Department of Water & Sanitation financial position & contested audit: Treasury & Auditor General briefing

Water and Sanitation

09 May 2018
Chairperson: Mr M Johnson (ANC)
Share this page:

Meeting Summary

The Portfolio Committee received briefings from the Auditor General of South Africa (AGSA) and the National Treasury (NT) on the financial state of both the Department of Water and Sanitation (DWS) and the Water Trading Entity (WTE).

Members of the Committee, shaken by the tale of gross abuse of taxpayers money at the DWS, and dismayed that a national government department could be brought to the brink of collapse, had some hard questions for those at the NT and AGSA who had failed to sound the alarm bells in time. They also called for legal consequences for those found responsible for wrongdoing, and demanded to know if political cover had been provided for the blatant mismanagement. The Committee also heard legal opinion on whether the DWS could be put under administration. The Chairperson said the fundamental question was whether it made sense to expect those who had presided over the “mess” at the DSW to do anything differently in implementing the budget next time around. 

The Committee resolved to invite the Minister of Finance and the NT’s Director General to a high level meeting to deliberate on the crisis facing the DSW.

According to AGSA, the DSW’s financial woes could be traced back to the 2014/15 financial year, when expenditure began to “sky-rocket”, and had culminated in the current situation where the DSW was now staring at a huge billion rand-plus budget hole and an unsustainable overdraft facility, whose legal status Committee Members said should be looked into. A major cause of the overspending was the continuing funding of the “War On Leaks” programme, using unbudgeted funds generated by the WTE.

A significant portion of the irregular expenditure was related to Ministerial directives, which had opened the door for implementing agents and water boards to deviate from supply chain management (SCM) regulations. These directives were justified as arising from “emergency” situations, which had ironically emerged out of planned multi-year projects.

Meeting report

The Chairperson said the meeting should have been held earlier in the year to provide the Committee with information regarding its subsequent interaction with the Department of Water Affairs (DWS) in the lead-up to the Budget Vote and debate process. Although this had not happened, he believed it was still a useful exercise as all the relevant stakeholders still had to make inputs before the new Budget was passed. One area in which the National Treasury (NT) and the Auditor General of South Africa (AGSA) could assist was in regard to the DWS’s continued use of an overdraft facility extended to it by the NT.

DWS’s financial position and contested audit: AGSA presentation

Mr Andries Sekgetho, Business Executive: AGSA, said that following the AGSA’s negative audit findings on the DWS and its entities in respect of the 2016/17 financial year, the DWS had disagreed with the findings and initiated a complaints and appeal process, as provided for in the AG’s enabling legislation. After an independent review by the AG’s office had exonerated the original report, the Director General of the DWS had withdrawn the appeal earlier this year. However, the Chief Executive Officer (CEO) of the Lepelle Northern Water Board was still persisting with a court challenge regarding the same audit. The latest

update on the matter was that the CEO had requested a meeting with the AG in order to brief him on the reasons behind the decision to litigate.

The DWS had incurred a net loss of R89 million, with an overdraft of R194 million and unauthorised expenditure of R406 million, during the year ended 31 March 2017. The Department’s current liabilities from that date had exceeded its total assets by R454 million. This cast significant doubt on its ability to continue as a going concern. An amount of R542 million paid for the “War On Leaks” programme had not been budgeted for. Additional unauthorised expenditure was expected to accrue from the previous year’s still unapproved figure. It was estimated that another R1 billion shortfall was on the cards for this period alone.

The Water Trading Entity (WTE), in line with its commitment to the South African Reserve Bank (SARB) to reduce its R2.7 billion overdraft, had paid only R748 million by 31 March 2018. The current outstanding balance was R1.6 billion. However, by 30 September 2017, the WTE had already racked up a separate payables bill of R1 billion. In addition to this, there were outstanding invoices from the Trans-Caledon Catchment Authority(TCTA) to the tune of R1.4 billion. This cast doubt on how the WTE would be able to meet its commitments to reduce the SARB overdraft. The most recent review of records at the DWS and the WTE had made a number of negative findings across the board. Some of these were:

  • Action plans did not address not address the qualification areas relating to fruitless and irregular expenditure.
  • The financial adjustments which needed to be made on whether projects had been completed or not, had not been made, because the information had not been collected from regional offices.
  • With regarding to oversight and monitoring, previous recommendations by AGSA had not been fully implemented.
  • Consequence management was not adequately implemented by the DWS.
  • On procurement and contract management, the DWS and WTE had not completed the update of the supply chain management (SCM) policy.
  • Systems of internal control were inadequate as they failed to identify irregular expenditure, especially relating to implementation agents

A significant portion of the irregular expenditure at the DWS was related to Ministerial directives, where implementing agents and water boards had deviated from SCM regulations. These directives were made on the pretext of “emergency” situations, although they actually related to multi-year projects. The irregular expenditure had occurred most heavily at the Lepelle Northern and the Mhlathuze Water Boards -- R2.2 billion and R90.2 million respectively.

As of 31 July 2017, Departmental reports had confirmed that 50% of confirmed cases of WTE officials involved either in unauthorised, irregular and fruitless or wasteful expenditure had not been subjected to disciplinary processes. The same percentage was reported for the DWS, indicating the extent of the allegations of this nature that had either not been investigated, or evidence had not been found. An interim audit report for the 2017/18 period had found that DWS’s responsibility for transferring and monitoring the Regional Bulk Infrastucture Grant (RBIG) and the Water Service Infrastructure Grant (WSIG) had been hampered by some of the following factors:

  • Transfers and subsidy issues raised in the previous year had not been addressed.
  • Some transfer payments had not been authorised by the delegated official.
  • No withholding of allocations had been implemented when some municipalities had under-spent the their allocations.
  • There had been non-submission of some of the quarterly reports within 45 days, as required by NT.

Additional fruitless and wasteful expenditure had occurred when the WTE entered into a three-year contract with Systems, Applications and Products (SAP), ending in December 2018. This contract was superseded by another entered into in July 2016 for five years. Therefore one of these was fruitless and wasteful, as the WTE could obtain a usage benefit for only one licence, though it had paid for two. 

National Treasury presentation

Ms Ulrike Britten, Chief Director: Urban Development and Infrastructure, NT, said the timing of the presentation was difficult because any meaningful conclusions about the true financial situation of the DWS and its entities would be available only when pre-audited financial statements were submitted by the Department at the end of May 2018. The best that could be done was to present the Committee with a certain set of figures -- which might have changed by the end of the May -- and try to analyse what those figures suggested the DWS’s budgetary challenges might be. She added that since the WTE used the SAP accounting programme, which was different from the Basic Accounting System (BAS) used by government departments, she was in no position to discuss current financial data relating to the WTE.

The presentation noted a number of important aspects around expenditure at the DWS, including:

  • Overspending on administration because of the decision to include the “War On Leaks” programme as a line function under “Administration.”
  • Money allocated for the Butterworth project in the Eastern Cape as an emergency intervention had not been spent.
  • Overall, there had been under-spending totalling approximately R500 million.
  • The biggest budget cuts had been made to the Accelerated Community Infrastructure Programme (ACIP), because it was believed to be a duplication of different spheres and functions of government and also a DWS “slush fund”.
  • Despite commitments made to the NT that the WTE would no longer fund water services projects, the funding was still ongoing -- R100 million in the third quarter of 2017/18 -- in relation to projects such as “War On Leaks” and “Drop-the-Block.”

Ms Britten also used the presentation to communicate the NT’s response to recommendations made by the Portfolio Committee in its Budgetary Review and Recommendations Report (BRRR) circulated amongst stakeholders in anticipation of the imminent passing of the new budget. These included:

Recommendation:

NT should consider a differentiated approach when dealing with municipalities and bulk

water projects.

Response:

A new grant co-funding committee had been established to review applications for the waiving of co-funding requirements on RBIG and Municipal Infrastructure Grant (MIG) projects. The new structure would also allow for differentiation on a project-by-project basis so that where possible, high income households and businesses could pay for the costs of infrastructure. It also allowed for grant funds to focus only on low income households.

Recommendation:

The DSW should work closely with the Minister of Cooperative Governance and Traditional Affairs (CoGTA) and NT to access the equitable share allocation for municipalities dealing with outstanding debt.

Response:

NT and CoGTA had begun to engage on the issue.

Recommendation:

The DWS, NT and CoGTA should sign a memorandum of understanding that clearly outlines the bufget processes and procedures to be followed in the event of emergency interventions, especially those with no budget allocations.

Response:

The Department should develop a framework for water services emergency interventions; allow for greater certainty in determining roles, responsibilities and accountability in the provision of water services emergencies; and the Division of Revenue Act (DORA) and the Public Finance Management Act (PFMA) provided flexibility to shift funds in the budget to ensure services were delivered.

Discussion

Mr H Chauke (ANC) said the DSW’s new budget was due for passing in a week or two, so these two presentations should have been made well before the upcoming debate in the National Assembly, to allow the Committee enough time to engage the Department on the matters that had been raised. Without trying to blame anyone, he wanted to point out that the Committee had invited the NT and AGSA to come for a briefing well ahead of the delegation from the Department, precisely to ensure that Members had the most up to date information when engaging the DSW on the dire financial situation that had been reported. It was regrettable that the NT and  AGSA had not been available at that time, but this had resulted in the Committee now having to work backwards regarding these matters.

He asked if the NT and AGSA had already briefed the new DSW Minister on what they had just presented to the Committee, and if so, when? If not, what were the implications? What was the responsibility of the NT when a government department collapsed “in front of you?” Was there no concrete action to be taken? He asked AGSA why no firm action had been taken to declare whether the DSW was a “going concern” or not. Acknowledging that most of these questions perhaps should be directed at the top leadership echelon of both the NT and AGSA, he suggested that the Committee should invite the Minister and the Director General of the Department of Finance for a meeting. The reality was that the DSW was bankrupt. Water was a national security issue, and yet this was treated as being normal – no one had been fired, and there had been no consequences. 

In a situation where the DSW and its water trading entity already had a R4.5 billion budget shortfall this current financial year, no amount of threats from the NT to stop payments would resolve the situation. This was the opening comment of Mr L Basson (DA) in his assessment of the crisis at the Department. He said the situation called for a more radical intervention. If there was none, then the Committee must be told and it should come up with something new, or one shuddered to think where the DSW would be in the next financial year. The DSW was caught in a vicious circle in which it was not only paying millions on an overdraft facility, but spending precious revenue on unbudgeted programmes such as the “War On Leaks,” while important clients such the Trans-Caledon Tunnel Authority (TCTA) were owed billions of rands. Ultimately, the buck stopped with the NT and it was the NT which had to decide on the best intervention going forward. 

Mr D Mnguni (ANC) asked whether the NT was really in control of the fiscus of the country. How could the NT let a government department get into such a financial mess right under its nose? The monthly and quarterly reports should have told the NT that a crisis was on the cards at the DSW. The NT had let the Committee down because after passing the budget, the Committee entrusted some of its oversight role to the NT, as it was better placed to work with money and the myriad systems and procedures governing the use of those funds. Why had the NT kept quiet? Alternatively, why had it advised the DSW to cut expenditure in some parts of the budget and redirect funds elsewhere? Why had other stakeholders, such as the Porfolio Committee, which were necessarily affected by these decisions, not been informed? He urged that in spite of the DSW’s decision to withdraw its challenge regarding the AG’s negative audit opinion, AGSA should still pursue the process to its logical conclusion. He said “crooks” always used every trick in the book to avoid being investigated. On the use of a debt collection company to recover monies owed to the DSW, he asked whether any good had come of that, and if not, what had been done about it? Had the DSW got its money back?

Ms M Khawula (EFF) also blamed both the NT and AGSA for the DSW debacle -- for failing to monitor and verify departmental budgetary processes. Citing the “War On Leaks” programme as an example of mismanagement and failure of service delivery, she said scores of learnership programmes in Durban had run out of money, yet according to AGSA and the NT, millions of rands were still being spent on the project.  She commented with dismay that although reports of an investigation into these matters had been announced, no arrests had been made. The time had come for all those responsible for the theft and misuse of taxpayers’ money to be brought to book. She said it was very aggravating for her as a public representative to sit in committees and continue to be “deceived” by experts while the community looked to her for a better life that never came true. Funds had been stolen, yet the people who had been working with the former Minister, some of whom had been under disciplinary processes, were still at work as if nothing had happened. That was an insult.

Inkosi R Cebekhulu (IFP) asked whether, assuming that NT had tried every trick in the book to assist the DSW to push back against the disaster unfolding before its eyes, it was now feasible to propose that the DSW be put under administration to prevent its total collapse?

Mr Mnguni also interjected to ask whether or not the decision to extend an overdraft facility to the DSW was legal.

The Chairperson said getting to the root of the matter was the only way to address the crisis facing the DSW.  Given the upcoming Budget Vote debates and the passing of the next budget, could the same people who had presided over the current financial meltdown at the DSW be trusted with more of the same? He said that could not be.

He invited Advocate Frank Jenkins, Senior Parliamentary Legal Advisor, to clarify the legal position on placing an entire national government department under administration.

Adv Jenkins informed the Committee that in terms of Section 100 of the Constitution, only provincial and local government departments could be placed under administration. In his opinion, the main challenge in the case of the DWS was cash management, and it was the duty of NT as stipulated by the PFMA to intervene, including stopping the payment of funds. The role of the Portfolio Committee would be to look at the Appropriations Act to see whether the Department had complied with its functions as set out in the legislation. If not, then the Committee would have to call the NT and AGSA to ask what steps had been taken to address the situation – had there been monthly financial statements and reports? How had funds been moved around? What had really happened? His opinion was that all those interactions had failed to halt the slide into the current mess. This brought the Committee back to the same question: why and how did this happen?

The Chairperson said it was clear that the DWS, together with NT and AGSA, would have to come back and brief the Committee on the question. If the mismanagement and non-compliance at DWS had been aided and abetted at the highest political level, the Committee should be told of this. Had officials been told to go ahead and “do all these wrongs things,” and if anybody should ask, “we will protect you”? The Chairperson also acknowledged that in the last two years, the Committee itself had been “soft” on the Department, thinking that the situation would finally turn around. He also recalled that AGSA had told the Committee that political interference indeed had taken place -- the DWS had decided to legally contest the audit findings of the AG. The Committee had been vocal that the decision amounted to contesting the very credibility of the South African Constitution, as the AG’s office was a Chapter Nine institution.

Mr Chauke declared himself fully behind the decision to invite the DWS and its entities to appear before the Committee again, adding that the Minister, Deputy Minister and the DG should be present, as well as their counterparts at the Department of Finance. He requested that next time, the AG should have a clear answer as to whether the Department was a going concern or not. The NT should also have a definite answer on the legality or otherwise of the decision to approve an overdraft facility for the DWS.

Mr Basson was also in full agreement with the proposal, and suggested that the presentation made by the DWS on 2 May 2018 before the Committee be forwarded to the NT, because there might be more irregularities to be uncovered on this matter. He cited as an example the fact that the Department still did not know for sure how much they owed the water boards, so the amount could still escalate. He was still waiting for a reply to a question he had asked in March this year on the reported wasteful expenditure at Clanwilliam Dam, where allegedly around R45 million had already been spent on paying workers despite an ongoing strike.

The Chairperson informed the meeting that all questions and comments had been noted, and the NT and AGSA would not be giving responses. The Committee would send invitations to the top leadership of the DWS and all its entities, as well as the Minister of Finance and the National Treasury’s Director General to come for a briefing. He also asked both the NT and AGSA to clarify the government’s position on restraint of trade. Too many times, high ranking officials in the administration resigned today and by tomorrow they were back as consultants to the same departments they had been working for. The practice was wrong and it should stop.

He remarked that it spoke volumes about the type of leadership which had come in in 2014, as this was the same time the rot had begun at the DWS. Regarding the “War On Leaks” programme, it was unheard of that a Department could spend billions of rands on something that had not been budgeted for. Also of concern was whether it was legal for the DWS to have separate accounting systems for the same set of departmental entities, as reported by AGSA.

Mr Chauke proposed that the Special Investigation Unit (SIU) and the National Prosecution Authority (NPA) also be invited to be part of the planned high level meeting, in order to explain the lack of progress regarding cases of fraud and corruption which had been brought before these law enforcement agencies, and to work out a programme of action going forward. The DWS had achieved only 28% of its annual targets, and yet a R16 billion budget had been spent. He told of a village in the Groot Marico, where people drank their water “directly from the sewerage system,” yet DWS officials continued to live luxurious lifestyles – appearing before the Committee “wearing R20 000 shoes.”

Mr Basson requested a full report on the “War On Leaks” programme. How many people had been trained? What were the successes? It seemed billions had been spent without any tangible effect on the country’s water system. 

Ms Khawula revisited the Clanwilliam Dam matter, and suggested that whoever was in charge there should be called to account. She added that if it were up to her, the previous Minister of the DWS should be summoned to appear before the Committee. She also welcomed Mr Chauke’s SIU suggestion, and said she was more than willing to work with them, even as far as travelling with them to KwaZulu-Natal to show them actual evidence of DWS illegality.

The meeting was adjourned.

Share this page: