Mhlathuze Water Board 2016/2017 Annual Report, with Minister

Water and Sanitation

13 March 2018
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

Annual Reports 2016/17 

The Minister of Water and Sanitation said that he had met with members of the Board of Umgeni Water and Mhlathuze Water the previous Friday. As an outcome of the meeting, he requested that the Committee should give him 30 days to sort out the issue of the legitimacy of the board of Umgeni Water, and that the discussion on the proposed tariffs by Umgeni Water and Mhlathuze Water/Amazi be moved to another meeting to enable him have a comprehensive review of the proposed tariffs.

Mhlathuze Water informed the Committee that its board had been dissolved on 26 April last year, and the Minister had appointed an interim chief executive officer as the accounting authority until the appointment of a new board. An independent audit and risk committee had also been appointed to oversee all strategic financial and risk matters.

The revenue of Mhlathuze Water had improved, although targets had not been met because of the prolonged drought in Kwazulu-Natal. There had been a decline in gross profit because the drought had impacted on their sales. The qualified audit opinion expressed by the Auditor-General (AG) had highhlighted the misstatement of property, plant and equipment, and irregular expenditure. These irregularities had not been identified by KPMG, which had audited the entity for the past six years. However, an audit recovery plan had been developed to address these findings. The majority had been addressed, and would be audited by the AG during their interim audit.

The Committee expressed concern that other entities within the Department might be using the services of private audit firms, especially KPMG, and suggested that they should be audited by the Office of the Auditor-General. The Department should inform the Committee on the process of initiating and imposing the new tariffs, considering its importance. Members also questioned whether those officials found guilty of irregular and wasteful spending would be “blacklisted” and prevented from obtaining employment at other government entities.

Meeting report

Mhlathuze Water Board: 2016/17 Annual Report

Mr Mthokozisi Duze, Interim CEO: Mhlathuze Water, informed the Committee that the area of operation of Mhlathuze Water extended to the entire Kwazulu-Natal (KZN) province. They supplied raw, clarified and potable water to both municipal and industrial customers, such as the City of uMhlathuze, Mondi, Foskor, Tronox, Richards Bay Minerals (RBM), South 32 and Mpact; provided operation and maintenance services on water and waste water bulk infrastructure to municipal and industrial clients; operated and maintained the Tugela-Goedetrouw Inter-basin transfer scheme on behalf of the Department of Water and Sanitation (DWS); and implemented water and waste water infrastructure projects on behalf of various government departments.

Their financial year highlights included drought interventions, the Jozini regional bulk water supply project and the bucket eradication programme. Their secondary activities included ministerial directives such as the Nongoma and Abaqulusi Water supply scheme, the Royal Household water supply, and the Newcastle emergency intervention.

The Mhlahuze water board had been dissolved on 26 April 2017, and the Minister had appointed the interim CEO as the Accounting Authority until a new board was appointed. An independent audit and risk committee had been appointed to oversee all strategic financial and risk matters. The establishment of one KZN board was in progress.

On organisational performance, their revenue had improved although their target had declined because of the drought in KZN. There was also decline in gross profit, because the drought had impacted their sales. However, the cost of sales had not changed because the level of maintenance had increased. Some of their targets for the financial year were exceeded, while some were not. The performance objective on bulk potable water quality compliance, management of avoidable water loss and reliability of supply were met, while the targets for increased access to services, financial reporting committee and improved key financial ratios were not met.

A qualified audit opinion was expressed by the Auditor General (AG), who had noted misstatements of property, plant and equipment, and irregular expenditure. Some of the irregular expenditure had occurred as a result of irregular awarding of contracts, tenders not being advertised properly, payments made that were higher than the contract value, and costs incurred for traveling to conferences where the delegate did not attend. In the last case, the employee had offered an explanation to the Minister and the board was awaiting the decision of the Minister. An audit recovery plan was developed to address these findings and the majority had been addressed and would be audited by the AG during their interim audit.

The operating surplus had decreased by 53% from the prior year due to an 11% decrease in volumes for the year. Depreciation and amortisation costs had increased by 77% due to re-assignment of the useful lives of assets and the re-instatement to fair value of assets previously acquired. Other expenses increased by 30% because of external audit fees, legal costs, regional bulk studies, stock adjustments, travel and subsistence.

The tariff proposal for financial year 2018/19 was not discussed, in line with the Minister’s request that the proposal would be reviewed before being forwarded to the Committee.

Discussion
 

The Chairperson said that the respective water boards should forward a comprehensive report on the tariffs across the board to the Acting Director General (ADG) of Department of Water and Sanitation.  This report must include the cycle from the initiation to the implementation of the tariffs. The ADG would forward these reports to the Committee. The ADG should inform the Committee on the process of initiating and imposing the tariffs, considering its importance. He was concerned about the acting capacities of the boards and the officers of the water board. What was the role of the water board? The Minister should explain if the casualties as a result of the amalgamation of the two boards of Umgeni Water and Mhlathuze Water would be allowed to do business in the water environment, or in the entities where these members had worked before. Where would the payment of debt owed to Mhlathuze by the Department of Water and Sanitation come from?

On the issue of auditing, the Department should reconsider using private firms like KPMG, considering the issues of irregularity involving the firm. Any irregularities discovered after the audit by KPMG must be uncovered and challenged. All entities should be audited by the office of the Auditor-General. The Acting DG should confirm if there wee other entities within the Department that were being audited by private firms. He expressed concern about the capacity of the construction unit of the Department.

Mr H Chauke (ANC) said that the DWS should deal with the legality of tariffs before the deadline, which was March 15. The Department should prepare a brief summary on tariffs for the Committee. What was the issue regarding the amalgamation of the boards of Umgeni Water and Mhlathuze Water, as this issue seemed to have been abandoned and Parliament had not been advised of the status. What was the scope of the authority of the acting board? Had Mhlathuze Water received any support from the government because of the drought in KZN? What would the interim CEO of Mhlathuze do about the wasteful expenditure highlighted by the audit report while they waited for the input of the Minister of Water and Sanitation? There must be interventions in place to strengthen the internal controls and supply chain management, which at this point seemed weak. The wasteful expenditure, as highlighted by the AG, should be investigated in line with the Public Finance Management Act (PFMA), and also recovered. The Department should also be careful about using KPMG, which had audited Mhlathuze for six years and had not discovered the irregularities which were uncovered by the AG in one year. Departments should move away from using private auditing firms. He suggested that there would be sessions where the construction unit would be invited to brief the Committee on their progress, as well as the challenges.

Mr L Basson (DA) said that the DWS had some unpaid invoices last financial year which added up to R3.4 billion. These invoices did not include the contracts with all the entities. The debts owed by the Department would swallow up the entire budget for this current financial year. The Department should pay their accruals within the current financial year and not carry them over to the next year. The Minister should discuss the issue of the Department’s expenditure with National Treasury, and such expenditures were also regulated. There seemed to be no planning in place to cover the building of pipelines from dams to the end users. He emphasised that the Department should be cautious about using private firms for audits. The services of private firms should be considered when completing some of the projects being handled by the construction unit of the Department, as this unit seemed overwhelmed by various projects being handled by them.

Ms N Bilankulu (ANC) asked if KMPG was still auditing other entities, considering the irregularities identified by the AG which had been missed by KPMG. How long would these entities operate without board members, and what were the implications as well as the dangers associated with this? The wasteful expenditure must be investigated, recovered and the perpetrators prosecuted, as this seemed like deliberate defrauding of the state of taxpayers’ money.

Mr R Hugo (DA) said that the perpetrators involved in the irregular and wasteful spending must be blacklisted so that they would not be employed in the public sector.

Department’s response

Mr Gugile Nkwinti, Minister of Water and Sanitation, said the Department’s main focus was on governance, considering that all the board members had been temporarily appointed. This had affected any dynamic relationships across the board. Changes were being implemented in the various boards and the Department. There had also been a review of the workforce, considering that the Department had about 74 chief directors and five deputy directors. These were some of the issues that would be discussed with the two water boards at the meeting the following week. On the issue of blacklisting identified perpetrators from the civil service, he said that the issue was complex as the law did not restrict reappointment of ex-employees from the civil service. However, he suggested that there may be development of policy to guide such instances.

Mr Sifiso Mkhize, Acting Director General: DWS, said that in line with the Department’s agreement with the National Treasury to reduce their debt, they have been able to reduce their debt considerably and would bring the Department into alignment with their budget. The bulk of their budgets would go to various municipalities, as well as in payment of salaries.

Mr Duze said the Mhlathuze Water Board had investigated the irregular expenditure and some of the culprits had been identified. Some matters had been reported to the Hawks and were still being investigated. He was not able to divulge further information because some of these matters were sub judice. There was also a pending court decision that some identified perpetrators’ pensions should be seized.  The Board had requested a refund of the wasteful expenditure.

Some of the irregular expenditure had occurred as a result of mere maladministration, by not following the necessary procedures. In these cases, value for money was derived, but in the process of acquiring those services, certain approvals were not obtained. Employees that were found guilty of these infractions were subjected to internal disciplinary measures.

The Audit Recovery Plan was also communicated to the Committee. On the collapse of the internal control, the matters picked up by the AG should have been picked up by the in-house auditor, as well as the external auditor, as some of these matters had lingered on for a while, considering that Mhlathhuze had been given a clean audit report during this period.

On the issue of the debt owed to Mhlathuze Water by the DWS, the invoice for this payment had been forwarded to the Department and was expected to be paid by 15 March. Despite the approval of a loan by the National Treasury, the loan had not be accessed to avoid constructions that may not be optimally used.

The appointment of the board members for Mhlathuze Water and Umgeni Water would be addressed as one by the Minister, to avoid any confusion.

The Deputy Director-General, Construction Unit: DWS, said that by May, the issue with the boards of both entities would have been resolved. Regarding the capacity of the interim board, it was composed in line with the Act, but its status as interim was because of its temporary nature, and the tenure of office was determined by the Minister. In other to ensure good governance in these entities, an accounting authority for both entities had been appointed.

Ms Babongile Mnyandu, Acting Chief Financial Officer (CFO), referred to the collapse of the internal control of the Board, and said that measures had been put in place to mitigate this issue. The measures included the appointment of experienced and qualified staff in key positions, such as a new CFO and a contract specialist, which would be finalised soon. There had also been regular training of staff.

The meeting was adjourned.

 

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