portion of the capital programme funded through borrowing. If Rand Water increased borrowing for the capital programmes, it could remain within the targeted maximum debt of 0.4 and would still be within the borrowing limit as determined by National Treasury.

Did Magalies Water have a system in place to determine if the existing bulk water and sanitation system is adequate to factor in the population growth rate since population growth is a concern? On the Madibeng water restrictions, she asked if the rights of the residents were considered when the decision was taken to stop water supply until the Madibeng account is settled. Sometimes the residents pay for the water but the municipality misuses the money. She asked how the matter will be resolved because the residents cannot be punished for the actions of the municipality.

Ms G Tseke (ANC) applauded the three water boards for the outstanding work and services provided to communities throughout Covid-19. She applauded Magalies and Rand Water for receiving clean audits. In January 2021 an advert called for nominations for  the Umgeni Water board and she asked for progress on the board appointments. On the Umgeni listing of stakeholder engagements, the role of traditional authorities is not seen and she asked if the traditional authorities are involved in the development of communities.

Ms Tseke said the Rand Water war on leaks training is commendable but only 16 learners were absorbed which is a drop in the ocean. She asked for the strategy on the way forward on how learners will be absorbed and how will municipalities be involved in this process. The grading of the water board was last done in 2014 and she asked for the DWS plans for reviewing the grading as it is affecting the water revenue of the water boards. She appreciated that there was no irregular expenditure at Magalies Water.

Ms N Sihlwayi (ANC) appreciated the work done by the water boards against all odds with municipalities not paying and Covid-19. Rand Water had managed the extra work to provide water in water tanks to communities. On the skills provided and capacity that has built, she asked what the skills are that are supposed to be transferred to municipalities and what the plan is for absorbing the trained skilled youth. It is important to have content on how work is done and the lessons learnt from Covid-19 from Rand Water. She requested Rand Water present a consolidated report on the lessons learnt from Covid-19 so there can be policy improvement. On programme performance, she asked for the lessons learnt in identifying strengths and weaknesses and ways to improve government.

Ms S Mokgotho (EFF) asked Umgeni Water on the corrective measures in place to counter Umgeni achieving only 75% of its performance objectives in rural KwaZulu-Natal. She asked if irregular expenditure caused by non-compliance could have been avoided, if so, why not. Rand Water irregular expenditure was R183.5m and she asked why effective monitoring systems are not applied to detect non-compliance of the Preferential Procurement Policy Framework Act (PPPFA) at an early stage to prevent irregular expenditure. If systems are in place, irregular expenditure will not be discussed at the end of 2020/21. She asked for details on the Magalies financial account and if it increased water sales as a result of the full capital programme. She asked for an explanation of how the capital programme and water sales have been incorporated into the 2019/20 business model. She asked how Magalies will fund the expansion of the Vaalkop scheme.

Mr M Mashego (ANC) said the presentations dealt only with 2019/20 but the challenges of the prior years will not be addressed unless a separate report is requested for matters raised in previous years. There is an element of good work being done by the water boards. He asked what the existing relationship is like between the water board and the voters and if it is accountable to the voters. The voters pay for water services to the municipality but the municipality decides not to pay the water board. Is it fair on the voter not to receive water? He asked how the rights of the voter are respected in the process.

Umgeni achieved 32m cubic meters which is equivalent to 90% but the CPG states that only 35% was achieved. He asked what the 35% means and if it can be accepted as a good achievement. Operational optimisation had achieved only 5% and he asked what this 5% means and if this is a good achievement. What is the plan to balance the 35% and the 5% despite the clean audit outcome? Magalies requested grading which DWS should assist with. He appreciated the water boards. The Atmospheric Water Solution school project where water was generated from air should have been presented by the Deputy Minister because the work was impressive. The project should be implemented in other provinces in the rural areas.

The Chairperson applauded Magalies for its clean audit as well as Rand Water and Umgeni for their unqualified audit opinions. She asked Umgeni and Rand Water if there were repeat findings and about an audit action plan to ensure that SCM risks do not repeat themselves. Irregular expenditure should be attached to the individuals responsible and there should be consequence management. The Chairperson asked Umgeni and Rand Water to give assurance that the audit findings are being addressed. Umgeni had a decrease in maintenance and she asked if this would not affect infrastructure in the future and if there is a plan in place to increase maintenance.

On Rand Water training of artisans, the Chairperson asked if this group is made up of old or new people and if there are engagements with municipalities to hire these artisans. Most of the water boards reported water loss and she asked if the municipalities are engaged about the people trained to prevent this.

On the debt owed to municipalities, the Chairperson asked the Deputy Minister for progress in the engagements between SALGA, National Treasury, DWS and the Portfolio Committee. Madibeng is under administration and the administrator was reported to be arrogant. The Portfolio Committee suggests that there is collaboration with the provinces on the municipalities under administration. She asked if there have been DWS engagements with provinces to ensure that administrators are helping with the repayment of debt by municipalities. Why is Modimolle-Mookgophong Local Municipality not being taken to court as there must be payment of water services.

On the DWS institutional support to water boards she asked what the identified challenges are and how the water boards can be strengthened to maintain sustainability in providing services to communities especially quality water. Rand Water noted that the chemical supplier was changed to avoid problems. The Committee had asked for a briefing on how chemicals can provide employment in the country. She asked about the progress of this presentation to the Committee.

Umgeni Water response
On consequence management, Mr Tselane replied that in August 2020 there were court pronouncements on the appeals by service providers. An forensic analysis on the tenders was done by Umgeni Water in partnership with the Special Investigating Unit (SIU). Most of the forensic investigations have been concluded and the report finalised. A roadmap for the implementation of corrective actions has been drafted to avoid the resurfacing of the same issues. Consequence management is key and the water board is in the process of working with a reputable law firm to ensure that consequence management is applied and that there is a change in the culture that resulted in the findings.

On stakeholder engagements in the province with traditional authorities, he replied that an inclusive approach is ensured with traditional authorities and the end users part of the system. On the 5% achievement, he replied that this was misinterpreted as an under achievement but the 5% target represents the minimum level of water loss to avoid water losses above 5%. The 5% does not represent an achievement but a preventative measure.

On irregular expenditure, Ms Mkhize replied that the irregular expenditure noted from previous years meant that compliance in previous years was being observed to determine the increase of irregular expenditure that has been disclosed as per National Treasury instruction notes. Umgeni wanted to identify contracts that had been concluded in previous years and determine where the instruction note was not applied which is why the irregular expenditure has increased.

There is a detailed investigation process for irregular, wasteful and fruitless expenditure so that appropriate actions can be taken – either recovery or relevant consequence management – as recommended by the ongoing investigations. The process has not been concluded but once it has the report will be forwarded to National Treasury for condonation. Through consequence management implementation there will be an evident reduction in irregular expenditure.

Umgeni Water is also evaluating the SCM policies and procedures to ensure they are up to date with legislation. There have been extensive engagements with National Treasury to ensure this.

On the corrective measures for tender bids, there are engagements with National Treasury and assistance is being provided by external entities for bid specifications, adjudication and evaluations to strengthen the processes to prevent the same issues resurfacing from the delayed appeals.

On product quality, she confirmed that most treatment plants belonging to Umgeni did achieve excellent quality. The contract participation goal (CPG)  refers to the programme for sub-contracting SMMEs in predetermined areas under Exempt Micro Enterprise (EME), Qualifying Small Enterprise (QSE), black owned, youth owned or women owned. The CPG target of 35% procurement means that all procurement above R500 000 per bid or per contract must have 35% going to these identified SMMEs. This target was achieved.

On the reduced maintenance and its impact on infrastructure, Ms Mkhize replied that only critical maintenance that is not done would affect infrastructure and there were plans in place to ensure a catch up process to avoid these infrastructure failures.

Rand Water response
Ms Mbonambi replied that a report on the lessons learnt, strengths and weaknesses experienced during Covid-19 will be put together by management as well as on the relationship between the water board and voters. This is a difficult balancing act because water boards are supposed to be sustainable organisations so quality water services are provided and Capex programmes are delivered. Where assistance is required by municipalities in paying water debts, the water boards have to adjust certain processes which has been done especially during Covid-19. At the start of the current financial year, credit management policies and processes were evaluated to determine how debtors can be accommodated.
 

The challenge is the trend where end users take water boards to court because municipalities failed to pay the service providers which is concerning. However, measures will be implemented to try and meet the end users halfway. It is important that there is collaboration amongst government to ensure that quality services are delivered.

Non-compliance to SCM prescripts is an issue and corrective measures have been implemented to improve the SCM control environment. All active contracts have been reviewed to ensure that irregularities are identified and recorded. Consequence management is being addressed through the assistance of the loss control committee with assessments to identify wrongdoing. A submission has been made to National Treasury for R1.5 billion and a follow up has to be made with Treasury to ensure that the condonement of irregular expenditure is clear and permissible. The board is implementing an irregular expenditure framework and there are hopes that Rand Water will be working towards a clean audit.

Mr Mosai explained about borrowing limits and capacity for borrowing that in the current financial year there will be high volumes of borrowing to try and find a balance on the weighted cost of capital. On the 2015 War On Leaks report, he replied that the report will be made available to the Committee. When the war on leaks programme was initiated it was a bottom-up approach where all municipal requirements and needs about leaks were explained including high non-revenue usage and water loss percentages. The students were identified but the challenge in the absorption of those trained has been due to budget constraints in the municipalities. There are engagements on resolving this. The Cooperative Governance and Traditional Affairs (COGTA) Minister has also been involved in trying to address this to ensure that the learners are absorbed into the municipalities. It is impossible for Rand Water to absorb all the learners because they were not formally trained on the needs of the water board but of the municipalities.

The specific skills include artisans who have the technical ability to attend to leaks on site and water agents who assist with water conservation. The War On Leaks programme is important because the skills are required at a municipal level. Skills development can never be a waste but the challenge is the absorption of the learners.

On the local production of chemicals, most of the chemicals are manufactured in South Africa but the challenge is with the input materials to produce the required chemicals such as salt. Rand Water has started internal pilot projects where chemicals are produced and the dependency on external chemicals is reduced.

Magalies Water response
On the impact of population growth on infrastructure, Mr Twalo replied that a master plan has been developed and submitted to DWS. Magalies is ready but the challenge is the funding for the implementation of the master plan. The concern about grading is a result of the challenge to the borrowing limit.

On the municipalities that are not paying, Mr Twalo replied that it is unfortunate that the system is structured this way because paying consumers are affected. Municipalities receive grants from government and decide how to allocate the money. Some municipalities make water payments when receiving subsidy funding but others do not which affects debt collection.

Mr Mkhize replied that the Madibeng water challenge is difficult. A water board is expected to be self-sustainable and not to receive funds from the fiscus or from Treasury. Section 30 of the Water Services Act states that water boards can be involved in other related activity that does not impact negatively on the ability of the water board to implement its core mandate. The provision of services to Madibeng has been exhausted because if services are provided then the water board will incur irregular expenditure but there is compassion for the residents of the communities. The matter can be resolved if Madibeng agrees to implement the ministerial directive given in 2020. However, the Madibeng council refused to implement the directive so assistance cannot be provided by Magalies Water.

On the modeling of capital infrastructure programmes in alignment with the water sales programme, Mr Mkhize replied that there is alignment. When capital infrastructure is planned the master plan covers all areas of operations to ensure that all capital infrastructure programmes result in increased water sales to municipalities and operational efficiency to reduce costs.

On Modimolle-Mookgophong Local Municipality, a legal route has been considered but government relations have not been exhausted. Instead Magalies is monitoring the payment agreement with the municipality made in 2020/21 and solutions will be made to resolve issues.

Department of Water and Sanitation (DWS) response
Ms Deborah Mochotlhi, DWS Acting Director-General, replied that the institutional support DWS is doing to assist water boards starts with the planning process water boards have to undertake and these reports have to be signed off and approved by the Minister. The reports are submitted to DWS which has regular engagements with the water boards on the reports and plans and a summary of the status of the water boards is forwarded to the Minister.

DWS contributes to the sustainability of the water board by giving directives to implement projects and by appointing the water board as the implementing agent for projects in a water services authority.

DWS also assists the water boards with disputes with municipalities and water service providers. Interventions are implemented if there are disputes between the board and the CEO. When personnel of the water boards have concerns, the matter is escalated to DWS and is dealt with accordingly.

The Department assists water boards with their borrowing limit. Assisting water boards also comes as a DWS expense on resources because the areas that the water boards cover are smaller than the areas DWS is responsible for. The water boards have to be strengthened to expand their area of operation especially in assisting municipalities in delivering water services because these processes take time.

Deputy Minister response
Deputy Minister Mahlobo stated that the debt owed to water boards and the Eskom debt can be discussed by the Ministers of COGTA, Human Settlements, Water and Sanitation as well as the Deputy President. There are ongoing engagements with SALGA but the matter has not been resolved because the debt continues to increase. The debt is a result of the many municipalities that are in bad condition, even though payment arrangements are made, the municipalities still default on the payment. There are some that are trying to pay.

The Deputy Minister said that all contracts between all the water services authorities and the water boards must be honoured. Contracts need to be enforced even if it means approaching the courts. If the non-payment culture continues, the water boards will cease to exist and the current administration will be blamed for the collapse of the water boards. This debt requires the assistance of the Portfolio Committee and a report on this still has to be forwarded to the Committee. The Deputy Minister said that although citizens have the right to access water, the rights have to be balanced with the ability to pay for the services as the cost of resources that relate to the tariffs has been outlined. The sentiments of the Committee on reducing water supply to communities is understood by the Department and will be dealt with accordingly. The water boards have the responsibility to deal with irregular expenditure and consequence management. The investigation reports will not be in vain as action will be taken because corruption cannot be tolerated.

The Deputy Minister replied that uMhlathuze Water has the Atmospheric Water Solution and that it is a good system that must be implemented in other provinces. On chemical production, there are efforts to produce the chemicals locally. Municipalities and water boards have raised resource capacity where some service providers have not adequately conducted the logistics and management for the required chemicals. The manufacturing base has to be increased and the water pipes also have to be manufactured locally. Input costs for infrastructure investments must promote black industrialists, localisation and manufacturing capacity.

Deputy Minister Mahlobo applauded the leadership of the water boards for their outstanding audit outcomes but said that there is room for improvement. The relationship with water services authorities will be improved. In some cases those municipalities without capacity reject the assistance from the Department and claim that the water boards are expensive.

The Chairperson thanked the Department and the delegations from the water boards.

Meeting adjourned.