Lepelle Northern Water Board & Magalies Water Board 2016/17 Annual Report, with Deputy Minister

Meeting report

Briefing by Office of the Auditor-General of South Africa (AGSA)

Ms Surette Tdjaard Senior Manager, AGSA, took the Committee through their presentation on the outcomes of the audits done on all the water boards. The Auditor General audits based on the following: financial statements; performance information to determine objectives (reliability of information presented in report by entities); compliance with the relevant laws and regulations.

Bloem Water Board’s audit findings have stayed unqualified with no findings, however Umngeni Water Board and Umlathuzi Water Board moved from an unqualified with no findings position to an unqualified with findings position for Umgeni and a qualified audit outcome for Umlathuzi. Magalies Water Board, Amathole Water Board and Randwater Water Board received an unqualified audit opinion with findings. Sedibeng Water Board and Lepelle Northern Water Board both received an unqualified audit opinion with findings last year and moved to a qualified audit opinion.

In terms of compliance with key legislation, the AGSA has found that there is a regression in all water boards.  Bloem and Umngeni water boards did not have any compliance findings on the audit report, however all the other water boards had findings. Most of the water boards are not preventing irregular and wasteful expenditure; not procuring through competitive bidding processes, submitted financial statements late or with misstatements, no safeguarding of assets and no collection of revenue due to the water boards.

In terms of performance information and looking at whether reports given by entities are accurate, reliable and complete, the AGSA has found that Magalies, Umngeni and Bloem water boards had no findings on usefulness.

It is the first time that all the water boards are being audited by the Auditor General (AG). The AG tried to look at the indicators or objectives cutting through all the water boards and have identified seven objectives. It also looked at whether the objectives are being reported on by the water boards and what the impact was in terms of the Bulk Portable Water Quality compliance. Five of the water boards achieved the objective. Lepelle, Umngeni and Sedibeng partially achieved the objective.

In terms of managing avoidable water losses, six water boards achieved the objective. Amathole and Lepelle did not achieve the objective.

In terms of the Reliability of Supply to ensure that there are no unplanned interruptions to bulk supply exceeding 24 hours, all the boards achieved the objective except Umngeni.

In terms of Increase Access to services mainly on expansion and looking at the spending of the Capital expenditure, Randwater was not reported on because they have to get allocated Capital Expenditure to the expansion project. This particular objective is one where the Water Boards have performed the worst, Magalies, Umgeni and Umlathuzi did not achieve the objective.

In terms of Support to Rural Development, the objective was to look at five contracts with municipality, however Lepelle was not reported on and Umlathuzi, Magalies and Bloem did not achieve the objective.

In terms of compliance, Amathola, Umathuzi, Magalies, lepelle and Sedibeng had a few material misstatements that they had to correct. Compliance findings were raised at Umlathuzi, Sedibeng, Magalies on management of procurement and contracts. There are six water boards that have expenditure management compliance findings which were Amathola, Lepelle, Sedibeng, Magalies, Umlathuzi and Umngeni.

The AGSA has consolidated the irregular and fruitless expenditure on all the water boards. There is about R8,4 million on fruitless and wasteful expenditure and the nature of the expenditures is due to interests and penalties paid to South African Revenue Services (SARS) due to late payments which were Lepelle and Randwater. If you look at irregular expenditure which is where there is a contravention in legislation, the figure is about R298 million for the water boards. If some of the water boards were implementing agents for the Department, this particular irregular expenditure would not show, the irregular is then included in the financials of the Department’s main account. With Sedibeng, there were instances were contracts were not advertised on Construction Industry Development Board (CIDB), it (Sedibeng water board) obtained quotations instead of following tender processes for R66 million. It also paid R 20 million to a supplier before actually conducting competitive bidding. Amathola also failed to follow the competitive bidding process and there is R 79 million on irregular expenditure. Lepelle, had an irregular expenditure of 9million attributed to extension of expired contracts, no compliance with the panel selection, and deviations not in line with National Treasury.  

Water boards generate their own revenue by providing services to municipalities and other water users. It funds its activities from the generated revenue. It also gets Ministerial directives which the department has to fund in advance. Performance indicators and targets in Lepelle were adequately developed in terms of the requirements of the SMTTI , however it did not consider the processes and resources to ensure that the indicators and targets are measurable and achievable. There were also community processes that delayed the achievement of the objectives at Magalies and although the funding was not really impacted, the targets of that objective could not be achieved.

All the water boards were appointed and are functional except for Umlathuzi and Waterwag, The term for Umlathuzi expired and the new board has not been appointed.

The AG has recommended that key position should be filled within reasonable time to ensure efficiency and leadership. Quality review needs to be implemented, specifically to the financial statements and performance reports to make sure it’s accurate, valid and complete. Management should provide monitoring and corrective actions to address audit findings. Management should also ensure that appropriate systems are designed for indicators, the recording and reporting thereof.

 In terms of consequence management, leadership should be held accountable for poor performance, risk management functions should be capacitated, and adequate IT governance framework should be designed and implemented.

Accountability and good governance are central to building an efficient, effective and development oriented public service. Improvement can be attributed to the political leadership taking accountability and discharging oversight responsibility, robust discussions and interrogating reports submitted by the administrative leadership.

Discussion

The Chairperson asked Ms Surette to take the Committee through the Public Audit Act Amendment Bill process.

Ms Surette responded that if AGSA sees that the Department or entities keeps on having regressions and other issues then the AG has to keep those people accountable and investigations will still be conducted.

Mr Andries Sekgerho, Senior Manager, AGSA, said call for comments on the Amendment Bill closed on 26 February. The current engagement is consolidation of the comments and the public hearings are scheduled for 9 March 2018. There is no definitive deadline but that is how far the AGSA is in terms of the process.

Mr T Makhondo (ANC) asked why the AG did not rate stakeholders this time as it normally does.

Mr HP Chauke (ANC) said that the process taken by AGSA is different from the usual engagement of briefing the Portfolio Committee separately, but now the water board and the Department is present at the meeting. Has the process changed?

Mr D Mnguni (ANC) asked if a project has been given to a water board as an implementing agent and it is found that there are irregularities, especially in expenditure that has happened in the Board, is it usually taken to the Department, what happens to the water board because it might happen that they were in the wrong?

When a project stretches for three years and it happens that there has been an irregular or fruitless expenditure during the first year of the project, does that mean that the expenditure will still be incurred as fruitless throughout the next two years of the project? When does the expenditure issue expire?

The Chairperson addressed Mr Chauke’s concern and said the Committee has found itself in such a situation and ideally the Portfolio Committee should have been meeting with the AG alone but the decision to engage with the AG came very late in preparing and as a result the meeting took place on the day and started very late.

Ms Surette said in terms of rating on the Portfolio Committee, the reason why the AGSA had not included it in their report was because it is the first time the AGSA is engaging the Portfolio Committee from a water board point of view but going forward it will probably be indexed.

Irregular expenditure is unfortunately an instance, so if you award a contract one should have complied while doing the awarding. So if there is an instance of noncompliance on the day that contract was awarded even if it is a multi-year contract, all payments linked to the contract will therefore be classified as irregular for as long as payments linked to that contract continues. During the contract, management or leadership within the entity can go and apply for condonation then they have to demonstrate that they have done investigations, have identified what went wrong, have implemented remedial control and have taken the necessary action and there it can be condoned. Once it has been condoned, you do not condone the expenditure but the action that resulted in the non-compliance. If the action is condoned, the similar principals will apply therefore all subsequent things will not be classified as irregular.

The Department at the end of the day is still accountable for that project; they are just using the Water Boards as their agents. Providing a blank cheque is not ideal, there needs to be a contract in place, there needs to be pricing to ensure that the procurement was fair, equitable and transparent.

Mr Chauke asked if AGSA will take the Committee in confidence with their findings on Lepelle water board.

The Senior Manager from the AGSA Mr Sekgerho said the office has done the audit and has picked up certain noncompliance and as far as the PFMA and the audit mandate is concerned, those findings inform the session that took place on the 29 November 2017 when the Committee was briefed on some of the projects found on the ground and some of the findings also informed a lot of the irregular expenditure reported at the Department already. When the AG was doing a report at the Lepelle space, the AG picked up irregular expenditure subject to the SIU investigation. Further to what the AGSA has disclosed and reported as picked up by the AG, from the AGSA’s point of view is on the investigative bodies and agencies to take the matter in terms of unearthing deeper what is going.

Mr D Mnguni (ANC) asked whose responsibility is it to ensure that the implementing agent gets paid on time so that projects can be able to progress.

Mr Sekgerho explained that it is the Departments’ responsibility to make sure that there is adequate funding available at a given point in time to make sure the project advances as required.

Mr Chauke said the biggest problem faced by the water boards is that a directive is given and then funding does not follow but the money remains in the Department and the water boards end up spending their own money. There is a weakness somewhere at the level of regulation of directives.

The Chairperson asked what the bursting of a water pipe would be classified as and how do you respond.

Ms Surette responded to say that it would be classified as an emergency and it would take a day or two to attend to the emergency and correct it. However, if a pipeline is built from one dam to another dam it is not an emergency because the project might be a multi-year project.

Mr LJ Basson (DA) asked that in terms of the contract with Lepelle which is now for years, who is at fault there? Is it the Department or Lepelle?

AGSA Senior Manager said the project started off as an emergency and then evolved in terms of the scope and the extent of the work that was done while still classified as an emergency. Lepelle is working as an implementing agent, implementing on behalf of the Department, the Department is responsible for the delivery of the infrastructure and the budget. The reason certain things are going wrong could be from a management point of view unless there is evidence from the implementing agent showing that additional work has been conducted without key instruction from the principal department.

Mr Chauke asked the AGSA what the general view of the AG’s engagements with all the water boards is. What has been the assessment with regard to risk and internal audits in the water boards?

Mr Sekgerho said the risk management process helps management identify the response to risk. Internal audit helps to ensure they use that risk assessment to inform that place so that they can go and audit those risky areas and provide assurance to management based on work they would have done on the risky areas. Some of the entities need a lot of improvement in terms of risk management. 

The Chairperson thanked the AGSA and said the Committee takes a very keen interest on the processes around the new Amendment as it will assist a great deal going forward.

Lepelle Water Board

Mr Phineas Legodi, CEO, Lepelle Water Board, took the Committee through the boards’ presentation. In 2015/16 the revenue generated from the primary transactions which is the core mandate of the water boards in terms of the Water Services Act, the board was sitting on R 459 Million and then increased to in 2017 to R 474 million. The boards’ surplus (deficit) from operating services was R 112 million and then decreased to R29 million in 2016/17. In terms of the statement of financial position for the year ended in 31 June 2017, the board’s performance in relation to net assets the board was sitting at R 1,3 billion and then increased to R1,7 billion in 2016/17. The finance ratio, gross profit of the board has dropped from 47% in 2016 to 44% in 2017, the reason for the drop is the increase in the cost of sales. Serious drought has been experienced in the year in question and the costs of treating water have increased. The cash and cash equivalent at the end of the year amounted to R152,3 million. The ratio on return on assets is 2%. This illustrates the entity’s effectiveness in using its investment in assets. During the period under review, the debtor days’ analysis reflected an increase to 661 days. This is due to continuous non-payment by the board’s major customer. The assessment is that the board will maintain liquidity, viability and sustainability for the financial year 2017—18. This assertion is based on the board’s review of the cash flow projection until June 2018, which reflects a healthy cash balance of R150 million. These assertions are further supported by management’s appetite to continuously implement strategies that are geared towards safeguarding of the margin of safety ratio to ensure that it remains above 1.0 as an absolute worst case scenario.

The board has had an instance of irregular expenditure of R8,9 million. There is currently a process where the board is finalising investigations against employees who are responsible for the irregularities. There has been interaction with National Treasury that helped to conduct training on how best the board can conduct its responsibilities in relation to the supply chain management. The board is preparing submissions to make sure that the competent government structures can help the board to condone the irregular expenditure. This relates to extension of contracts that have expired, noncompliance with regard to panel selection criteria; deviation not in line with treasury guidelines; non-compliance with local content treasury procurement guidelines.   In 2015/16 the board was sitting on R36 000 on fruitless and wasteful expenditure and for the year 2016/17 the board is sitting on R 383 000. The reasons for the fruitless and wasteful expenditure is that the board has incurred interest for the municipal services in Limpopo province. Late payments to suppliers, mainly SARS resulted in interest and penalties. This is a result of cash flow constraints because of significant portion of debtors not settling their accounts timely as well as pre funding of projects implemented on behalf of DWS. The expenditure does not necessarily point to a situation where money has disappeared from the account. The board is not in a position to pay its creditors on time as a result the board is charged interest.

The AG’s findings highlighted that assets register was not unbundled as per IFRS standards. A service provider has been appointed to assist with the exercise and would be completed by end April 2017. The AG found that performance information did not meet the SMART criteria for certain objectives (SO1& SO2). The root cause was that the entity did not have a guiding tool that clearly defined its objectives and measurements. A guiding tool has now been developed. The AG also reported that the board has a poor payment history of debtors. The cause is poor collection of outstanding debt from municipalities. Continuous engagements are happening with respective municipality in an attempt to improve collection. The AG found that no processes to avoid or detect irregular, wasteful and fruitless expenditure were conducted by the board. The reason is that there was non alignment of interpretation and understanding of irregular expenditure. The board is improving on their submission as well as training to avoid misinterpretation.

Discussion

Mr Makhondo asked what exactly the issue was with regards to the Giyani project as there is continuous extension of the deadline.

Mr Mnguni said he is disappointed over the reported regression and the qualified audit outcome received by the board. When can the Committee expect the results of the investigations of the people who are being held accountable for the irregular expenditure?

The fruitless expenditure is the result of the Department of Water Affairs and Sanitation, what impact did it have to the board regarding advance payment.

According to the AG, in terms of internal control and impact to role players, the board seems to not have the assurance, contrary to other boards. What assurance is the board going to give to the Committee?

In terms of asset register control, the board mentioned that they were requested to componentise asset register. What does the board mean by that?

Mr Chauke said he wants to hear from the members of the board and not just the CEO, the people that are part of the board should engage with the Committee. Is the board in charge of the entity?

Mr L Basson (DA) said the board mentioned that they had a drought in the current financial year and the main reason why the surplus had dropped is because of the chemical situation. That is only 23% of the R72 million lost in surplus. He asked for the board to explain the depreciation.

The Chairperson asked what the role of a water board would be if the directives were to be taken away versus the role of the Department, especially the construction unit.

Mr Chauke said the Water Act section that was mentioned by the AGSA representative is something that the Committee needs to look at and it would be nice to hear from the boards plans moving forward.

The Deputy Minister of Water Affairs and Sanitation Ms Pam Tshwete asked for reasons as to why the Giyani project is delayed. She said it would also assist the meeting if the board could provide a perspective on the issues and the role of the board.

The Deputy Chairperson of the Lepelle Northern Water Board responded to some of the questions and said with regards to the municipalities, there is some movements taking place  and there payments coming through. The CEO and Chairperson of the board have been interacting with municipality, signing agreements on payments plans. There is commitment from municipalities it is just that there is no funding to speed up the processes.  On the issue of directives, the Board met with the DWS representative, the Chairperson of the Audit Committee as well as the Chairperson of the Risk Committee on Monday as the various boards and discussed the issue of directives and will continue to work with other boards to try and improve the matter. The issue of componentising assets has been raised as one of the issues that water boards are struggling with but the issue will be handled, the process may take as much as three years and the AG will monitor the boards.

The CEO of the board said the board is in total owed R1,6 billion as the water board both from the Department and the Municipalities. The Department owes the Board not less than R 600 million, R456 million of the R600 million owed by the Department is the money for the project that the board is implementing on behalf of the Department. This is not necessarily the Giyani project.  On the question of what the board is doing to address the issues, the board is interacting with the municipalities that owe the board, and there is something that they are bringing on a regular basis although they are struggling to pay. The very last interaction that will take place will be on 1 March to make sure that the R456 million is paid.

From a Human Resources point of view, there is a chain of command, when you are given a legal instruction you can only defy at your own risk because that is insubordination, so directives had to be understood within that context, as a written lawful instruction on the basis of Section 45 of the Water Services Act. In good faith the board receives and implements them with the understanding that money does or will follow.

The Chairperson interrupted and asked if the board was given an illegal directive, would the directive be implemented.

The CEO responded to say that if it is illegal then he cannot implement, he is given the context to which directives are given and the legal authority on the basis of which directives are given out.

The delay on the Giyani project was caused by the delays in payment and there are instances where service providers abandoned the site because of delays in payment and the completion date has to be revised.  The board has also been to court in relation to the delays in payment.

On the question of unbundling of the assets, this is the first activity that the board is performing in relation to the AG’s response measures, service provider has been appointed and is being monitored, completion of the work is expected by the end of April.

The board is sufficiently impressed on the matter regarding the SIU investigation.

Mr Chauke said it seems as if only two people are going to speak and the rest of the Board members are quiet. He asked for other members of the board to speak.

Ms Amy Phatlele, board member of the Lepelle water board said the role of the water board is to give communities access to water and is doing that by providing bulk services to municipalities. Their role includes ensuring that the institution is financially viable, properties are safe guarded and providing sustainable water. Looking at the future, the board is having discussions to touch on areas where the board does not yet have jurisdiction.

Mr Harold Matsipe another board member said he agrees with Mr Chauke that the board members are responsible for dealing with the issues and should therefore engage with the Committee. He said this is his second sit as a board member, all the directives that the board has received before were similar in nature which comprised of commitments, what the board should do, payments to be made. There are no funds to honour directives and save Polokwane currently but there is hope that the Committee will assist and that the Department will commit. The board had a bit of a problem when it comes to collection because most of the municipalities are in the rural areas, with no money and expertise. The board has now resolved to help the municipalities collect money from their people and so far the debt is coming down.  The investigation from the SIU is welcomed and if there is a request to do additional work, the board will be happy to do so. The problem was that there was no money to pay the board, otherwise the board does its job well and if it were not for the directives the board would probably not be meeting with the Committee.

Ms Langi Malamba, Chairperson of Human Resources and Human Relations Committee said the dilemma faced as the people tasked with the oversight and the political leadership of the water board is the relationship that exists with the shareholder. The Chairperson interrupted and asked if he heard her say political leadership. She continued to explain that at where they are sitting as people responsible for oversight, they are not dealing with operations but political issues and have to interphase with the Premier and different Departments. The Chairperson interrupted again to say that she is talking about policy and not political issues. She explained that the Committee that she is part of is sitting to give oversight on issues that have a burden on the ability for the water board to provide farm water and portable water to the people. In the absence of political will to deal with the issues for example, instituting a clause within the regulations that mandates them to switch off the water because the municipality is not paying and that issue has political ramifications at the end. Once the water is closed, the community will say either the Department does not have water or the government does not care. The board does not just accept things at face value when administration is giving reports, they do not just accept things.

The Chairperson said the conversations around politics need to be nipped in the bud because as a board they are not a political structure, the board is responsible for oversight on policy issues and that does not make the board a political structure. He told her to try to get rid of that from her vocabulary otherwise they will find themselves conflicting with other political structures. That is not the space of the board to talk to but that of the Portfolio Committee. He added that he would have loved to allow for follow up questions but there is not enough time.  

He asked what the number of litigations that the board is dealing with in the current year is and whether the amalgamation is not affecting the organization.

The Chairperson asked the board if there is any wrongdoing that the board has done.

The Chairperson excused the board and suggested a 15 minute break.

Mr Chauke said the issue of Lepelle needs to closed properly because the board is being owed money and the board is collapsing. This issue needs to be dealt with.

Mr Basson said since the board is alleging that they are owed money by the Department and the Department is not paying them, what has been the response to the board by the department. What has the Department said is the reason for not paying the board? Surely the board is interacting with the Department if the Department owes them money.

The CEO responded to say that in a series of interactions there is always the commitment that money will follow but it has not followed to a point that the board is in front of the Committee. He addressed Mr Basson that it is not an allegation but a fact that the board is not being paid what is due to the board and the board has got books to prove the fact.

To the best of the board’s knowledge, there is no wrong doing that the board has done.

He said on the question of the effect of amalgamation, he understands that the Chairperson was asking on the realignment of the water boards. The only effect is that the board needs to now expand its services footprint to other areas in the Limpopo province and this would mean the board would have to be financially viable. Currently it is difficult because of the liquid state that the board is currently in.

The CEO requested the Chairperson to give the board time to respond in writing the question on the number of litigations.

The Acting Chief Financial Officer Ms Rebecca Nkomo from the Department said she is sitting with a letter that was written to Lepelle in October 2016 which said there was R97 million worth of invoices that cannot be validated either because of the rate for the management fee, absence of appointment letter from the board as an IEA or the PFPs for the contracts. Down the value chain there are no invoices that the board is referring to and if the department can get the full set of invoices then the money can be paid.

Mr Chauke said here is a water board in parliament to present a case in front of the Portfolio Committee and representatives from the DWS that has given instructions to the water board sitting at the meeting and is saying that they have not received invoices. He said that is unfair to the water board, the entity is collapsing and the Department is fully aware that the Board is in need. The issue needs to be resolved and not dismiss the board. 

Mr Mnguni said he cannot understand how the department could sit in the meeting and lie and say that they are owed a certain amount of money and the Department says they need to verify whether the board has done the job. He said the Department should be given a time frame to forward the conversation and letter that they received from the board.

The Chairperson said that the Portfolio Committee has found itself entertaining administrative issues in Parliament and that is uncalled for. The Committee cannot be discussing whether payments have been made, invoices have been received and verification has been done. The Department is abusing the Portfolio Committee and the Department should get its act together. The Chairperson requested the tail of the correspondence between the board and the Department by 07 March. 

The Deputy Minister asked the Magalies Water Board to give a brief presentation on the outcome of the AG report because there was only five minutes left before the scheduled meeting ends and there would not be enough time to go through the entire presentation.

Magalies Water Board

Mr Mosotho Petlane, Chairperson, Magalies Water Board, took the Committee through the report.  The report has improved from the previous year and the performance of the board has also improved. The board has received an unqualified audit report for the sixth year in a row.  The board’s revenue from water sales has increased by 17% and the surplus increased by 86%. The assets of the board grew by 27% and the total assets grew by 25% and this shows that the water board is growing at a rapid rate and this is a result of the capital expenditure programme that the board implemented in 2013.

Irregular expenditure was identified during the audit which amounted to R3,19 million. No National Treasury approval was secured for the R3, 19 million worth of deviations as per the National Practice note # of 2016/2017. A R1.07 million is flagged as irregular; the award process to the preferred bidder was found to be unfair. Another R 343 130 relates to the quotations where comparative schedules were done on amounts exclusive of VAT. Investigation will be done in accordance with the National Treasury guideline and action will be taken against the employees who transgressed the regulations.

Discussion

The Deputy Minister asked what the Department has said in response to the fact that they owe the water board money, given that the invoices had been sent to the Department.

Mr Petlane said the board is engaging with the department at a regional level on a monthly basis and the invoices had been submitted. The challenge is that there seems to be no funds for some of the projects that were budgeted for and cannot carry them on so the board is unable to honour the invoices that had been submitted. The Department owed Magalies R108 Million from 31 January.

The Chairperson said that they are faced with a serious challenge of time.

Mr Mnguni said the Board should be applauded for its performance and the consistent qualified audit outcome. The Department is playing a role in the failure of the entities when it does not allocate funding or pay the water boards.

He asked for clarity on the issue where board mentioned that there was irregular expenditure reported in the previous financial year but the expenditure was not condoned.

Mr Basson congratulated the board on its audit outcome. He said the issue around funding will be raised by all the water boards and this matter is serious because at the end of the day the Department and the water boards are one body. He suggested that the Director General come with a report of all the water boards in the next week, the water boards should tell the DG what is owed to the by the Department and the DG sorts it out and come with a report next week because that is not the Portfolio Committee’s work to do so.

The Chairperson said the issues are straight forward.

The Deputy Minister congratulated the board on its audit outcome and asked the DG to consolidate all the important information and funds owed to the boards by the Department and present it to the Committee next week.

The meeting was adjourned.