Financial management at Water Trading Entity & bulk water supply: Department briefing; with Minister & Deputy Minister

Meeting report

Opening remarks

The Chairperson welcomed everyone to the meeting, including the Minister of Water and Sanitation, Mr Gugile Nkwinti. The Committee would be dealing with a Department that was troubled financially, and therefore there was an expectation that the meeting would be fierce. There was also the problem of drought which impacted on the work of the Department. The Committee was looking forward to hearing from the new Minister, and where he was planning to take the Department to.

Minister Nkwinti said he hoped to learn a lot from the meeting about where to take the Department and the existing challenges to be dealt with. He was beginning to understand the scourge of the challenges. The main challenge currently was having people in acting positions, especially the position of the Director-General (DG). There were also serious challenges in around finances, but the Department would do its best to offset them.                                                              
Ms P Samka-Mququ (ANC, Eastern Cape) wanted to know if there was an appointment letter from the Department, appointing the current Acting Director-General (ADG) present at the meeting.

The Acting Chairperson responded that there was indeed an appointment letter coming from the Department, appointing the current DG in an acting position.

Financial Management: Department of Water and Sanitation briefing

Ms Mbalenhle Manukuza, Chief Director: Finance Accounting, DWS, said the Department had been allocated a budget of R15.6 billion for the 2017/18 financial year. To date, R14.6 billion (93%) had been spent, leaving an available budget of R1 billion. An executive decision had been taken by the former accounting officer, Mr Dan Mashitisho, to move certain projects from the Water Trading Entity (WTE) to the DWS’s main account after the closure of the WTE’s account by National Treasury, as these projects were not deemed to be the core mandate of the WTE. These projects had been moved without a budget to the main account, as they were unfunded, and the main account’s budget had been unable to absorb them. This decision had created financial distress in the main account.

Four projects had been moved from the WTE to the DWS without funding, and these had included water services projects, drought interventions, the ‘War on Leaks’ and ‘Drop a Block.’ Payments to the value of R697 million relating to these unfunded projects had already been made by the DWS in the 2017/18 financial year in accordance with the former Accounting Officer’s directive. These payments had been made without an available budget and had resulted in cash challenges at the DWS.

The DWS had also reported to the Portfolio Committee about the Bucket Eradication Program (BEP) and the unavailability of a budget to cater for all the financial obligations of the BEP. In the 2016/17 financial year, an overdraft of R193 million was reported by DWS due to the payment of court orders for the BEP projects.

Ms Manukuza added that there had been an overdraft of R193 million when the DWS had closed the 2016/17 financial year, as well as the payment of R697 million for projects moved without a budget from the WTE to DWS, which had resulted in a cash shortfall of R890 million for the 2017/18 financial year. This had caused a misalignment between the available budget and the available cash, creating a situation where there was an available budget of R1billion, but an overdraft of R111 million to date. The unavailability of cash had resulted in the non-payment of transfers to municipalities and water boards (R198 million), as well as non-payment of current invoices (R545 million) that were in the possession of the Department. The main account was anticipating closing the 2017/18 financial year with an overdraft of R132 million after the payment of month-end salaries. This amount would likely be reduced by a receipt of R124 million from the WTE, leaving an overdraft of R8 million. The Department had decided to review the 2018/19 annual performance plan (APP) to align it with the available cash for 2018/19, after factoring in the 2017/18 year end accruals, as well unfunded projects moved from the WTE to the main account.                                                        

Ms Manukuza said that the Department had experienced challenges in terms of under-expenditure because of vacant posts across all four programmes. In the interests of cash management, most of the outstanding invoices have been deferred to the next financial year beginning on 1 April, and this had resulted in under-expenditure. The unauthorised expenditure had been due to the utilisation of specifically and exclusively appropriated funds for purposes other than what the funds had been appropriated for, mainly due to the payment for WTE projects.

Financial Management: Water Trading Entity briefing

Mr Paul Nel, Acting Chief Financial Officer (CFO): Water Trading Entity, DWS, said that the WTE was in a strong financial position. Assets exceeded liabilities by R70.2 billion, according to the 31 March 2017 audited annual financial statements. Budgets were strictly adhered to through budget blocking on the financial system. Therefore, nobody could spend unless the budget had been made available, and there was no overspending in the WTE. The existence of the WTE overdraft had been a once-off occurrence in the 2016/17 financial year due to budget cuts from National Treasury and non-payment of debt by municipalities. The overdraft had to date been reduced in line with National Treasury expectations. 

The main reasons that National Treasury (NT) had indicated to the entity for the budget cuts were that it was under-spending on capital projects and could use its accumulated surpluses to fund its capital needs. The NT requirement was not for the WTE to reduce expenditure, but it was expected that it should collect the debts owed to it to fund its capital needs. The accumulated surplus indicated by NT consisted of non-cash items and therefore did not translate into cash.                                                                                                   

In compiling the WTE 2016/17 budget, a number of assumptions had been made. These included the belief that R7.8 billion would be billed and collected from the water users in 2016/17 for current debt. Augmentation of R1.5 billion would be received from National Treasury. An amount of R2.9 billion of long outstanding debt (over 150 days) was to be received from the water boards and municipalities, and the R200 million owed by companies would be collected through the debt collector. There was also hope that the intervention of Cooperative Governance and Traditional Affairs (COGTA) and National Treasury would be required for the collection of this long outstanding debt. Clearly this intervention by COGTA and NT did not have any effect on the municipalities, hence the overdraft of R2.675 billion as at 31 March 2017. Due to the NT requirement that the WTE no longer fund any non-core projects, the Accounting Authority had had no alternative but to move the funding of these projects to the main account. The WTE budgeted to spend R748 million less than expected revenue in order to reduce the overdraft. Strict budgetary control had been exercised during the year and this surplus would be realised. The June 2017 NT target was met and as at 20 March 2018, the overdraft was R1 851 million, which was in line with the 31 March 2018 target of R1 927 million.

Mr Nel highlighted that debt recoveries were still not satisfactory and were regressing further. The debt had increased by R1.3 billion during first 11 months of 2017/18. Critical infrastructure projects --  the raising of the Tzaneen and Clanwilliam dams, the Nwamitwa dam, and the Olifants River water resources development project phases 2D, 2E and 2F -- were being delayed due to the repayment of overdraft. The Trans-Caledon Tunnel Authority (TCTA) required 100% of revenue to be paid to repay loans, even though the debt was increasing. The outstanding debt relating to TCTA had increased by R804 million during the first 11 months of 2017/18. To date, the WTE had paid TCTA for all amounts invoiced for the TCTA charge. During the 11 months to 28 February 2018, the debt relating to the TCTA charges had increased by R804 million to R4.1 billion.

The non-payment of debt by municipalities would have a negative effect on the WTE’s ability to pay the TCTA, as it would not be able to absorb this non-payment of debt. Any non-payment by the WTE to the TCTA could result in the TCTA defaulting on the loan repayments. An urgent political resolution to this problem was required.

Regional Bulk Infrastructure Impact on Service Delivery

Ms Zandile Mathe, Acting Director-General (DG), DWS, said that the Regional Bulk Infrastructure Grant (RBIG) had started in the 2007/8 financial year as schedule 7 of the Division of Revenue Act (DoRA), and had subsequently been changed to schedule 6. A total of 67 projects had been completed since inception until the end of the 2016/17 financial year at a cost of R3.9 billion. For 2017/18, 97 projects had been implemented, with 26 projects planned for completion at the end of the financial year. Five projects had been completed up to the end of December 2017. There were 23 RGIB projects under schedule 5B that had been implemented in the 2017/18 financial year and most of them were in KZN (six) and the Free State. There was no RBIG project implemented in the Gauteng municipality.

A number of projects had required co-funding, including the Greytown Regional Bulk Scheme in KZN, the Kalahari East to Mier pipeline in the Northern Cape, the Greater Bulwer Donnybrook Water Scheme in KZN and the Klawer Bulk Water Scheme in the Western Cape. There were seven projects in Limpopo without reticulation, four in the Northern Cape, six in the Eastern Cape and two in the Northern Cape. There were eight projects in North West without reticulation. There were 13 projects in the Eastern Cape that were affected by reprioritisation, 15 in the Free State , four in Gauteng and seven in Limpopo. There were also seven projects affected in Mpumalanga, and nine in the Northern Cape and North West.

The Department still had challenges in a number of areas. These included:

• Inadequate funding for RBIG projects;
• Budget cuts over the last two financial years had delayed the implementation and prolonged the completion of projects, which had impacted on the APP;
• Emergency interventions, including ministerial projects initially not budgeted for, had had a negative impact on the budget for planned projects;
• Budget/funding reprioritised and re-allocated from the RBIG to the Bucket Eradication Programme had impacted on programme performance;
• Increase of accruals on the new financial year, which had become a “vicious circle;”
• Inability of municipalities to co-fund infrastructure projects;
• Misalignment of bulk and reticulation;
• Delays by municipalities in implementing projects.

Ms Mathe said these challenges had impacted on service delivery, but had also resulted in possible litigation due contractors vacating site, community unrest, and standing time resulting in fruitless and wasteful expenditure. There was also a possible challenge because of the project cost escalations, the delayed completion of projects, vandalism of infrastructure and the budget shortfall over the Medium Term Expenditure Framework (MTEF).

The proposed solutions included the need for the Department to focus on its mandate, and alignment of government infrastructure programmes to accelerate service delivery. There was also a proposal for the finalisation of the Water and Sanitation master plan, and strengthening the Departmental leadership and regulatory role within the sector. There should be an engagement with the NT and COGTA to explore a funding model for operations and maintenance for local government, and also a look into institutional reform at the local government level.

Discussion

Mr D Stock (ANC, Northern Cape) expressed concern about the progress that had been made by the Department with the supply of water to different areas around the country. The Department should continue to do its work going forward, as there was a high demand for water in many parts of the country and many of the challenges were beyond the control of the Department. The Committee had established in 2014 that a community staying less than 1km away from the Vaal River had had no access to water. The Committee had written to the then Minister to intervene in the area. The Minister had arranged a meeting with a municipality and the money had been allocated in the readjustment budget for just that particular project to be prioritized. The allocation had been around R60 million. A problem with the project had been picked up when the Committee visited the area, and it had been mentioned that this was an area where the Department was going to under-spend. There were cases where the Department would allocate the money, but the main problem would be with the delays in the allocation of tenders, because people were fighting over who must get the tender. This was reflecting negatively on the work of the Department. He supported the proposal by the Department for the engagement with both the Minister and the Deputy Minister in order to address the problem of delays in the allocation of tenders in most municipalities.

There should perhaps be a radical approach in the implementation of some of the projects. The DWS could not allow a situation where the government went into the elections with a problem of people not having water, as it knew there were likely to be service delivery protests in those municipalities. There was a same challenge in the Department of Sport and Recreation, where there was always conflict over who should be given funds, and a decision had been taken that the Department should be the one responsible for dispensing funds for the implementation of projects.

Mr M Khawula (IFP, KwaZulu-Natal) wanted to know where the ‘War on Leaks’ was happening in the country, as it looked like there were no benefits from this project. It was also unclear as to what was being done by the young people involved in the ‘War on Leaks.’ There was an indication that the Department was withholding funds for other municipalities to implement the projects. Why was it withholding funds from municipalities? What was going to happen to those municipalities? There was a possibility that some would stall the projects because of this withholding of funds. It seemed absurd that the current Acting DG kept on blaming the former accounting officer, despite the fact that this was a team, and therefore everyone involved should be blamed. It was unacceptable for the Acting DG to isolate herself from most of the challenges that were being experienced by the Department.

Mr Khawula said that there seemed to be a change of language in the presentation made by the Department, from saying there were enough funds in the WTE, but then concluding that there were not enough funds in place. Which one should be believed? It was unrealistic to expect almost all municipalities to have money to co-fund the projects to be implemented. It seemed like there was no consistency between the amount required for co-funding and the number of households to benefit from the projects to be undertaken in these municipalities. It seemed as if there was no monitoring and evaluation in place to monitor the progress that was being made in the implementation of these projects.

Ms T Mpambo-Sibhukwana (DA, Western Cape) had sympathy for the new Minister, as he was inheriting a troubled Department. It was also clear that it was only now that the Committee was getting the views of the Acting DG on the former Minister of Water and Sanitation. The issue of outsourcing was problematic and needed to be addressed, as it appeared there was no monitoring and evaluation taking place within the Department on the implementation of the projects. There was an indication that the Department was in a dire situation when looking at the finances, and this was likely to impact on those provinces affected by drought -- not only the Western Cape, but also KZN. The three previous Presidents had promised that the bucket system would be eradicated in 2014, and the Minister would probably come up with his own deadline for the eradication of the bucket system. What was the timeframe for the eradication of the bucket system? There seemed to be frustration around the issue of finances within the Department.                   

Ms T Mampuru (ANC, Limpopo) also said that the Department should provide detailed information on the ‘War on Leaks,’ as there was a lot of money that had been allocated to the project, with no tangible benefits. The Committee should be briefed on the progress that had been made in regard to the problem with the initial contractor in Giyani, Limpopo. It was unclear if payments had already been made, as there was a concern around the non-payment of funds. Were the people of Giyani currently receiving water? The main challenge was really the lack of monitoring and evaluation in place, which had been identified as a problem by other Members. There should be available data in place on where projects would be implemented and the location of that project. It was not the fault of the Department that there had not been much rain in some parts of the country, but it still needed to deal with the challenges this created.

Ms M Moshodi (ANC, Free State) asked about the progress that had been made with the project in Edenville, a small farming town in the Free State, as this was where she came from. She had lived in this municipality from 1976, and people were getting water from a borehole. The issue of monitoring and evaluation was critically important, as had been flagged by Members. The people in her area did not receive water all the time, and they then had to fetch water from other areas.

The Acting Chairperson commented that it was absurd that the Department sometimes agreed to undertake a project that had not been budgeted for. There were media reports that young people involved in the ‘War on Leaks’ were being paid a stipend, despite sitting at home. The Committee should be briefed on the issue surrounding the overdraft. Why was the Department employing people without the requisite skills? There was an indication of reserves within the WTE, but it was unclear if these reserves were in the form of cash or assets. The Department was concerned about municipalities that were not paying for the use of water, but the most important question was whether there were any programmes in place that were aimed at educating the public on saving water and the responsibility to pay for what was being used. Were there any entities to be retained? Were these entities adding value to the Department? It seemed like there was nothing happening in KZN in terms of projects to be implemented.

DWS’s response

Ms Manukuza responded that the National Treasury had indicated that the ‘War on Leaks’ was not the core mandate of the Department. The students were to be placed in the municipalities, and therefore municipalities were the ones to be paying the salary of students involved in the ‘War on Leaks.’ The WTE had therefore requested to stop making payment for the project. The DWS was responsible for water consumption and dealing with leakages, and that was why it had been initially involved in the project.

Regarding the withholding of funds from municipalities, the DWS was in agreement that municipalities should not be penalised because of the problems within the Department. However, the DWS was between “a rock and a hard place,” as the only way to pay the municipalities was through an overdraft, and the account of the Department would be blocked again if went into overdraft. The withholding of payments was to avoid the possibility of an overdraft.

Mr Nel said that Water Trading Entity was really improving if one looked at the balance sheet of the entity. The overdraft had been R2.6 billion, but it had been brought down by R750 million, so the entity was able to pay off a third of the debt. The entity was in a better financial position than last time. However, the challenge was that the entity had had to take the R750 million to pay off the overdraft instead of building infrastructure for municipalities. There were a lot of projects that the entity wanted to undertake but could not because of a lack of funds. The entity was not building the infrastructure because there was a responsibility to pay off the overdraft which was caused by the municipalities not paying their debt. National Treasury had indicated that the entity should use its reserves to fund the projects. It was not legal to have an overdraft, as this was against the Public Finance Management Act (PFMA). The overdraft could not be condoned as it was unacceptable. The National Treasury was only acknowledging the overdraft, but was definitely not condoning it, and there was always a reminder to address the issue as it was against the law. The reserves were only to show to the bank that the entity was financially strong enough to be approved for credit, instead of having to go to National Treasury.

Ms Mathe said that the Department was indeed working as a team, and therefore it was not correct to blame the former accounting officer for everything. The issue of co-funding was dependent on the level of development in a particular municipality. KZN was the most expensive area to do projects because of the topography of the area. An agreement had been signed with the National Education, Health and Allied Workers Union (NEHAWU) to stop outsourcing for some of the projects. There were some projects where the Department felt should be outsourced because of the lack of capacity internally. The agreement with organised labour was to find a way where the Department could use internally capacity while also outsourcing some of the projects. The Department could not afford to retrench its personnel just for outsourcing.

The issue of monitoring and evaluation was critically important and the Department was in agreement with Members that it should be prioritised. The structure for infrastructure delivery did not have a person doing monitoring and evaluation, as it was filled with engineers. The Department had been asking to have people to deal with softer issues, like having to communicate with traditional leaders and labour unions. The National Treasury and the Auditor-General (AG) had also picked up that the Department was lean on other key personnel, such as project managers, and this was a challenge that needed to be addressed. The lack of enough personnel had immediately been picked up by the new Minister. The Department was planning to forward a report to the Minister that would address the key requisite skills needed and the interventions to be made.

Ms Mathe said that the Department had resolved the dispute between the contractor in Limpopo and the Department, and the contractor was currently on site. 55 villages in Limpopo were receiving water and the Department had provided a bulk water supply in the area. Giyani had been flagged as one of the areas that would need special attention for the DWS to deal with reticulation. The Department agreed fully that monitoring, evaluation and oversight of these projects was important, and it needed to work on its structure, as it was filled with technical people.

The delays on some projects would need political intervention, and this had been flagged to the Minister. The job of the Department was to lay the bulk pipelines, and Edenville did not appear as one those areas without reticulation. There was an indication that the bulk pipelines had been laid down back in 2011/12, but maybe the municipality had not made provision for reticulation. There was a need to ensure that the people were benefiting from the Edenville project. The sourcing of water from boreholes in the area simply meant that these pipes were not being utilised.

The reality was that some of the projects were half way to completion, but the Department was in a difficult situation and had decided to withhold funds. The current climate in the country showed that it was impossible to have Phase 3, but the DWS would get guidance from the political leaders. The Department had an engagement with the uMkhanyakude Municipality to address challenges with the supply of water in the area.

Ms Pamela Tshwete, Deputy Minister, DWS, apologised for her late arrival, as there had been were flights delays. The ‘War on Leaks’ was a Presidential project that had been announced in the State of the Nation Address (SONA) of former President Zuma. The plan was to train 15 000 young people to deal with leaks. The country loses around R7 billion a year on water leaks. The 15 000 young people had been divided into three phases. The Department had started launching the project with 3 000 young people in Nelson Mandela Bay, and had then gone to other provinces.

The constant changing of DGs in the Department was a major challenge, as it was affecting the stability of the Department. It agreed with the Committee that there should be a radical approach in the implementation of these projects. The Minister was currently in an induction phase, and therefore learning from engagements with the Committee and the concerns of Members. The Department was indeed financially challenging, and it was difficult to see a way forward. The lack of proper planning needed to be dealt with, as one could not build infrastructure without determining if there was enough money for a particular municipality. There was also a problem of working in silos, and there was a need to work closely with municipalities. It was really a waste to build infrastructure that would be stranded for 20 years because municipalities did not have money, as this was irregular expenditure. There was hope that there would be some engagements with municipalities, since there was now a new Minister of Co-operative and Traditional Affairs to address the payment of the outstanding debts.

The Minister said he was pleased with most of the questions that had been asked by Members, as this was helpful to identify the main concerns. The technical team was able to deal with the major issues raised by Members. It was important to fix the problem of financial instability within the Department, and there would be an engagement with the National Treasury. The issue of the ‘War on Leaks’ was linked to ways to employ young people. The Department was also aiming to deal with the problem of outsourcing, with a focus on using internal capacity. It should recruit the right people to ensure they had the requisite skills.

Adoption of Minutes                                        

The Committee adopted the minutes of 2 and 13 February, without amendments.

Adoption of Committee Programme

The Committee adopted the Committee Programme, with amendment.

The meeting was adjourned.