Turnaround plans to address Water Trading Entity challenges and audit outcomes; with Minister and Deputy Minister

Meeting report

Minister's opening remarks

Mr Senzo Mchunu, Minister of Water and Sanitation, said the Department's priority for the next two years was to have water security throughout South Africa. The Department was busy with various schemes which were progressing well.

The first scheme was the Lesotho Highlands Water Project (LHWP)-2, where there were two weeks left for government to clarify the letter indicating there was no objection. The UMkomazi offtakes had been finalised and the Department was making progress in signing off the offtakes, and was ready for funding to start the project.

There would be a partnership launch with mines in Limpopo via the Lebalelo Water User Association. A 50-50 partnership would lead to various villages in Limpopo getting water. The project would cover 96 villages, while 38 other villages in the west wing of the project and would be getting water from the Flag Boshiello dam. These villages had not been covered with water in terms of services. It was going to take a few years to implement this project. There was good progress with the Loskop Dam project, including the Thembisile Hani Municipality and the Dr JS Moroka local municipality.

There had been repositioning of water boards in the Western Cape. The Overberg Water Board would cover the whole of the Western Cape. This was being done while the Department was waiting for projects to start early in 2023. The Department was waiting for the final meeting about the Umzimvubu Dam regarding another ongoing project.

The National Water Resources Infrastructure Agency was making progress on its Bill. There was a continuation of the main project, which sought to strengthen the municipalities regarding providing water. The DWS had taken a long time to realise that municipalities were declining and becoming incapable of carrying out their duties. There was an initiative to intervene and assist various municipalities to get back on track.

Issues of pollution were driving the DWS to address the infrastructure incrementally. There had been letters issued to the eThekwini Municipality after an assessment of the sewage spillage. An intervention was being made by the DWS.

The report of the second quarter would cover the financial aspects of the DWS and its response to the Auditor-General of South Africa's (AGSA's) recommendations.

There had been an 98% recovery in Gauteng to address the water outages. Load-shedding had resulted in the reservoirs not having sufficient water, as there was less pumping. The heat wave had also caused people to use piped water for various household duties, which led to a decline in water available for households. The DWS had held a meeting with various stakeholders and established a War Room.

There was an article in the Daily Maverick which had not articulated the situation precisely. It had neglected to mention that there was a heat wave and load-shedding. The Vaal River was full, but the challenge was the inconsistency of pumping water to the metros. At the moment, they were back to full operation and the recovery was expected to be complete soon.

The purpose of the presentation was to brief the Portfolio Committee on the Department's progress on its financial and institutional turnaround plans to address the challenges related to the Water Trading Entity (WTE) and strategies to address the audit outcomes highlighted by the AGSAfor the 2021/22 financial year.

Strategic priorities of the DWS

Dr Sean Phillips, Director-General, Department of Water and Sanitation (DWS), outlined the strategic priorities of the Department. These were to:

• Plan and implement a range of major projects to augment national bulk water resource infrastructure, e.g., Lesotho Highlands Phase 2, uMkhomazi.
• Guide and lead the development of other water resources, including groundwater and desalination.
• Establish the National Water Resource Infrastructure Agency (NWRIA) to own and manage national water resource infrastructure, and to raise finance for its further development.
• Strengthen the role of the DWS in regulating, supporting and intervening in municipalities where municipal water and sanitation services were deteriorating, linked to the reinstated blue, green and no-drop regulatory monitoring tools.
• Strengthen regulatory interventions to address pollution of the environment and communities from waste water.
• Increase participation of private sector finance and skills in the water sector.
• Continue to improve water-use licence turnaround times and promote transformation in water use.
• Guide and lead increased water-use efficiency and demand and conservation management, including addressing non-revenue water at the municipal level.
• Fight corruption in the water sector at all levels of government.
• Improve billing and revenue collection across the water value chain.
• Establish remaining catchment management agencies.
• Transform irrigation boards into water user associations.
• Reconfigure and reorient the water boards.

Establishment of the NWRIA

The 2022 State of the Nation Address (SONA) contained the following statement relating to the NWRIA:

“Legislation has been prepared for the establishment of the National Water Resources Infrastructure Agency and will be published for public comment within the next month.”

There were several reasons for its establishment.

Financial rationale

The country required an ongoing and sustained water resource infrastructure build programme, in addition to effectively operating and maintained existing assets. However, the DWS could not rely on significant fiscal support to develop the required infrastructure due to fiscal constraints. An agency would be better positioned than the Department to raise funds from sources other than the fiscus.

 

Based on its Public Finance Management Act (PFMA) listing and authority, credit rating and condition of assets, the Agency could raise commercial and development finance domestically and internationally. For some projects, it could also enter into public-private partnerships (PPPs). The current financial model used by the Trans Caledon Tunnel Authority (TCTA) of raising finance backed by offtake agreements and explicit government guarantees, could be expanded by levering the assets on the Agency's balance sheet to raise finance without government guarantees.

 

Governance and transparency

Establishing the NWRIA would strengthen governance and transparency in the water sector by separating the roles of player and referee. In other words, the DWS would retain responsibility for regulation, policy and price setting, whilst the Agency would finance, build, operate and maintain water resource assets.

Rationalisation and integration of entities and reduction in fragmentation

Establishing the NWRIA would address the current fragmentation of asset management and revenue collection functions for national water resource infrastructure. Currently, these functions are fragmented between the TCTA, the WTE and the Department, and the establishment of the NWRIA would enable them to be integrated into one entity

Mandate and functions of the NWRIA

• The Agency would be established as a wholly owned and controlled state-owned entity (SOE), governed by the prescripts of both the Company’s Act and the PFMA, and had to comply with all other legislative prescripts and best practice codes, such as the King IV code.
• Implement water resource management infrastructure as identified in water resources planning processes within the DWS.
• Manage national water resources infrastructure of both an economic and social nature.
• Generate and collect revenue from the sale of water as its primary source of income.
• Develop options to increase the sources of revenue, e.g., recreational use of assets and hydropower.
• Raise commercial funding on the strength of its balance sheet and operational cash flows (actual and projected) for commercially viable projects.
•  Facilitate public private partnerships.

Water assets and current related tariff income

(See attached presentation document for details)

Increased investment through the NWRIA

The funds currently available from the fiscus and the TCTA were insufficient compared to the amount required for water resource infrastructure to meet the country’s economic and social needs. R10.2bn per annum was required for developing national water resource infrastructure, and the refurbishment backlog was estimated to require an estimated R36bn. R6 bn was insufficient to effectively operate and maintain the existing infrastructure.

The current TCTA and fiscus funding model was constrained. The TCTA funding model depended on government guarantees from National Treasury (NT), which were limited. There was no more scope for the NT to provide more guarantees to the TCTA.

However, once well established and with a good credit rating, the NWRIA (incorporating TCTA and WTE and all the water resource infrastructure assets in the WTE) would be able to raise additional funding, or enter into blended finance agreements or other forms of partnership with the private sector without NT guarantees on the strength of its balance sheet, credit rating and current and future revenue collection.

This could enable the current build programme to be increased from investing approximately R10bn per year, to a threefold increase of approximately R30bn a year.

Proposed water resource infrastructure charges

Dr Phillips outlined the revised draft national pricing strategy for raw water use charges as follows:

• Operations and maintenance - charge recovered on a scheme or system basis.
• Depreciation component for the purposes of funding the refurbishment cost.
• Future infrastructure build charge for the purpose of funding social and economic development and a stimulus for water resource infrastructure
• Capital unit charge to fund government water schemes off-budget, in order to raise loans to finance the development of new infrastructure and service the loans through cost recovery.

Key milestones, progress and remaining processes for the establishment of the NWRIA

The legislation and the detailed business plan for the NWRIA were currently being run in two separate but parallel processes, which were coordinated so that they were aligned.

The draft business plan had been developed and submitted to National Treasury. The Minister of Finance's approval of the business plan had been required in terms of the PFMA, before the NWRIA was established.

Cabinet had granted approval on 3 August for the Bill to be published for 90 days for public consultation. The Government Gazette had published it on 16 September. The Bill would be introduced to Parliament for endorsement.

The consultation with affected stakeholders was taking place between October and November, and based on the comments received, the Bill would be revised by January 2023 and introduced to Parliament for endorsement. National Treasury would schedule the NWRIA under the PFMA.

Transitional arrangements would start after the Bill and the business case had been passed and approved.

The delegates continued to speak about the other important aspects of the NWRIA, which included the transfer of assets and staff, managing key risks, and the financial turnaround plans.

(See attached presentation)

The Chairperson thanked the DWS for the presentation and requested the right verb tenses -- the present, past and future tenses -- as that would assist in understanding what had been achieved, what was being achieved and what was to be achieved. The Committee should be advised in time about the launches so they could be present if possible to avoid being seen as not supportive of the DWS's initiatives.

Discussion

Ms G Tseke (ANC) asked about the realignment of catchment management agencies (CMAs). The DWS had decided to give each province one CMA, but in Gauteng, North West and the Northern Cape, there was one CMA for three provinces. Why was there one CMA assigned to three provinces? The letter of no objection highlighted by the Minister was posing a higher risk to the LHWP-2. It was a challenge to the funding that the DWS was attempting to secure. Why was it taking so long to address the matter of the letter of no objection?

Ms N Sihlwayi (ANC) indicated that the report meant that there was progress, as it was able to identify all the gaps that the DWS had and there was a strategic management strategy that had been developed. The NWRIA establishment had raised concerns when it was introduced, but now there was an understanding that it was an inclusive structure of CMAs. The fragmentation of all CMAs could cause a weakness in the water sector.

She appreciated Minister’s input that the Portfolio Committee must await the Umzimvubu project. Many people had been feeling anxious about the project. It was good to know that there would be a presentation that would go into the details of the matter. What made the municipalities unable to understand their role? It seemed that they were unable to carry out their duties and their associated roles. The national government was now "playing Messiah" to the district and local municipalities.

The turnaround on groundwater infrastructure had not been explained clearly enough. Could there be clarity on that, as well as on the " War on Leaks"? The Minister had promised that there would be a chance to engage on the matters raised by AGSA and National Treasury. There was also the matter of the six water boards which were inefficient and had been like that for some time.

The Chairperson said normally, when money had been used inappropriately within a department, the public servants were expected to pay it back as a means of recovery. In the case of junior staff members, who might not have a significant amount in their accounts, how would they be able to recover millions that could have been used recklessly?

DWS's responses

Dr Phillips said that a team was engaging with a counterpart team in Namibia regularly. A number of studies have been done about the impact of LHWP-2 on the water that would be supplied even to the Namibians via the Orange River. Namibians were concerned about the construction of the project, as it might reduce the amount of water available to them from Orange River. The studies had been through various phases, and there was a proposal for a large dam to be built near Namibia. That study showed that there would be a detrimental effect on the ecosystem. There was an estuary where the Orange River joined the ocean, and it was a very important estuary. It had even received accredited status from the United Nations and was very important both for the environment and for tourism in Namibia and South Africa. There had been a counter proposal recently to build two smaller dams -- one near Namibia and one near the Orange River -- which would not affect the ecosystem. The tabling of the proposal had already taken place, and the stakeholders had indicated they were happy with the progress. Minister Mchunu, and his counterpart minister were going to wait for the Cabinets’ approvals first.

It was a very complex issue. The DWS had been working with the Namibians on this for some time. The Namibians understandably wanted a firm commitment that there would be no water issues affecting them because of the project. It was a major priority for the DWS, and it implemented the necessary measures to fast-track the process.

The Department's fruitless, wasteful and irregular expenditure cases were divided according to the extent of the cases. Some of the cases were much simpler than others. Some included costs incurred due to the bookings done by the officials and not using the rooms that had been booked. Those officials had paid back that money. In more complicated cases involving millions, there was a forensic investigation that often took place. The internal audits unit would recommend that the DWS lay disciplinary charges where the officials were found guilty. The other cases could result in civil claims and some criminal charges, and others involved collaboration with the SIU. The Department’s ability to recover funds was in place, and it depended on the extent of the cases. There was a backlog of cases currently. There was a plan to deal with the backlog of the simpler cases.

The realignment of CMAs did not involve any policy of one CMA per province. The boundaries were bound to the natural catchment areas. There were six catchment management agencies, as there were six catchment management areas.

There was a close relationship between dysfunctional groundwater infrastructure and municipal non-performance. The provision of groundwater was a function of local government, and groundwater was normally supplied through municipal-owned and managed boreholes. The poor maintenance and operation of those boreholes were related to the poor performance of municipalities. However, the Department also needed to improve its role concerning groundwater management. It had to improve its regulation of the use of groundwater and make it much more effective. This would ensure that people did not abuse groundwater and only used it in terms of the existing licensing requirements. The DWS also had to ensure that regulation ensured there was no pollution of groundwater, and that groundwater was protected. Groundwater was increasingly important, as the country ran out of additional water resources.

The "War on Leaks" project had been completed. It had been to train students to do basic maintenance to reduce water losses through leaks. It was an important task but did not address all issues, such as leaks in municipalities' distributions. There were big pipes underground that were leaking in some of the municipalities, and that would require more funding to repair. The municipalities had not been able to employ the trainees. The DWS hoped the trainees could use their skills in private companies if the municipalities did not hire them.

Mr Michael Motsatsi, Chief Audit Executive, DWS, answered the question about recouping money from the officials.

He said the investigations, especially into fruitless and wasteful expenditure, were done to determine whether there was any intent involved in carrying out such fruitless and wasteful expenditure to assess whether such funds should be recovered from any official. In essence, the investigations were intended to recover the money and ensure that the DWS did not have to deal with similar cases in the future.

Mr David Mahlobo, Deputy Minister, DWS, said that the team had covered all the questions that Members asked. The DWS was going to fix its grammatical errors and use the correct tenses which would indicate clearly what had been achieved and what was to be achieved. That would show clearly if there was progress or no progress. However, the DWS had made significant progress thanks to the support of the Portfolio Committee. There was a sharper focus now as the impact of load-shedding was being felt.

There has been big progress concerning the infrastructure for water services. The mistake had been to neglect the existing infrastructure, because the population had grown, creating the pressure that the DWS was feeling now. However, it prompted more interventions that assisted in improving the DWS management in an effective way. The DWS would have to work extremely hard in other spheres because of local governments’ need for support to be more aligned with the national government.

The Chairperson thanked the DWS and the Ministry for their responses. He asked the Committee Secretary what item was next on the agenda.

Ms Nosipho Bavuma, the Committee Secretary, said that the next item on the agenda was closing remarks, but Ms Tseke had her hand up.

Ms Tseke said that the response provided by the DWS on the matter of CMAs was too complex for the Members to understand. Could the DWS provide a clearer explanation? Could it explain more about the hydrological boundaries?

The Special Tribunal had ordered a software company called SAP to repay an amount of more than R81 million. Was the money going directly to the Department or National Treasury? If it went to the Department, what would its purpose be?

The Chairperson said that the Members were now awaiting Minister Mchunu’s closing remarks.

Minister's closing remarks

Minister Mchunu explained the role of municipalities concerning reticulation. The municipalities were legislated to deliver water and were responsible for being water service authorities. The DWS was not contesting that. The issue began when the local municipalities failed to deliver water for various reasons, such as a lack of capacity or proper management. There was a wide range of reasons for the lack of proper management, some of which included vacant posts -- and the DWS did not wish to involve itself in those small matters. The DWS was concerned about service delivery. It also offered extensive support to the local municipalities to assist them in carrying out their mandates.

The Lekwa Local Municipality was one of the municipalities severely challenged with non-performance, and the Department had to intervene. It was not an issue of a lack of grants. The municipality was simply not able to carry out its mandate. The DWS had noticed that there were spillages and had assessed all the situations. It also offered recommendations and suggestions to the municipality.

Service delivery was not what it ought to be in the Umkhanyakude Municipality. The municipality got grants to provide water, but they were not doing that. The water demand was high, but the water delivery was not up to par. In Giyani, the DWS had suggested refurbishment of the plant and asked the local municipality to procure for reticulation to all the nearby villages. The situation in Giyani was monitored closely by DWS, so that the suggestions made could be carried out correctly. Should there be a lack of supervision, the suggestions would not be carried out efficiently. There might even be litigation.

At Loskop, a steering committee was setup, where the DWS made procurement suggestions. After those suggestions, the Department received a report stating that procurements had been made. The DWS officials were now intervening to stabilise the situation. The DWS could therefore not be seen only at the national level, as it was responsible for assessing service delivery to all the communities in South Africa. It would account to the Portfolio Committee for lack of service delivery to some communities.

Vhembe municipality had been asked what caused the lack of service delivery to seven villages that did not have water. In one meeting with Vhembe municipality, it was discovered that even with the various grants offered to them, the seven villages still did not have water.

In one municipality, 96 villages had never received water. The DWS needed to devise a strategic plan to deliver water to the villages.

The eThekwini Municipality water was leaking up to 52% of its available water. The report they sent said it was a far cry compared to the money that the DWS had provided. A meeting was set to take place to address the matter.

The Namibian matter had been stablised already.

The Minister said that the DWS wanted the CMAs to follow provincial boundaries, but in practical terms it was not possible. For instance, there had been a proposal from the DWS that would take the whole of the Pongola waterway right up to Usuthu. This proposal would have meant that Pongola would be part of the Usuthu CMA. The proposal stemmed from the fact that the Pongola runs its course via KZN in the main, but when it gets to Usuthu, it is already in Mozambique. The proposal would not be functional. The DWS should make a thorough presentation on the matter.

The Chairperson wanted to close the meeting, assuming that the questions had been covered.

Ms Tseke opposed the closing of the meeting, as one response about the recovery of fruitless and wasteful expenditure of R81 million was unsatisfactory.  

The Chairperson said he noted Ms Tseke's question, but she was asking a question on a matter that was not part of the meeting.

Dr Phillips said that the DWS would answer the question, and asked one of the delegates to respond.

Mr Frans Moatshe, Acting Chief Financial Officer, DWS, said that the SIU had recouped the funds. Some of the funds had already been recovered and the DWS was expecting the R81 million to be fully recouped soon.

Dr Phillips intervened, and added that the SIU had been investigating the procurement of licences by the Department, and had reached a settlement with the company involved. An initial amount of R400 million had been recovered by the Department. In addition, more calculations had been done on the R81 million, which had also been resolved. The company had agreed that they did not provide the value that equated to the amount that had been allocated. However, the settlement did not preclude the SIU from proceeding with criminal charges against the individuals that the SIU had evidence. The DWS had implemented and was near finalisation of the disciplinary actions related to the same case.

The meeting was adjourned.