Department of Water and Sanitation on its 2017/18 Annual Report, with AGSA & Treasury input; with the Minister

Meeting report

DWS annual report: AGSA input

Mr Stephan Kheleli, Senior Manager: AGSA, said that they existed to strengthen democracy as an oversight body. Their role was to reflect on the audit work performed to assist the Portfolio Committee in its oversight role. The annual report would examine three areas: fair presentation and absence of significant misstatements in financial statements; reliable and credible performance information for predetermined objectives; and compliance with all laws and regulations governing financial matters. He emphasised the need for accountability, and said that for accountability to happen there needed to be plans in place where targets were defined. Through the continuous monitoring of their progress throughout the planned period, they identified gaps and transgressions, and where these arose, they had to put in place consequence management to deter the type of behaviour that they did not want. Once the DWS had done this, they were more likely to have better audit outcomes, thus leading to a better impact on service delivery.

This year, AGSA had gone into more detail with the planning phase, and were explaining how the portfolio had failed in the planning phase, which had shown signs of regression. In the “doing” phase, there were areas that showed regression and some areas that showed improvement. AGSA also wanted to highlight some of the positives with regard to the DWS portfolio, as 33% of their audits had resulted in clean audits, while the quality of financial statements was also sitting at 33%. 

The Water Research Commission (WRC) had once again received a clean audit, and this formed part of the 33% that he had referred to. The DWS itself had received qualification on the completeness of fruitless and wasteful expenditure (FWE), as the prior year finding had not been addressed, as well as the completeness of irregular expenditure (IE). It was also qualified on commitments due to not having adequate systems in place to process records-related projects. The Water Trading Entity (WTE) retained a qualification on its property, plant and equipment, and the completeness of FWE.

Regarding regression in audit outcomes in the current year, he said that in respect of compliance with key legislation, in the past two years the WRC had had clean audits, moving from qualified audits in the three years before that, but the DWS and the WTE still had challenges.

In their audit report, the AGSA always reflected on three key areas with regards to legislation compliance. They looked at expenditure management, revenue management and payment, and procurement management.  AGSA had found that the DWS had submitted their financial statements after the legislated date, and had thus noted it as a non-compliance. The financial statements that were submitted had material adjustments that needed to be cleared. Those that management had not been able to clear had resulted in qualified audit opinions. They also had non-compliance around expenditure management. With procurement management, they were able to clear some of the hurdles, yielding a better audit outcome than last year. Non-compliance around consequence management was also noted, where in some cases disciplinary hearings had not yet been held and some disciplinary steps were not yet taken on some of the irregular expenditure.

The AGSA also looked at the outcomes of the status of internal control and assurance provided, splitting the status of internal control into three -- leadership, financial performance and governance. The WRC was able to achieve clean audits in all three categories. The WTE had produced results that required intervention in two categories, while yielding good results in one category. DWS had had good results in one category, matters of concern in another, and results that needed intervention in the third category. The assurance provided was split up into levels, where level one included senior management, the accounting officer/authority and the executive authority. The WRC yielded results that provided assurance in all three categories, while the DWS and the WTE’s results showed no assurance in all three categories. The second level consisted of the internal audit unit and the audit committee. The DWS, WTE and the WRC all provided assurance in both the categories. At the third level was the Portfolio Committee, and this also provided assurance. One of the problems AGSA had pointed out was that when recommendations were given, management was slow to act and implement, and this proved to be a problem.

In the key focus areas of oversight and monitoring, financial management, performance management, procurement and control management, financial health and compliance management, all of these areas require intervention. Human resource (HR) and information technology (IT) management were areas of concern.

Ms Surette Taljaard, Senior Manager: AGSA, briefed the Committee on the management and delivery on key programmes, focusing on spending performance and reporting. This was to show how much of the budget was spent on a particular project and the achievements of that programme. It also indicated if material misstatements had been corrected, and three of the four programmes had corrected misstatements. Where the Department could not correct some of the mistakes, this resulted in an audit with material findings.

She also looked at the key projects selected for the audit. For each project, four areas were considered -- budget versus spending, financial management, compliance and pre-determined objectives. One of the projects was the emergency intervention of the refurbishment of the Vaal waste water treatment plant (WWTP), and this project had yielded material findings for all four areas. Because it was an emergency intervention, there had been no initial budget set for it, so that was why it had material findings in the budget versus spending area. With financial management, some of the refurbishments were not recorded as assets. With compliance, some of the processes were not followed correctly, and because this was an emergency intervention, there were no pre-determined objectives. The “War on Leaks” project also had material findings in most of the areas, and once again this was due to the project not initially having a budget. The financial statements on this project, and the Bucket Eradication Programme (BEP), showed irregular spending.

Mr Kheleli presented on the financial health of the DWS. For both the Department and the WTE, the audit had material findings. The Department was still in an overdraft position and the accrual and payables were still increasing. It still had some unauthorised expenditure, while the WTE also still had an overdraft.

Ms Taljaard said the Department had an overdraft of R119 million and had unauthorised expenditure of R526 million. This was an indication that a material uncertainty existed that may cast significant doubt on the department’s ability to continue as a going concern.

Mr Kheleli described the financial health of the WTE, noting that there had been an improvement in the cash/cash equivalents from 2016/17 to 2017/18. The surplus/deficit for the year had also improved slightly. Unauthorised expenditure increased over the past five years, and some of the material findings that included unauthorised spending in the “War on Leaks” programme that exceeded the budget, as well as unauthorised expenditure exceeding the budget on the infrastructure planning services. Fruitless and wasteful expenditure had also increased from last year. A significant contribution towards this was caused by contractor invoices not being paid, resulting in interest of R11.5 million. Irregular expenditure depicted an improvement. The WTE had been able to correct the 2016/17 irregular expenditure in the current year, thus removing the qualified opinion on irregular expenditure. The most common findings were on supply chain management (SCM). Regarding fraud and consequence management, both the entity and the Department had held disciplinary hearings and taken disciplinary steps in 2015/16, but in 2017/18, some disciplinary hearings were not held and disciplinary actions not taken.

Mr Kheleli referred to some of the Minister’s commitments, as well as the recommendations to the Portfolio Committee, and said one of the problems identified by AGSA was that management was slow to respond to recommendations, and sometimes had plans in place that did not necessarily deal with the root causes of the problems. Some of the recommendations made included requesting feedback from management on the implementation and progress of action plans to address poor audit outcomes during quarterly reporting.

He concluded that AGSA considered the three factors which led to corruption -- a monopoly, discretion and accountability. The one area which had a potential to change, thus affecting corruption was the accountability factor. Lower accountability, and lower service delivery, increased corruption levels.

Discussion

The Chairperson said that water was a right that everyone had access to, yet some were able to own water that others could not access. In the midst of a drought, water resources were truly tested, and yet there were some farmers in the Western Cape who had been able to donate water -- which was supposed to be a national asset -- and he was concerned as to how that could happen.

Mr D Mnguni (ANC) referred to the AGSA comment which showed that corruption was equal to monopoly, plus discretion, minus accountability. He would like to know when a formula would be drawn where prison was equal to consequence management, plus case opening, minus popularity, or one where good governance was equal to ethics, plus human capability development, minus corruption. He also asked for clarification of AGSA’s view that inadequate monitoring of SCM legislation resulted in non-compliance with SCM legislation, especially due to poorly motivated deviations. The presentation had also indicated in some cases, the Department’s cause for ongoing concern was the failure by implementing agents to follow proper procedures. Did this mean that the Department was doing well, and that the problem was the implementing agents that were doing as they wished, or were there other issues within the Department itself that were causing the problems that led to qualified audits?

Mr L Basson (DA) said the AGSA report was like a horror story that just keeps repeating itself year after year. He took issue with the fact that the Department had no problem spending money, yet they saw no results from this spending. He noted that 95% of the budget was spent on the water and infrastructure development programme, yet it only achieved 29%. He wanted to see better leadership, particularly from the new Minister. The Committee received excellent reports from the water research team, yet they did not see the same from the Department. If people were not capable of doing their jobs, then the Department must get rid of them. He added that the previous Minister had been arrogant and did not follow or even take into consideration the recommendations of the Portfolio Committee.  He was glad that there was a new Minister, and noted the work that he had done, but would like things to change now.

The Chairperson asked about the emergency intervention in the Vaal, where due processes had not been followed in the procurement phase. He also observed that consequence management had been a major issue, and was one of the areas that they needed to move broadly on. He also asked the AG to reflect on the unjustified deviations in the infrastructure programmes.

AGSA’s response

Ms Taljaard referred to the emergency intervention of the Vaal water works refurbishment, saying that because it had been an emergency, the Department had needed to revise its methodology for dealing with it. It had not complied with the grant conditions, for example. When AGSA spoke to the Department, they recommended having processes and procedures in place for events like these so that they had checkpoints.

With regard to the implementing agents, the DWS uses a lot of implementing agents, and last year it did have an intervention to better manage them. Most of the irregular expenditure had come from old projects.

Mr Kheleli also touched on the emergency procedures and said that procurement processes allowed for deviations during an emergency. He used the example of a tender where normally the advertisement would be up for 21 days, but during an emergency the Department might want to cut short that time, which gave it the ability to test the market. Without testing the market, it was likely to get inflated prices, as demonstrated in the previous projects spoken about. When looking at legislation around emergencies, the Disaster Management Act provides three months for an emergency.

Regarding concerns about the DWS as a going concern, as well as the implementing agents, when one looked at compliance one would see that there were hurdles that the Department and the entities needed to clear. The Department would need to do this first before they could try to clear the implementing agents.

With the challenges around irregular expenditure, where deviations were not adequately justified, used the example of the contamination in the Vaal system, where the DG had felt a need to deviate immediately to try and resolve the issue. The AGSA had wanted to know if there were mechanisms in place that could have prevented the emergency. They had found that there were reports that alluded to the contamination, but the Department had not done anything until it was too late, and they had had to go into a state of emergency. He also fully concurred with Mr Mnguni that there should be better governance. He emphasised the importance of consequence management to aid in deterring unwanted and unethical behaviour.

To answer Mr Basson’s question on the leadership, and what they considered in comparison to the WRC, he said AGSA noted the high turnaround rate in the accounting officer position. If one could ensure stability in positions, people would be better able to perform their jobs. Stabilising this position was key to tackling the problems faced. The CFO positions had to be equally stable and filled with capable candidates with good ethics.

The Chairperson commented that the simple point that Mr Kheleli was trying to raise on this matter was that the Department needed to have a DG as soon as possible.

Mr Basson said that the financial performance of the Department in 2017/18 had been very poor. He wanted to know who had agreed to pay performance bonuses when the Department had not achieved, and staff were therefore not deserving of these bonuses.

Mr Mnguni wanted to know what the actual performance of the DWS was, as there were many figures in the presentation. He also observed that Mr Kheleli had mentioned that many of the problems could be solved through stabilising the DG role -- but what about the senior management?

The Chairperson asked the Minister to call on one of his Department representatives to answer the question related to the performance bonuses.

Ms Ndileka Mohapi, Acting Deputy Director General (ADDG): DWS, explained that the lower level employees were the ones who had received these bonuses, as their performances were not linked to the outcomes of the Department. For instance, if the cleaners cleaned the offices well, they would get their bonuses regardless of the outcomes of the Department. The bonuses were not for the directors or senior management, and maybe only one or two directors had received a bonus.

Mr Basson said that bonuses should be linked to outcomes, and the Department could not be paying bonuses when they claimed not to have money for adequate service delivery.

Department of Water and Sanitation: Annual report for 2017/18

Mr Gugile Nkwinti, Minister of Water and Sanitation, said that after taking over from the previous minister, he had decided to establish a branch around planning, monitoring and evaluation. Upon listening to the AG’s presentation, he realised that indeed it had been a good idea to set up this branch. He had asked the branch to do an analysis of the report by the AG, using the annual performance plans of the Department. 

Ms Petunia Ramunenyiwa, Acting Chief Operating Officer (COO): DWS, starts by giving an overview of the service delivery environment, discussing the operations of the water resource system during 2017/18. She listed the water supply systems that operated in the five provinces during the drought conditions, focusing particularly on the Umhlathuze system in KwaZulu-Natal (KZN), where there was a 20% restriction on the domestic use of water, a 10% restriction on industrial use of water and a 70% restriction on the irrigation use of water. Another issue faced was the level of ground water resources which continued to deteriorate significantly in the Western Cape, the Eastern Cape, the western and southern parts of the Northern Cape and the central part of Limpopo.  Last year, KwaZulu-Natal, Gauteng and Mpumalanga had depicted a good increase in ground water levels.

Due to funding pressures, the DWS’s operation and maintenance (O & M) had not received the requisite funding, so some of the maintenance duties could not be performed.

An overview of departmental performance indicated that the adjustment of the 2017/18 APP included adjustments to the “War on Leaks Programme” and also revised annual milestones for some strategic The key highlights included the 267 graduates who were performing remunerated candidacy work. The annual international relations programme saw four young people being trained in Japan. Three had received their Master’s degree in engineering, and one had received a Master’s degree in international relations. In Botswana, there was a cooperation agreement that provided for joint monitoring and management of the water quality and aquatic weeds in the upper Limpopo River.

Among the Department’s strategic objectives, it had achieved 56% against the targeted 30% departmental procurement to support black entrepreneurs in the sector. The one area that had not been achieved within this programme was the audit for the 2017/18 financial year, which had yielded a qualified audit opinion. For programme 2 (Water Planning and Information Management), the objectives that were not achieved were the river systems with water resources classes and resource quality objectives determined. The reason for this was the fact that public consultation took longer than anticipated and affected all planned deliverables. The bulk water supply and sanitation services infrastructure project was also not achieved, as there was some reprioritisation that needed to be done due to budget constraints and a change of priorities by municipalities. The Department had failed to implement 54% of the Asset Management Plan (AMP) due to having to earmark the capital expenditure (CAPEX) budget to cover the operating expenditure (OPEX) shortfall, and this had impacted on the availability of funding for certain maintenance projects.

The overall organisational performance -- the consolidated main account and water trading -- showed a 55% achievement rate, with 19% of targets partially achieved and 26% not achieved. The spending of the Department against the allocated budget shows that the final appropriation was R15.6 billion and expenditure was R15.1 billion. 97% of the budget had been spent. The reason for going over budget in Programme 1 had been the “War on Leaks” project.

In 2017, the deficit had been R89 million, and in 2018 there had been a surplus of R514 million. The overall under-spending was mainly due to the impact of the unfunded and over-committed projects, with ripple effects over the medium term expenditure framework (MTEF), and payments not processed at the year end.

Ms Ramunenyiwa said that unauthorised expenditure had amounted to R933 million. Loans had amounted to R924 000. The “War on Leaks” and expenditure incurred in respect of infrastructure planning had involved some unauthorised expenditure.

The overview of the water trading performance showed that revenue from exchange transactions had been R10.9 billion, and revenue from non-exchange transactions had amounted to R1.7 billion. The total expenditure had amounted to R13.2 billion, which had left the WTE with a deficit of R572 million. The receivables from exchange transactions had shown an 11.2% increase due to non-recoverable debt. The overdraft account had decreased by 35.4% due to strict cash flow management.

The overview of the AG’s report had shown that both the Department and the Water Trading Entity had received qualified opinions, largely due to fruitless, wasteful and irregular expenditure. An audit action plan was being developed to address the findings raised by the AG. Some of the key actions include a detailed audit action plan, with specific corrective actions and milestones. The implementation of post audit action included a comprehensive reconciliation of all contractual obligations by the Department and implementing agents with respect to the elimination of irregular, fruitless and wasteful expenditure. With property, plant and equipment, the need to appoint an expert to perform annual useful life and impairment assessments was highlighted. Within the Department, the material uncertainty related to the going concern included an overdraft involving unauthorised expenditure, and accruals and payables. This was the same for the WTE. Some of the progress made in clearing the matter included stricter application of internal controls and consequence management. A financial recovery plan had also been developed.

The overview of human resources showed that 87% of vacancies had been filled. Regarding employment equity, there were 3 340 African males and 2 338 African females employed, 272 coloured males and 145 coloured females employed, 57 Indian males and 63 female Indians employed, as well as 419 white males and 277 white females.

The report also provided information regarding misconduct cases, showing the type of misconduct as well as the number of cases for each type. As an example, the misuse of state vehicles showed up in six cases, and fraud showed up in four cases. There had been a total of 24 cases of misconduct.

The overview of compliance with preferential procurement requirements showed that a total of R1.32 billion was spent on black-owned suppliers, while R166.77 million was spent on women-owned suppliers. Support for businesses which were owned by military veterans, youths and people with disabilities, as well as rural//township-owned businesses, was also depicted in the presentation.

The analysis of the main account showed that under administration, the Departmental management only partially achieved all their targets. Under water planning and information management, the water ecosystem was unable to achieve any of its objectives, and the sanitation planning and management was only able to partially achieve all its objectives. Under water sector regulation, 43% was not achieved for economic and social regulation.

She referred to the breakdown of the grants per region, and said that KZN had spent 97% of their budget for the direct Regional Bulk Infrastructure Grant (RBIG). Only the Magalies and Sedibeng Water Boards were not at a 100% expenditure level for the RBIG. With the direct Water Services Infrastructure Grant (WSIG), only the Free State and Mpumalanga had not spent 100% of their budget.

Discussion

Ms Ramunenyiwa said that the Budget Review and Recommendations Report (BRRR), which the DWS needed to mention, was not in the presentation, but they had noted the information and some of the recommendations.

The Chairperson asked what she meant when she said that they had noted the recommendations, as the recommendations were there for noting and implementation.

Ms Ramunenyiwa replied that what she meant was that the DWS would be implementing the recommendations.

Ms Deborah Mochotlhi, Acting DG: DWS, said they had already started implementing some of the recommendations, and progress was indicated on a spreadsheet. The plan to deal with the findings of the AG had not been approved by the Department’s internal audit committee, as they did not agree with some of them. The delay was due to the Department querying and disputing some of the audit findings. The Department would be meeting with the audit committee on 18 October, and she hoped the plans would be approved then.

She had noted the concern with regard to the budget being a certain amount, but the achievement not meeting that amount, and said that the budget was not only based on the APP, but that there had been certain operational matters on which the budget had been spent.. Another issue was that where the Department had not achieved a target, it was not necessarily because they had not spent money. On some of the projects, money had begun to be spent.

The Chairperson referred to members of the Department that had “jumped ship,” and asked if there was any recourse to bring them back so that they could account for their transgressions.

Mr Basson asked why the “War on Leaks” overspending had different amounts in the presentations of the Department and the AGSA.

Mr R Hugo (DA) asked if any action had been taken against officials who permitted irregular expenditure, and wanted to know what steps had been taken to prevent unauthorised expenditure.

Mr Mnguni asked what the reason for the late submission of statements by the Department was. How was the dispute between the Department and AGSA resolved? Did the Department have a plan to deal with the irregular, fruitless and wasteful expenditure?

DWS’s response

Ms Mochotlhi said that Mr Paul Nel, Chief Director (CD): WTE, would answer the question on the dispute with AGSA, as it was largely on the WTE side, but she added that the Department had ended up conceding to AGSA.

Ms Ramunenyiwa would respond on the plans in place, as well as the irregular expenditure in the “War on Leaks” and the difference in the figures presented by the Department and AGSA. Mr Nel would also touch on the age of debts, which were largely from municipalities.

On the question of whether people who had “jumped ship” would be held accountable for their transgressions, she said some criminal cases had been opened.

Mr Nel referred to the appeal of last year, and said the WTE had just needed more time, and that everything had been sorted out in the current year. On the age of the debt, the debt continued to grow. The municipalities were still not paying the Department, and they had collected only 90% of the debt. The water boards were also not paying, but this was due to the fact that the municipalities were not paying them.

Mr Frans Moatshe, Acting Chief Financial Officer (CFO), DWS said the figure for the “War on Leaks” in the Departmental presentation related to actual payments made for the whole programme. The figure in the AGSA presentation was for overspending on goods and services. Regarding the prevention of unauthorised expenditure, the Department had put various interventions in place. One of these includes awareness on the consequences of irregular, fruitless and wasteful expenditure, making sure that officials were aware of the “do’s and don’ts.” They also had regular communication with all officials. Another intervention was making sure that the Department did not spend money that they did not have. All commitments needed to be confirmed by the Department, making sure that funds were actually available.

With the Water Boards, the tackling of irregular expenditure would take the same approach of awareness. Officials would be made aware of behaviours that would not be tolerated. There would also be continuous monitoring.

Mr Mnguni said that the Department needed to have a more robust approach. It was not enough just to make people aware, because if the Department did its research it would find that the people were aware. With no consequences, the same behaviour would continue to happen.

Minister Nkwinti referred to the promotion of black industrialists. He said there was a need to generate various groups of people from disadvantaged backgrounds, and not to hire the same people across the board. That was what the Department would be doing from now on. The Department had spent a lot of money on the “War on Leaks” project. There had been irregular spending on this project which had been meant for operations.

The meeting was adjourned.