A joint meeting of the Portfolio Committee on Water and Sanitation and the Standing Committee on Public Accounts met to be briefed by the Auditor-General of SA (AGSA) and National Treasury on challenges facing the Department of Water and Sanitation (DWS). The AGSA briefed the Committees on irregular payments and deviations as major concerns facing the Department. The presentation also spoke to deviations as a result of ministerial directives which in fact were not exempt from compliance requirements in procurement. The Department also had issues of instability of leadership which particularly led to deterioration in the Department’s financial management system and internal controls. Members were also informed of sharp increases in irregular expenditure from 2014 to 2017 while elements of fairness, equity, justice, transparency and competitiveness in procurement were not adhered to. Irregular expenditure, as a result of deviations not approved by Treasury, amounted to R2.4 billion while fruitless and wasteful expenditure was flagged in the Department’s Giyani, Nandoni and Mopani Water projects. Such wasteful expenditure was attributed to excessive project management and professional fees, alongside excessive construction costs.
Members were deeply concerned that it seemed to appear the Department of Water and Sanitation had completely collapsed and which point it would be identified as a going concern. Questions were raised on irregular expenditure, approved deviations, DWS plans to address fruitless and wasteful expenditure and the role of the Department’s accounting officers. The Committee was interested in the view of the AGSA on performance bonuses given to DWS senior officials, funding model of the Water Trading Entity (WTE) and fully funded budgets.
National Treasury then briefed the Committees on the rapid increase in the budget of DWS, spending patterns, overspending and unauthorised expenditure in certain projects. The presentation also spoke to the WTE in terms of outstanding debt from municipalities and increased operating expenditure. Members were also informed of the overdraft in the Department’s primary banking account, risks posed to the fiscus, deviations, outsourcing of procurement responsibilities and cash flow problems.
Some Members of the Committee were concerned about contradictory information presented by National Treasury specifically in regard to deviations. Further questions were posed on applications for funding by DWS, application for the overdraft, the role of Treasury’s procurement office and abusing of emergency situations. Members wanted to know the fiscus was strained, criminal investigations and DWS spending most of its budget in the final quarter of the financial year. The Committee requested a list of contracts for deviations done without the approval of National Treasury.
The briefing by the State Investigating Unit (SIU) was held ‘in camera’ to avoid jeopardizing ongoing investigations where members of the public were asked to leave the room. The Committee noted that a number of issues had been raised which would be considered a work in progress and the Committee would have a responsibility insofar as probing was concerned for issues raised.
Chairperson Johnson (ANC) asked Members of the Committee to share their views of having a closed meeting with the Special Investigating Unit (SIU) on the challenges faced by the Department of Water and Sanitation (DWS). Members unanimously supported the holding of a meeting ‘in camera’ with the SIU.
Briefing by the Auditor-General of South Africa (AGSA)
The Auditor-General of SA, Mr Kimi Makwetu, began his presentation by highlighting the status of previous audit reports of the Department of Water and Sanitation, which attracted a qualified opinion in 2014/15, and had serious misgivings on its financial statements for the year 2016/17. Deviations from water boards, such as Lepelle Northern Water, were flagged by the AGSA because these deviations contradicted internal control processes within the Department. The issue of instability of leadership particularly led to deterioration in the Department’s financial management system and its internal controls. This was because movement of leaders who were responsible for driving implementation of projects sometimes led to the misplacement of documents which posed major risks to financial loss. Long periods of vacancy were also experienced in Human Resource because of several acting positions which disrupted the flow of internal control activities.
Irregular expenditure sharply rose between 2014 and 2017 in comparison to 2009-2010, while the elements of fairness, equity, justice, transparency and competitiveness in supply chain were not adhered to, as required by the Constitution. Several projects that led to deviations under the Department’s Water Boards were as a result of ministerial directives which the AGSA maintained were not exempt from compliance requirements in procurement. Irregular expenditure as a result of deviations not approved by Treasury amounted to R2.4 billion while concerns of fruitless and wasteful expenditure were raised in terms of the Giyani Water Project, which cost R2.5 billion but was nowhere near completion, the Nandoni pipe line project of approximately R690 million and the Mopani emergency project which amounted to approximately R465 million. Fruitless and wasteful expenditure was largely attributed to excessive project management and professional fees, alongside excessive construction costs.
Mr D Ross (DA) sought clarity on irregular expenditure in 2014/2015 which escalated in 2016/17 to unacceptable levels. He was concerned that the Department of Water and Sanitation had completely collapsed. At what point would the Department be classified as a going concern based on indicators from its financial statements?
Ms V Mente (EFF) asked if the AGSA was aware of irregular payments in other key infrastructure projects because those that were listed in the 2015/16 audit report were not captured in the AGSA’s presentation. What specific project did the irregular expenditure in Lepelle Northern Water relate to?
Ms T Chiloane (ANC) sought clarity on deviations of R975 million that were approved in 2015/16 but not in line with Treasury regulations. Were they related to the Giyani Project that was not near completion by the time the AGSA was conducting an audit?
Mr E Kekana (ANC) asked what financial year the AGSA was referring to in terms of the scope of irregular expenditure in the Department of Water and Sanitation.
Mr H Chauke (ANC) asked what plan the Department of Water and Sanitation had in place to address issues of fruitless and wasteful expenditure after the findings of the audit report. How committed were the Department’s accounting officers to investigations, taking action against those involved in corruption and recovering lost funds? Had the AGSA shared the state of the audit report with the current Minister of Water and Sanitation and what was the Auditor-General’s view of the Department’s position as a going concern?
Ms N Khunou (ANC) wanted to know the Auditor-General’s view on deviations and expansions which had now become costly to government. She also wanted to know the view of the AGSA on deviations of the Department of Water and Sanitation? How could the AGSA assist with projects that were not paid for after services were rendered?
Mr Makwetu said the AGSA did not pay attention to the Department of Water and Sanitation being classified as a going concern because constitutionally, it was funded via an appropriation, meaning that it would always be funded regardless of losses incurred. Unlike an entity financed by shareholders who may not have funds to bail out the company when in financial distress, the case of the Department of Water and Sanitation was different. This was because it was financed through the National Revenue Fund where taxes were collected. Financial sustainability was however a concern because the Department’s financial position was significantly strained arising from an increase in the number of deviations over the years. Duplicate payments, payment of contracts not yet completed and irregular payments, which had mostly been done without requisite value, put additional strain on the fiscus.
On the commitment from the accounting officers, the AGSA noted that while conducting its audit, it had many of its conversations with people in acting positions, which unfortunately did not materialise in the officers fulfilling their commitment because of high staff turnover. It also observed lack of stability in leadership created a risk of service providers encroaching into the initial scope and expanding themselves into areas that were not agreed upon. This was because the Department was dealing with many suppliers technical in nature and which required ongoing supervision to deliver what was intended. The AGSA had not had an opportunity to interact with the current Minister of Water and Sanitation but attempts to engage were made. His view on deviations was that they were allowed but the additional responsibilities of disclosing further information and accounting for additional factors remained important and should be adhered to. The AGSA also come across instances where payments were not made for services rendered leading to the abortion of services by service providers.
Mr Andries Sekgetho, Business Executive, AGSA, further explained that the focus of the audit was more on where the Department of Water and Sanitation had put strain on the fiscus and where it had overspent rather than it being classified as a going concern. The Department indeed exceeded its spending over the last two financial years and was mentioned as a going concern in the last audit report but it was important to note that the reporting applied to public entities was different from that of the private sector. The Department of Water and Sanitation was required to recover accruals of approximately R1.1 billion before it started spending in the current year. On the question of the AGSA being aware of other key infrastructure projects, the AGSA only sampled some projects on the basis of audits being conducted on a few and not all projects. Criteria were applied to identify high risk and high level projects of which feedback is only limited to. Part of the audit process however required the Department to revisit all its projects and identify if similar risks existed to deficiencies discovered in the audit sample.
The Department of Water and Sanitation did not develop a current action plan for the current financial year because it disputed the findings of the AGSA on irregular expenditure and deviations. R2.4 billion reported as fruitless and wasteful expenditure by the AGSA was not disclosed in the financial statements of the Department of Water and Sanitation and the Water Trading Entity (WTE), despite these deviations based on factual evidence which was reported to management. Irregular expenditure was related to various projects, including the Giyani Project and was for the 2016/17 financial year, even though some irregular payments related to projects started in prior years. The AGSA was in constant communication with the acting Director-General of the Department of Water and Sanitation but had not had a chance to engage with the Minister. The Department had also topped the list of having the longest acting Director- General of 56 months, combined over the past seven years, which influenced the process of decision making and authority within the Department.
Ms Mente sought clarity on the R467 million in deviations by Lepelle Northern Water - was it one project or several? Among the reasons given for irregular expenditure, expansions and deviations, did the AGSA at any point come across unlawful instruction as one of the reasons?
Mr T Brauteseth (DA) raised concern over the Vuwani steel pipeline project which originated in 2012 where the SIU was currently in court with the current Deputy Director- General and contractors to the tune of R140 million. Should it be included in the Committee’s enquiries or are there any other projects before 2014 that the Committee should look into as significant exceptions?
Mr D Mnguni (ANC) asked if the AGSA looked into the performance bonuses given to Director-Generals in the Department of Water and Sanitation.
Ms Khunou raised concerns over costly payments to LTE Holdings, which got a lot of projects through deviations while there were projects not been paid for after services were rendered. Was the AGSA looking into the investigation of this? Deviations spoke to lack of planning in government departments thereby preventing new companies from being players in the Department’s projects
Mr Ross sought clarity on the funding model for the WTEs - were they completely dependent on payment from municipalities and what was the risk associated with this? Going forward, could the Committee focus on defaulting municipalities and impact they had on the WTEs?
Mr Sekgetho confirmed that the R467 million included the Mwamita Dam Project. The AGSA had not come across unlawful instruction as one of the reasons for irregular expenditure but found that there existed a blame-game between Department officials and the Minister of Water and Sanitation at the time on directives given. Based on further research, the AGSA found that the Department could have appointed 102 full time project managers with the amount it spent on consultants such as in Lepelle Northern Water. The Vuwani Project was not among those selected by the AGSA in the current financial year but Committee Members were however encouraged to include it as part of its enquiries if red flags were identified. For the Giyani project, red flags were raised on overpayment because approval was given towards the end of August but invoices were raised as though work had started at the beginning of the month. The rates and working hours were also inflated when benchmarked against the industry resulting in fruitless and wasteful expenditure. The AGSA’s audit did not reveal any information on performance bonuses paid to Director-Generals.
Mr Stephen Khelehi, Senior Manager, AGSA, explained that the funding model of the WTEs was the augmented model which was for new infrastructure development projects but the Entities also received income from its sales. The Department of Water and Sanitation went wrong when it budgeted for money it expected to recover as outstanding receivables from the municipality, but failed to develop processes that would help it recover these funds. It failed to monitor whether collections were received and also increased its spending on projects that it had not initially budgeted for. It was expected that the Department would have reduced its expenditure to cater for additional procurement because it was operating on a constrained budget but an analysis was not done to demonstrate this.
Mr Ross asked whose role it was to ensure that the Department of Water and Sanitation’s budget was fully funded. How could the AGSA assist to see that budgets were more realistic?
Mr Makwetu responded that the accounting officers in those Departments would be responsible for the budget in conjunction with the Portfolio Committees.
National Treasury: Budgeting and Financial Management in the Department of Water and Sanitation and the Water Trading Entity
Ms Ulrike Britton, Chief Director: Public Finance Division, National Treasury, highlighted that the Department of Water and Sanitation’s budget grew rapidly over the past couple of years and would continue to grow in the coming years. In terms of spending, the Department was generally good at spending its budget between 2012 and 2015 where it spent 98.8% of its budget in 2015/16 but overspent in 2016/17 where it spent 100.7% of its budget. In 2014/15 the Department spent 47% of its capital budget in the last month of the financial year which had improved in 2016/17 where only 14% of its budget was spent in the last month of the financial year. It was however not expected to overspend in the current financial year.
The overspending in 2016/17 was attributed to the Bucket Eradication Programme, which resulted in R110.8 million overspending on the vote, and R292 million on the main division of the vote, which both qualified for unauthorised expenditure. In relation to the Water Trading Entity (WTE), there was a large outstanding debt from the municipalities which accumulated over the past five years even though it had increased its cash receipts in the same period. Operating expenditure increased over the past five years largely due to an increase in professional and consulting services. The overdraft in the Department’s primary banking account, which sat with Treasury, had seen a rapid deterioration in its cash balances which coincided with the entity’s rapid increase in operating expenditure. Risks posed to the fiscus by the WTE related to amounts owed to the Trans Caledon Tunnel Authority (TCTA), of which failure to pay posed further risks to the TCTA in meeting its bond obligations.
Mr Solly Tshitangano, Chief Director, Office of Procurement, National Treasury, further briefed the Committee on deviations by the Department of Water and Sanitation. He explained that deviations granted to entities that were under investigation were not supported by National Treasury but were solely undertaken by DWS. The Department had also outsourced its procurement responsibilities to private companies which did not comply with procurement regulations. Concerns were raised on payments made to service providers for work not been done such as the R19 million that was claimed by MSW Consulting. He attributed cash flow problems in DWS to the lack of a sound financial management system.
Ms Khunou expressed disappointment in Treasury’s presentation because it contradicted the report given to Members especially on deviations. According to the report, Mr Tshitangano approved all deviations he was referring to on paper but something different was referred to in the presentation. DWS was still single sourcing deviations instead of ensuring procurement processes were open to all. She urged Treasury to be more prepared for meetings because officials appeared to be saying one thing in person but approving something else on paper.
Ms Chiloane asked about the application for financing by DWS for the construction of the Mzimvubu Dam - was the overdraft applied for by the WTE related to the financing of the Mzimvubu Water Project?
Ms Mente sought clarity on deviations that DWS made on its own. What did the procurement office in Treasury do concerning this matter? Did the Department furnish Treasury with any letters stating reasons for its actions and did anyone from the procurement office sign the same? On the issue of the overdraft that DWS had, how did the Department successfully make an overdraft without consulting Treasury?
Chairperson Johnson explained that the Committee had asked DWS to furnish it with a written report on its overdraft because there was conflicting information on whether the overdraft was sitting with the National Reserve Bank or with Treasury. Could Treasury assist in clarifying this matter?
Mr Ross could not understand how the building of a dam could be an emergency situation when it was a long term project. There should be consultations with Treasury in the founding stages of such huge projects. Could the Committee get a thorough analysis on how the fiscus was strained due to the lack of planning from DWS? Such actions of deviations and expansions could not be condoned and it was necessary for the Committee to investigate the role of the procurement officer who should have played an oversight role.
Ms Khunou raised concern with DWS spending most of its budget in the last quarter of the financial year - this lack of planning was a key problem in government that gave rise to the problem of deviations. It was a problem that Treasury colluded or agreed with the lack of planning in DWS because it contradicted Treasury regulations and what government was trying to achieve. It was clear from the presentation that Treasury understood the dynamics and problems in DWS but went further to condone its actions.
Chairperson Godi requested Mr Tshitangano to send the list of contracts for deviations that were done without the approval of National Treasury to assist in guiding discussions later on.
The Chairperson informed Members that inquiries had been made into the Human Resource Department on issues of capacity. On submission of the Department’s organogram last year, the Committee was shocked to discover that, apart from the nine DDG’s, there were three floating DDGs and three Chief Financial Officers that were not qualified.
In response to the several concerns raised, Ms Britton confirmed the overdraft from the WTE was not related to the financing of the Mzimvubu Water Project. The financing arrangement around Mzimvubu was based on a directive from the Minister of Water and Sanitation at the time which was a social project that would not generate revenue to pay back the loan, and therefore required funding from the budget. Treasury had a series of conversations with DWS on the budgeting of large projects with regard to planning, financing and procurement. Treasury however did not get involved in other processes beyond procurement apart from when the Department started its spending. Budget planning and programme planning remained a challenge in the Department especially when aligning plans to actual projects implemented. Treasury had since increased the 2018 budget for the planning unit to strengthen and elevate it.
Mr Tshitangano said a list of deviations approved by the Department of Water and Sanitation without the permission of Treasury would be provided. He however indicated that the Giyani Water Project had an element of emergency in the beginning because there was no water in the hospital. As a result, Lepelle Northern Water appointed LTE under an emergency which, meant the Department was not required to seek Treasury’s approval for an emergency deviation. It was nonetheless required to report to Treasury and the AGSA ten days after the Department had deviated, of which Treasury had no power to reverse the deviation because it rested with the accounting officer within DWS. He agreed that the element of emergency was abused – those abusing the system must be dealt with.
Mr Ross raised concerns over the emergency situation at the hospital giving rise to the signing of long term contracts because the hospital not having water was a temporary problem. How could the signing of millions and billions of Rand be associated with a short-term solution? It was not correct that short term solutions were being used for long-term planning. He requested that the Committee be allowed to conduct a thorough analysis on the procurement process concerning deviations.
Ms Mente sought clarity on the price of boreholes for the Giyani Water Project - did the Department evaluate if the cost of one borehole was worth R2.5 million? What about the criminal element of abusing power in emergency deviations? Did National Treasury deal with the criminal element of abusing money from the procurement office?
Mr Mnguni was not convinced with the response from Mr Tshitangano and asked him to tell the Committee what really happened. How was it that a year later, the amount for deviations escalated to what it was if the maximum time for an emergency was three months? Where was National Treasury’s monitoring?
The Chairperson further reiterated that the Committee was going to be guided by the rules related to the Constitution which were relevant to what was being discussed.
In response, Mr Tshitangano said that after receiving allegations of corruption, Treasury did a review of its procurement process and findings on the investigations available. He was not saying that the appointment of LTE by Lepelle was correct because the Department had indeed abused the system and was riding on emergencies to do what was wrong.
The Chairperson, in concluding, said that a number of issues raised during the meeting were going to be considered as work in progress and the Committee would have a responsibility insofar as probing was concerned for issues raised.
Clarity was also sought by Ms Khunou on how responsibilities within the procurement office were shared and how it supervised projects. She asked for the Treasury’s organogram and full disclosure of the borehole prices.
Ms Mente asked if Treasury at any point took anyone for criminal investigation in DWS for inflated prices.
The Chairperson explained that any Member had the right to take individuals to any police station for offences committed - this could not only be tasked to National Treasury because Members also had a responsibility to report transgressions committed.
Mr Tshitangano said that National Treasury always forwarded its investigation reports to the SIU, but an investigation had already been opened by the SIU in the case of Lepelle, which did not require Treasury to conduct its own investigation. Treasury was however working with the SIU on the Lepelle case.
Briefing by the State Investigating Unit (SIU)
The briefing by SIU was held ‘in camera’ to avoid jeopardizing ongoing investigations. At this point, members of the public were asked to leave the room.
The meeting was adjourned.
- Special Investigating Unit investigations of Water & Sanitation Department presentation
- Budgeting and financial management in DWS & Water Trading Entity: National Treasury presentation
- AGSA: Pushbacks by Department of Water and Sanitation
- AGSA: Report of auditor-general to joint committee of inquiry into functioning of DWS