Briefing by AGSA on Department of Water and Sanitation 2020/21 & entities' Audit Outcomes

Meeting report

The Chairperson had elected Mr S Somyo (ANC) to be the Acting Chairperson, as he had a funeral to attend and could therefore not chair the meeting. The purpose of the meeting was for the Committee to receive a briefing from the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department of Water and Sanitation and Water Boards.

Committee Matters

The Acting Chairperson (hereafter 'Chairperson') announced the changes to the Portfolio Committee. The Committee planned to meet with the Department of Employment and Labour (DEL) and the Road Accident Fund (RAF). As the DEL was originally scheduled for Wednesday, 07 September 2022, the date was changed to Tuesday, 06 September 2022, due to a scheduling conflict. The swap would accommodate both meetings.

The Higher Education and Training Department was asked to submit a special application to meet the Committee on Wednesday, 07 September 2022. This is because of the revised programme of the National Assembly. 

Briefing by AGSA on the Department of Water & Sanitation and the Water Board

Mr Andries Sekgetho, Business Executive, AGSA, thanked the Committee for the opportunity to present the audit outcomes of the Department of Water and Sanitation (DWS). There were two document packs to be presented before the Committee. One briefing note comprised findings made by the Department of Water and Sanitation, the Trans-Caledon Tunnel Authority (TCTA), the Water Trading Entity (WTE), and the Water Research Commission (WRC). The other briefing note had the outcomes of the water boards. These were split up because the Department of Water and Sanitation, WTE, the TCTA and the WRC fell within the PFMA (Public Finance Management Act) cycle, with the year ending on 31 March. Financial statements on these entities were obtained on 31 May every year. This led to Auditor-General (AG) submitting an audited report on 31 July. Whilst the Water Boards did fall under the PFMA entities or institutions, their year-end was aligned with the local government's year-end, from 01 July – 30 June. 

As all the entities had different year ends, the AGSA produced different documents for the briefing. The institution was part of the continued evolution of the enhancement of its reporting processes. To that effect, the results that AGSA provided were contained in a report subjected to some internal stakeholder engagements. A report is intended to be tabled and formally issued to Parliament in September 2022. As a result, Mr Sekgetho requested the Committee to present only the report on DWS, WTE, TCTA and the WRC findings. Once AGSA is near issuing the water boards report, there will be another briefing on the outcomes of the water boards. 

Mr Sekgetho tendered his apology on behalf of the office of the AG for the late finalisation of the audit outcomes for the 2021/22 financial year. This was the subject of the meeting's hearing. The reason for the lateness was impacted by COVID-19 and the fact that the portfolio had a unique set of transactions in the Lesotho Highlands Water Project. The construction for the project took place across the borders of Lesotho and South Africa. South Africa had been funding the project, and it was receiving water benefits in return.

There had been consultations between AG and the TCTA, about the accounting treatment and transactions of the Highlands Water Projects. The consultations ended up reaching the Accountant-General, to seek guidance. The guidance was received, and it was issued in January 2022. Upon receiving guidance, the AG was required to unpack the guidance, scrutinise it, analyse it and assess it before seeing how it could translate the guidance into the accounting and auditing principles.

As the consensus had been reached, the TCTA and the WTE then proceeded to effect the necessary adjustments as advised by the Office of the OG. The adjustments were implemented, allowing the AGSA to proceed with auditing processes.

The audit report of the TCTA was completed on 28 March 2022, and the audit report of the WTE was finalised on 15 April 2022. Those reports culminated in the tabling of the DWS annual report in June 2022. The process panned out in this manner due to the Highlands Water Project. The TCTA acted as an agent representing the South African government's interests and had to perform certain duties on behalf of the SA government. Certain governmental procedures must take place, including quality assurance checks – before funds could be distributed. The finalisation of WTE financial statements was linked to the finalisation of TCTA financial statements. The TCTA financial statements influenced the financial accountability of the WTE financial statements. 

TCTA and WTE were contained in one annual report of the Department of Water and Sanitation. Despite being signed off in the previous financial year, the report could not be physically tabled, as it depended on the finalisation of the WTE financial statements – which depended on the finalisation of TCTA financial statements. While the annual report of DWS was signed off in the 2020/21 financial year, it could not be tabled. This is because the TCTA and WTE reports were contained in the same report. 

Mr Sekgetho said it was important to outline this to the Committee so that the Committee could understand the reason behind the lateness of the audit outcomes for the 2020/21 financial year. 

Overview: Executive summary on Department of Water and Sanitation

The Audited-General of South Africa had included an executive summary of all key messages of the outcome's components outlined in its presentation.

Overall, the combined audit outcomes of the portfolio have regressed due to the regression of the DWS from an unqualified audit opinion with findings in the prior year to a qualified audit opinion with findings. WTE and TCTA remained stagnant, receiving an unqualified audit opinion with material findings on matters of compliance.

AGSA qualified the training and development costs, and the related payables, as the Department did not adequately reconcile the invoices received from a supplier, through an appointed implementing agent, to the supporting evidence of learners actually trained, relating to the War-on-Leaks Programme.

Material corrections to the financial statements resulted mainly from internal control weaknesses over the recording and reconciling commitments, accruals and payables. The internal control weaknesses have been a challenge for the Department for a number of years. It is important that the Department implements an appropriate audit action plan to address this challenge. 

The Department continued to incur material amounts of irregular expenditure amounting to R265 million during the year. The majority of the irregular expenditure was caused by deviations from normal procurement processes, which were deemed unjustifiable. These deviations included extension of contracts without prior approval by the delegated official, and payments exceeding the commitment value of contracts. Of the total irregular expenditure, R81 million related to the Mopani emergency water and wastewater intervention. The irregular expenditure incurred for this related to deviations from normal procurement processes.

Investigations into instances of irregular expenditure and allegations against departmental officials were delayed during the year, resulting in consequence management processes not being effective. Management indicated the delays experienced were due to the impact of COVID-19. The lockdown contributed to the availability of staff to conduct the required investigations; this resulted in delays.

No material findings were reported on the audit of the annual performance report. The AG scoped in and audited programme three of the Department. Material corrections were, however, made to this programme, as a result of insufficient processes in place – to ensure consistent measurement of the information received from some regional offices to support the reported achievement.

In addition, it should be noted that only 10 of 22 indicators have been achieved under programme three. This represents a 45% achievement for the programme. The main reason for the non-achievement of targets are challenges with contractors, protests and delayed procurement and contract processes. Overall, on the annual performance report, the Department achieved 62% of the planned targets for the year. 

As disclosed in the appropriation statement, the Department materially underspent the budget by R2.492 billion. This included R95 million on programme one, R104 million on programme two, R2.238 billion on programme three, and R55 million on programme four. The Water Trading Entity's audit outcomes remained unchanged, with an unqualified financial audit opinion – with findings on compliance with legislation. Material misstatements of non-current assets and disclosure items, identified by the auditors in the financial statements submitted for audit and corrected by management, resulted in the financial statements receiving an unqualified opinion. 

Management of the entity did not implement adequate preventative internal controls to avoid non-compliance with legislation. This resulted in the following:

The incurrence of irregular expenditure amounting to R179 million in the financial year was caused by irregular contract extensions and approval of deviations, where it was practical to invite competitive bids and procurement of goods and services of a transaction value above R500 000 – without inviting competitive bids. Fruitless and wasteful expenditure amounted to R157 million in the financial year. This was caused by losses or abnormal costs incurred on internal and external projects and interest payments to accounts that were long overdue. Some payments were not made within 30 days or within the agreed period, after receipt of an invoice – as required by National Treasury regulation 8.2.3. Consequences management steps were not being taken against officials who had incurred irregular and fruitless and wasteful expenditure. The balance of irregular expenditure as at 31 March 2021 is R7.9 billion, and fruitless and wasteful expenditure is R223 million. Ineffective consequence management processes have led to delayed condonation of irregular expenditure over the years. 

The entities (TCTA and WTE) have not demonstrated sufficient steps in responding to the audit finding raised during the 2019/20 audit, concerning the overpayments of royalties to the Government of Lesotho (GOL). SA has been making payments on an incorrect and outdated net-benefit of the royalty rates of the Lesotho Highlands Water Project (LHWP) scheme, since the year 2007. This resulted in overpayments of royalties to Lesotho. The actual amount of the overpayments will only be determined after a re-computation of the net benefit, as provided for in the Treaty signed by the two governments.

The financial health of DWS has been at an overall concerning state for two consecutive years. DWS still takes longer than legislated to pay its creditors, which is evidenced by high amounts in accruals and payables that have been outstanding for more than 30 days, as disclosed in the financial statements. The Department currently pays creditors after an average of 81.6 days. Delays in paying suppliers impact suppliers' ability to perform in accordance with contract terms, and that may impact the Department's achievement of service delivery targets. Therefore, the Department also continues to be exposed to penalties and interest.

Vacancies in key management positions still persisted at DWS and WTE, as at 31 March 2021. DWS continued to have acting incumbents for the accounting officer and CFO posts, as at 31 March 2021; these positions were not officially filled for a significant period of time. However, these positions have since been filled. In addition, the significant positions posts of DDG: Corporate Services, and DDG: Human Resources, which were vacant, were filled after the financial year.

Acting incumbents do not always have the ability to contribute to effective and sustained improvements in audit outcomes, as they do not have sufficient time to effectively implement initiatives they have started. For the same reason, acting incumbents are also not always effective in improving service delivery performance.

The audit outcome of TCTA remained a financially unqualified audit opinion, with material findings on compliance with legislation. Inadequate reviews of the financial statements and supporting schedules resulted in material misstatements identified on current and non-current assets and liabilities, revenue and expenditure line items, and schedules that do not agree with the financial statements submitted for audit.

TCTA continued to incur irregular expenditure amounting to R1.7 million in the current year (For 2019/20, it was R142 million). There was also a notable reduction in the incurrence of irregular expenditure from the prior years, which resulted from improvement in controls within the SCM during the financial year, as management centralised the contract management function to the procurement division. The entity further developed and implemented a contract management policy and procedure. Consequence management remained an area that requires intervention, as no steps were taken against officials responsible for the incurred irregular expenditure incurred by the TCTA. The balance of irregular expenditure, as at 31 March 2021, was R806 million; fruitless and wasteful expenditure was R4.6 million. These ineffective consequence management processes also resulted in delayed condonation processes of irregular expenditure over the years.

In accordance with the PAA and the material irregularity regulations, the AG is responsible for reporting on material irregularities identified during an audit and on the status of material irregularities reported in the previous year. There were no new material irregularities identified in the current year at the DWS, but the AG is still following up on one materiality irregularity that was identified in the past. This related to payment made without evidence of actual work performed. The matter was still in court, and the Department is waiting for the court judgement, with anticipation to recover the funds. 

A material irregularity amounting to R29 million relating to site re-establishment costs and standing time was issued to the WTE, during the 2020/21 financial year-end audit. This material irregularity related to raising of the Hazelmere Dam Project, where delays were identified in the procurement of permanent load cells required for the project. This resulted in the contractor incurring fees for standing time, leaving and returning to the site with their equipment (site re-establishment), due to disputes over non-payment by the entity. The accounting officer is currently in a procurement process to appoint a professional service provider to perform an investigation into material irregularity. The investigation seeks to identify, amongst others, the root cause of the irregularity, responsible official(s), and the remedial actions to be taken.

WTE demonstrated progress on the previously reported material irregularities, where the material irregularity on effective and appropriate steps not taken to collect all money due to entity amounting to R346 million was fully resolved. The entity has since billed all the customers previously recognised as accrued revenue not billed. Furthermore, the accounting officer demonstrated improvement in controls within the revenue management division. They also appointed a chief director of revenue management, and a chief director for water-user licence operation; these officials were to exercise the necessary oversight within the division, more particularly in the licensing and billing processes. The material irregularity relating to payment not made within 30 days resulting in additional interest amounting to R2.2 million, is still not yet resolved; this will be followed in the 2021/22 financial year's audit.

The internal risk management unit of the Department had previously investigated this material irregularity, as per the request from the accounting officer, and had found three former officials responsible for the non-compliance. Recovery letters were sent to the former officials in May 2021; those officials responded via their legal representatives, requesting their representations on the matter to be considered. The investigation was then re-opened/extended. The accounting officer had committed to finalising the extended investigation by 31 May 2022. The AG's office has since requested an update on progress and outcome of the extended investigation, and is awaiting the accounting officer's response.

No material irregularities were identified in the current and prior financial years at the TCTA.

Change and implications of the accounting treatment of the Lesotho Highlands Water Project: the accounting treatment of transactions and balances pertaining to the LHWP has been a matter of contestation, in reference to the mandate and operations of TCTA – on how these are translated to the accounting records.

TCTA sought an external technical accounting consultation on the accounting treatment of the LHWP costs. The AG also assessed the same. However, there were differences between the AGSA's assessment and the technical opinion sought by the TCTA. This led to the matter being referred to the office of the Accountant-General (OAG) for assessment. The OAG performed an assessment of the nature of these transactions, and provided a report on how these must be accounted. TCTA adopted this report.

In terms of the report, the transactions relating to the LHWP are now to be accounted for in the books of the WTE, as the TCTA was deemed to be only acting as an agent in these transactions. This resulted in significant adjustments to the statement of comprehensive income of the TCTA.

Closing Remarks on the presentation

The Auditor-General reached the end of the presentation and appreciated the patience that was exercised by Members, as the presentation was long. The AGSA tried to summarise the presentation, but there was a lot to discuss. Mr Sekgetho said that the privilege of presenting to the Committee is often used as an opportunity to make recommendations on matters. The recommendations are to stir matters in the right direction.

He recommended that the Accounting Officer and the Executive Authority examine how they would implement preventative controls. There should be systems of internal control to prevent some of the problems outlined in the presentation. He emphasised the area of supply chain management as well as the delays in procurements.

Mr Sekgetho also suggested that the Department must implement consequence management plans. Some of the delays adversely affected service delivery. Project managers should be held accountable for some of the delays.

In the year 2021/22, the accounting officer made progress with the Minister on the War-on-Leaks Project. There was robust engagement with the implementing agent and the service provider providing the training. The AGSA said it would provide more context and detail in this regard after the 22 March financial year-end audit.

The interventions and the engagements that must happen between the two countries must be guided by the political principles. These principles must be expedited to ensure that this issue of royalty payments is put to bed once and effectively. The calculations must be concluded to ensure that South Africa has received equal value for what it has paid for.

[See presentation documents for more details]

Discussion

The Acting Chairperson said that he would be facilitating the discussion on the reports. He commented that the reports were detailed to provide guidance on methods that would enhance functionality. He gave the opportunity to Members so that they may engage the presentation.

Ms B van Minnen (DA) thanked the Chairperson for the opportunity. She asked about the Highlands Water Project. Can the AG provide oversight of the current government structures and the effectiveness of those structures? There was a situation in the Highlands Water Commission where South African delegates were not appointed. There were vacancies. Has that been changed? If so, what sort of state is the government structure at this stage?

Ms A Beukes (ANC) thanked the opportunity and asked not to switch on her video to strengthen the network bandwidth. On programme three, she noted that there was underspending on an infrastructure project and that one of the reasons was the municipality's delay in finalising the design and environmental impact assessment. What was the reason for those delays? Was this caused by a lack of monitoring tools?

There was a notable improvement in the areas of qualifications for the Water Trading Entity. However, the financial statements remained a problem. Was the improvement due to the appointment of consultants? Were the consultants used to prepare the annual financial statements? How often do the consultants have an engagement with the Department? When was the last engagement, after filling the vacancies in senior positions, which took place in January 2022?

What progress has been made in developing an action plan to address the current situation?

Responses by Auditor-General of South Africa

Mr Sekgetho stated that the Minister of Water and Sanitation had been accessible. This assisted in AGSA's engagements with the Department. There had been regular meetings with the appointed Accounting Officer (AO) and the Chief Financial Officer (CFO). The AG compiled the first report on the KZN flood disaster relief programme with assistance from the Department of Water and Sanitation. The office of the AG had been having meetings with the Minister to engage on the audit report and the disaster relief programme. Mr Sekgetho stated that he commended the Director-General, Dr Sean Phillips, the appointed CFO and the Minister for their accessibility. Their accessibility has assisted with bringing the highlighted matters on the report to their Accounting Officer.

There was a meeting which took place in January 2022 – between the office of the AG and Dr Phillips. The meeting was to inform the Department of the key issues that the AG wanted the Department to focus on. There has since been an improvement. The outcomes that the AG presented were for 31 March 2021. The outcomes for March 2022 showed that the Department had improved in terms of accountability. The appointed AO and the CFO had taken good strides in resolving the issue of accountability. This led to the discovery that the Department had been overpaying and not receiving value. The Department could now engage with implementing agencies and service providers to implore recovery processes while the engagements of fees owed to the Department are being discussed.

Preparations of financial statements did not rely heavily on consultants. The management team prepared the financial statements under the guidance of the appointed CFO. There was certain control in the material misstatements. However, there is room for improvement.

The small gaps that the Auditor-General identified were corrected. The audit of the Department's financial statements for the 2021/22 financial year would reveal fewer issues since internal controls have been implemented.

The reason for the underspending in programme two was caused by a concern around planning and oversight measures, as highlighted on page 13 of the report (See slide 13). In a particular project, the Department outlined some challenges with contracts and protests.

Mr Sekgetho responded to a question by Ms van Minnen about governance and oversight on the Lesotho Highlands Water Project. The project was set up in a complex structure. South Africa makes payments to an institution or agency on the opposite side of the border. The money is then used to build the project. The Treaty was written with a clear articulation of the roles and responsibilities of stakeholders. These stakeholders are the Trans-Caledon Tunnel Authority, the Water Trading Entity and the Department of Water and Sanitation.

The DWS represents the interests of government. On the opposite side of the body, there is Lesotho Highlands Development Agency - which represents the Lesotho government. The Treaty makes provision for the Lesotho Highlands Water Commission. The Commission is the central body that ensures that the transactions between the two governments are fair. The payments made to Lesotho are scrutinised to see what has been purchased. Evidence then gets submitted to the Commission.

The Commission must then sit and see if the payments are justified. Has there been any over or underpayments? If errors are identified, they are brought forward to be corrected in the year. If South Africa has paid 60% and received 50% worth of services, the payment made by South Africa for the following year would be 10% less. Those particular key controls and steps were not put into place in past years – from 2011, at least. The Auditor-General wants to improve that so that there will be accountability. There must be an oversight that will provide recent numbers on the project, and reports on how much the South African government has spent so far.

The Commission does have delegates from South Africa and the Lesotho government. This ensures that there are fair processes in place. The Auditor-General would provide the Committee with more accurate numbers of the finalisation of appointments after consulting the Department of Water and Sanitation. As the Department was dealing with the overpayments of royalties, it was also making changes to the delegates.

The TCTA and its role: the TCTA sources money from the market, and avails it to the Lesotho government for project purposes. That leads to South Africa getting and selling water. Money acquired from sales of water is used to pay for liabilities. The TCTA, which represents South Africa, and the representative from Lesotho both read the metres to ensure that the delivered quantities are accurate. That information is then used to generate the invoices and the amount that will then be due to be paid to the Government of Lesotho. The Auditor General has identified a few gaps where the process was not done diligently; the office is ensuring that there are representatives from South Africa signing on time. This is to assist with figuring out the correct figures to be paid as royalties.

Mr Sekgetho concluded his responses.

Closing Remarks

The Acting Chairperson appreciated the presentation and the responses from the AGSA. He added that the presentation provided massive clarity. SCOPA must prepare even further for engagement with the DWS on what the AG office had deliberated on. There are financials and a 2021/22 report, which AG handled. The Chairperson also asked what the indication for the tabling of such financials and audit reports is.

Mr Sekgetho indicated that DWS submitted its draft annual report to the office of the AG for review. The Office was busy reviewing the annual report and ensuring it contained audited financial statements. In addition, it ensures that whatever is in the report – be it forewords and explanatory notes – does not distort what transpired during the auditing process. Once the Department has finalised its tabling, the process would continue to provide audit outcomes.

The Chairperson thanked Mr Sekgetho for his response. The report was a long one, but appropriately so, because it contained a chunk of information. SCOPA will engage with the Department, going forward.

He thanked everyone for attending the meeting.

The meeting was adjourned.