Current Expenditure Trends and their Impact on Implementation: briefing by Department of Water Affairs

Water and Sanitation

25 May 2010
Chairperson: Ms M Sotyu (ANC)
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Meeting Summary

The Chief Financial Officer of the Department of Water Affairs briefed the Committee on the expenditure trends for the previous fiscal year, ending March 2010.  The total allocation to the Department amounted to R7.77 billion.  Total expenditure amounted to R7.58 billion.  The under-spent amount was R187 million.

The Department had spent 98% of the allocated funds and the inability to spend the full allocation was attributed to the disparity between the fiscal year-end applicable to the Department (March) and municipalities (June). The briefing included the reasons and amounts of under-expenditure items, the request to the National Treasury to roll-over funds from the previous year and the transfer of funds to the Departments of Human Settlements and Agriculture, Forestry and Fisheries.

Major challenges included the failure of municipalities and Water Boards to make timeous payment for services.  The total debt owed to the Department was R3.7 billion. The income generated by the Department was insufficient to maintain and improve the infrastructure and the current backlog for infrastructure maintenance amounted to R13 billion.

Members were particularly concerned about the large amounts of under-spent and rolled over funds in view of the number of communities that did not have adequate water provision.  Questions were asked about the adequacy of financial planning, earmarked funding, capacity, budget monitoring and oversight over regional and local Government authorities, problems associated with invoices and late payment of service providers and moneys owed to municipalities.  Other questions dealt with the filling of vacant positions, clearing the backlog in issuing licenses, infrastructure maintenance, the impact of the failure to implement projects, the purpose of the National Youth Service Programme, the SAFCOL claim, the lack of alignment with municipalities, the provision for theft and losses and the practice of transferring project funding to cover administration costs.

The Department was requested to prepare detailed responses to the questions and concerns of the Committee for submission and discussion at the next meeting.


Meeting report

Briefing by Department of Water Affairs (DWA)
Mr Onesmus Ayaya, Chief Financial Officer; DWA briefed the Committee on the expenditure trends of the Department during the financial year ending 31 March 2010 (see attached document).

The total expenditure for the fiscal year amounted to R7.586 billion.  The total budget allocation was R7.774 billion.  The under-spent amount of R187 million represented 2% of the amount allocated. The Department had under-spent R1.07million for Administration, R40.5 million for Water Resource Management and R145.5 million for Water Services.

The reasons for under-spending on the Accelerated Community Infrastructure Programme (ACIP) were attributed to the fact that the projects were linked to the Municipal fiscal year-end of June 2010. The funding for the project was committed and work had started in the Mpumalanga, Limpopo, Eastern Cape, KwaZulu-Natal and Northern Cape Provinces.

The Water Service Subsidy Grant could not be transferred to municipalities as a result of the failure by municipalities to comply with the Division of Revenue (DoRA) conditions. Business plans had not been finalised and the 2008/9 close-out reports on expenditure were not submitted.  The unspent amount of R20 million for the Social Component of the Downstream Project resulted from the failure of commercial users (e.g. mining companies) in committing to the commercial components of the project. The funding provided would be returned to the National Treasury (NT).

The Department had requested a rollover of R123.6 million from 2009/10 to 2010/11. The bulk of this amount was for ACIP (R74.964 million) and the remainder for office space in Limpopo, Water Allocation Reform and Licenses, Water Service Operating Subsidy Grant, the SAFCOL claim against the State, National Youth Service, the Hartebeespoort Dam Remediation Project, the revision of the National Water Resource Strategy and installing rain water harvesting tanks in the Eastern and Northern Cape.

R8.4 million from Water Resource Management and R26.3 million from Water Services was transferred to Administration, which had overspent on IT services, write-offs of Water and Irrigation Board loans, office accommodation and severance packages. Total ring-fenced funding amounted to R2.698 billion.

Responsibility for sanitation services and forestry was transferred to the Department of Human Settlements (DHS) and the Department of Agriculture, Forestry and Fisheries (DAFF) respectively. An amount of R554 million was claimed from DAFF for expenses incurred by the DWA on their behalf and a total amount of R529.9 million was transferred to the DAFF in respect of the transfer of the forestry function.

Briefing on the Water Trading Entity Management Accounts (WTE)
The amount of revenue from interest received from customers was R608 million. This was the interest on overdue accounts.  The favourable variance was due to measures put in place to assist the WTE with improving the cash flow.

Compensation of employees was 23% below budget mainly due to a delay in the advertising of certain positions as a result of the moratorium placed on the filling of vacant positions in order to improve the cash position.


Exemption of Return on Assets (ROA) to water users and capping of tariffs (10% plus PPI) resulted in ROA not covering the depreciation amounting to R1.5 billion.

A major challenge for Water Trading Entity Management was the R3.7 billion debt resulting from slow payment for services provided by major customers such as municipalities and Water Boards. The Department was obliged to pay the Trans-Caledon Tunnel Authority (TCTA) whether or not payment for services was made by customers. The improvement in cash flow was mainly due to the savings made on employee costs. Cash generated from operating activities was not sufficient to fund the refurbishment and improvement of infrastructure assets. The backlog on maintenance and refurbishment of infrastructure of assets was estimated at R13 billion. The Department intended to employ more efficient debt collection methods; to review the TCTA contract and to review the funding policy and pricing strategy.

Discussion
Mr J Skosana (ANC) said that under-spending, which dated as far back as 2005, as well as the rollover rate, was very discouraging when dealing with nation development. The President had said in his opening of Parliament speech in June 2009 that funding provided had to be fully utilised in order to increase the rate of development. He believed that the suffering of the people on the ground was attributable to under-spending and the practice of rolling over funds from one year to the next. The Department had to find a way to deal with the problem. It appeared that the monitoring mechanism was lacking when funding for projects was available but municipalities were not implementing development projects. The lack of capacity could no longer be used as an excuse fro the failure to deliver services. He asked what the anticipated quarterly expenditure budget was for the 2010/11 fiscal year and if there was a plan in place to ensure that the full allocation would be spent.

Mr Ayaya replied that the key contributor to under-expenditure between 1995 and 1999 was the Olifants River Project, which included the De Hoop Dam. The DWA had requested the NT to reschedule the allocation of R600 million for the De Hoop Dam. The NT had responded positively to this request and had allowed the DWA to use R502 million for the Inyaka and Nandoni Dams instead. Had the request for re-allocation not been approved, the percentage of under-spending would have been 8%. The construction of the Inyaka and Nandoni Dams were progressing very well and the DWA had rescheduled funding for the Olifants River Project, where progress had been sluggish due to problems with certain mining companies. The process of re-scheduling funding was effective in reducing the under-spending trend but had not been as successful as the DWA had wanted it to be.

Ms A Lovemore (DA) commented that the impact of under-spending on implementation was not included in the presentation.

Ms Nobulele Ngele, Acting Director-General; DWA said that the delay in issuing licenses and the lack of economic growth had a substantial negative impact on service delivery. The delay in issuing licenses was blamed on the DWA in a review of the progress made in implementing the Industrial Policy Action Plan. License applications were logged at the regional offices for processing and the backlog of more than 2000 licenses was not being regulated by the head office. The Minister of Water Affairs had ordered that personnel were transferred from other duties to address the licensing backlog.

The Chairperson asked why the National Youth Service was only dealing with pipes in the Limpopo province when statistics had indicated that the Eastern Cape had the worst problem with leaking water supply pipes.

Ms Ngele said that the DWA needed to improve on the National Youth Service mobilisation programme. Planning had been inadequate and the programme had fallen behind schedule. In practice, planning was done in the middle of the financial year. Tenders had to be awarded in June/July and implementation should commence in September. The DWA had decided to train all senior managers in zero-based budgeting and to improve interaction with local Government authorities to improve the understanding of the requirements in an attempt to resolve the problem of the lack of service delivery.

Ms Lovemore asked for an explanation of the justification for rolling over the amount of R6.3 million budgeted for rain water harvesting tanks, particularly in the Eastern Cape where a serious drought was experienced.

Ms Ngele said that the rain water harvesting tanks were in place but the processing of the invoices for payment could not be completed before the end of the financial year. She undertook to provide the Committee with a list of locations where delivery had taken place and report on the impact where delivery had not been implemented.

Ms Lovemore asked for an explanation on the budget item for theft and losses.

Mr P Mathebe (ANC) asked if equipment or money had been stolen and what action had been taken by the DWA.

Mr Ayaya explained that there was no provision for insurance cover for public entities and therefore provision had to be made in the annual financial statements for theft and losses. In general, the losses experienced were in respect of stolen equipment.  The amount of R50 million reported included the Namaqua debt that was written off. The DWA’s annual report included a detailed breakdown of the individual expenditure items.

The Chairperson accepted that the DWA could provide the breakdown of theft and losses and suggested this item was covered when the Committee was briefed on the Department’s annual report.

Ms Lovemore believed that many municipalities did not know how to apply for funding nor to comply with the conditions associated with DoRA and RBIG applications. She asked who was responsible for helping the municipalities to ensure that the funding allocated would be used to improve on service delivery.

Ms Ngele said that there was a gap in terms of alignment in planning between DWA and local Government authorities. Municipalities were not ready to align with DWA activities. The DWA was planning a meeting with Mr Balzer, Mr Van Zyl, Planning Services and Water Boards so that all parties were on the same page and to prevent the situation of rollovers. At this stage, municipalities did not know how to use the money allocated to them, nor did they have the capacity to use the money effectively.

Ms J Manganye (ANC) asked why there was under-spending in KwaZulu Natal when there was a lack of infrastructure to provide adequate sewerage and water supply services. She asked if the DWA still owed the KwaZulu Natal municipalities money for rentals.

Mr Ayaya clarified that the under-spending amounting to R187 million did not mean that services were not rendered nor did it mean that invoices had not been submitted. The reason that the DWA was not asking for the rollover of the entire R187 million was because certain documents had to be made available to the NT (such as invoices), which could not be obtained as other verification processes were in progress and timing differences (such as the closing date of the financial year). In KwaZulu Natal, the DWA received invoices via the Department of Public Works. The DWA paid the Department of Public Works, not municipalities, for garbage collection, water and electricity services. The Department of Public Works was responsible for making payment to the relevant municipalities.

Ms P Bhengu (ANC) commented that it appeared that there were problems in the DWA and that more should be done about monitoring, including the monitoring of the functions performed by mining companies.

Mr Skosana suggested that the DWA began to implement oversight functions over regional offices before conducting oversight over municipalities. The DWA was not a new Department but the challenges were not being resolved.

Ms Ngele said that the DWA had a performance planning and monitoring component responsible for monitoring the performance indicators and output in terms of the business plan. Deputy Directors-General (DDG’s) were responsible for monitoring the expenditure of a particular sector and when there were areas of under- or over-spending, funds were reallocated to other areas, in line with the Public Finance Management Act (PFMA) requirements. She conceded that the DWA was not strong in this area and plans were in place to address the problems. For example, she planned to hold one-on-one monthly meetings with the DDG’s to discuss financial performance and expenditure.

The Chairperson asked why the DWA chose to keep employees who did not perform their duties. The comment was not directed at Ms Ngele or Mr Ayaya, but to those employees responsible for failing to provide communities with basic water supplies. She wanted to know which DDG’s were responsible for the rollovers and the under-spending so that they could be invited to report to the Committee on their performance in their respective areas of responsibility. As long as ineffective officials were not doing their job, the DG and CFO could not move forward. She believed that the problem was serious enough to fire those employees who were not performing. It was a shame to admit that almost R200 million had not been spent by the DWA. The lack of capacity in municipalities was a problem but there was a problem in the regional offices of the DWA as well as the processing of license applications were not up to date. The fact that there were many entities involved compounded the problem of implementation but the DWA could not place all the blame on the municipalities without examining its own performance.

Ms Ngele accepted that the improvement of the DWA’s financial management needed to be prioritised.

The Chairperson asked for an explanation of the functioning of the Monitoring and Evaluation component of the DWA.  She believed that the challenges experienced by the DWA should have been foreseen and monitored accordingly.

Ms Ngele replied that the Department’s top management had received and taken note of reports of under-spending during the year. She admitted that the DWA had failed to plan adequately and was currently experiencing the consequences. For three quarters of the year there had been under-spending but the spending rate was accelerated during the fourth quarter. Planning issues which needed attention included whether it was done at the right time, if the techniques utilised were correct, if planning was done timeously, if the costing was accurate and if adequate interaction with other stakeholders and the NT was taking place. She agreed that there was room for improvement in the way the DWA was handling its finances.


The Chairperson believed that the DWA should prioritise its core business, which was to provide funding for water services and the management of water resources to ensure that water supplies were provided to communities. The problem with transferring funds from core business functions to IT and other administration functions was that money that had been returned to the NT after funds had been used for purposes other than water services meant that the DWA had to convince the NT that any re-requested funding would only be used for the delivery of water services.

Mr Mathebe said that the PFMA stipulated that payments to suppliers had to be made within 30 days. He asked why had it taken six years of deliberations on whether or not to pay an IT company and what had been done about the person who was responsible for making the payment.

Ms Ngele explained that the DWA had received IT services from a company called Olivia. There were internal problems with Olivia and the company was subsequently taken over by a German company named T-Systems. Olivia had only issued invoices at the end of the previous financial year and the DWA was unable to make the payment before the year-end. The DWA owed R140 million for IT services as at the end of the year. The DWA had met with T-systems and arranged to clear the debt, which had existed for the previous 6 years.

Mr Ayaya said that service providers delivered invoices to a special invoice box.  Order numbers were allocated to invoices by the Departmental manager responsible for the payment of the invoices.

The Chairperson asked if all ring-fenced funding had been allocated and if all the work had been completed.

Mr Ayaya said an amount of R2.7 billion out of the entire budget of R7.7 billion was ring-fenced for specific projects. Certain projects had been completed and the entire allocation for the project had been spent.  Other projects were still in progress and some funding remained unspent.

The Chairperson observed that the impression was created that the DWA did not consider the under-spent amount of R20 million with sufficient gravity.  She felt that the amount involved would have provided many schools, clinics and households with water.

Mr Mathebe suggested that the DWA identified those regions where there was no water supply.  He asked what could be done to compel the mining houses to deliver on the commitments made.

Mr Ayaya explained that the amount of R20 million in question was for the social component of the commercial water users (i.e. the mining houses). When a project of that nature was started, the mining houses signed off-take agreements in terms of which a certain amount of water would be taken and paid for with a loan raised by the TCTA. The social component for the affected communities was allocated by the NT through the normal budgeting process. If the commercial process failed to progress as expected, it was difficult for the DWA to intervene as the mining houses were contracted on a commercial basis with the DWA. The mining houses were taking the water but when commodity prices declined, the financial situation of the mines was severely affected and payments were not made on time. This was a complex challenge and a series of consultations needed to take place before the DWA was in a position to avoid under-spending on the social component aspect of the arrangement.

The Chairperson asked for an explanation that would justify the DWA’s request to the NT to increase funding to R100 billion when the Department had failed to spend R7 billion.

Mr Ayaya replied that a meeting was scheduled for 15-18 June 2010 for the management of the DWA to discuss a new funding proposal for the 2011 Medium Term Expenditure Framework.  Before the Department approached the NT in July/August, the Committee and the Minister needed to engage on the mandate of the DWA, how an additional budget for the DWA would be justified, how much funding would be required, whether additional funding was required for infrastructure or for water services and how best to achieve the desired outcome.

Dr Z Luyende (ANC) asked for clarity on the status quo at the regional level, whether the DWA needed assistance with the zero-based budget approach and if the Department had the necessary capacity to spend the budget. The issue of infrastructure required a certain degree of expertise at the regional level.

The Chairperson said that the DG had acknowledged that there were problems but she felt that Mr Ayaya did not agree with the sentiments of the Committee. Rollovers were justified by services rendered but invoices were not received in time. Many small businesses had closed because they had not been paid by Government entities. She proposed meeting with the individuals who were heading the programmes at National Office and providing assistance with the challenges outlined by the DG and identified by the Committee.

Ms Lovemore said that it was important that the municipalities were on the same page as the DWA since service delivery occurred at the local Government level. In trying to assist a municipal technical director who did not understand the RGIB, she had found that there was no information available on the Internet to explain the RGIB. She hoped that the DWA was interacting closely with the municipalities and provided the necessary information concerning the various grants.  She felt that municipalities were not receiving the attention that they deserved from the DWA.

Ms Ngele requested that the DWA responded to the remaining questions from the Members of the Committee during the following meeting, scheduled for the third quarter.  All the DDG’s would attend the meeting. The DWA would brief the Committee on the process of accessing the budget allocation; how the process had been communicated with the municipalities; the status of licensing, what had caused the backlog and what progress had been made in clearing the backlog, the unpaid invoices and the impact thereof.

Ms Lovemore asked for an explanation of the SAFCOL claim amounting to R4 million.

Mr Ayaya explained that the DWA was obliged to cover a claim of R4 million lodged against the previous Department of Water Affairs and Forestry (DWAF).  Although the sector had benefited, the DWA did not and therefore this amount was considered to be a financial loss. The Namaqua debt write-off was similarly a loss.

Ms Lovemore commented that the R4 million would not have been payable if there had not been negligence on the part of the DWAF. She requested a detailed report from the DWA on the matter.
 
The Chairperson asked for a progress report on Namaqua.

Ms Lovemore asked why the compensation of employees for infrastructure development had increased by 162%.

Mr Ayaya explained that external consultants were used for specific tasks rather than full time employees. This practice was not encouraged and had resulted in the need to transfer funds at the end of the financial year to accommodate the expenditure item.

Ms Ngele acknowledged that the shifting of funds was not best practice and could pose a risk to the DWA if continued.

Ms Lovemore referred to the debt of R3.7 billion that resulted from the slow payment by municipalities.  An amount of R1.4 billion was owed to Water Boards by municipalities and at least R2.3 billion was owed to the DWA by municipalities. She asked which municipalities were defaulting on their payments to the DWA.

Ms Ngele undertook to provide the Committee with a detailed report on which municipalities owed money to the DWA, the amounts involved and what had action had been taken.

Mr Ayaya confirmed that a report had been compiled and would be forwarded to the Committee.

Ms Lovemore asked if the infrastructure backlog of R13 billion was in respect of the maintenance and refurbishment costs of infrastructure belonging to the DWA.  She understood that an additional amount of R23 billion was required to address waste water treatment infrastructure.

Ms Ngele said that the issues of backlogs and service delivery would be addressed at the workshop scheduled for June 2010. Any allocation made by the NT required capacity to be in place and the lack of capacity was another outstanding issue.

Mr Ayaya confirmed that the amount of R13 million was required to address the backlog in bulk water supply infrastructure and would not be used for waste water treatment.

Mr Skosana asked what the current situation was regarding the filling of vacant positions.

Mr Ayaya said that vacant positions were not filled in order to improve cash flow. The DWA was unable to attract suitable technical skills and attributed the problem to the demands on the construction sector by the preparations for the 2010 FIFA World Cup.

Dr Luyende recommended that the strategy to improve debt collections should be implemented within the current financial year.  He noted that the DWA owed money to municipalities for services rendered as well.  He asked if there was a directorate which dealt with the regions and other Government Departments. Without employing an integrated approach, the DWA may not achieve the desired response from service providers and other spheres of Government.

Mr Ayaya noted the recommendation.  He again explained the payment process whereby the DWA paid the Department of Public Works for services.  The implementation of the Municipal Property Rates and Taxes Act had resulted in certain unanticipated expenditure items and the DWA had applied for exemption of certain rates and taxes.

Dr Luyende asked for a report on asset management during the following meeting.  It was important to understand how the funds in the expense accounts were utilised and how the assets were managed in order for the Committee to relate the debts to the assets.

Mr Ayaya said that the monthly movement of expenses in the expense account was reported to the DG and scrutinised and verified by the auditor. The expense account was used when there was uncertainty on where to process expenditure items. For example, when appointing a Rand Water implementing agent, an advance was paid using the expense account until the DWA had received the supporting documents from Rand Water. The expense account was in essence a clearing account. Regular reports on the account were available to the Committee.

Dr Luyende said that the tendency to pay service providers at the end of the financial year was not fair on service providers. He believed that if payments to service providers were made within the stipulated 30 days, Government entities would have nothing in the bank at the end of the year. He suggested that Government Departments provided some form of guarantee for the bank loans service providers were forced to take out because they were not paid on time for services rendered.

Mr Ayaya assured the Committee that the DWA had not benefited from making late payments to suppliers and did not have a separate investment account where the supplier could be paid out of accumulated interest. Any income earned in addition to the appropriation was returned to the National Regulator Fund. The problems with unpaid suppliers were either because of internal delays in payment processes or a delay in the supplier submitting invoices.

Mr Skosana commented that the system of budget monitoring should ensure that no unauthorised spending was incurred.

Mr Ayaya responded that the matter would be treated with the gravity it deserved.

The Chairperson stressed that the issues of budget monitoring and capacity were important and need to be addressed. She asked the DWA to address the challenges and consider the suggestions made by the Committee.

The meeting was adjourned.


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