Department of Water and Sanitation: Auditor-General & Treasury input on audit & financial management; with Minister

Water and Sanitation

16 May 2018
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

The Portfolio Committee received briefings from the Auditor General of South Africa (AGSA) and National Treasury (NT) on the budget and financial management of the Department of Water and Sanitation (DWS). Treasury had been asked to respond to questions surrounding the approval of an overdraft to the cash-strapped Department, and AGSA had been asked to report on the financial status of the DWS, following the Department’s appeal against its audit findings.

NT said it did not allow or authorise overdrafts to any departments. It was the Treasury’s opinion that the overdraft by the DWS was unauthorised expenditure, since it had not been approved. The DWS accounting officer was ultimately responsible for financial management in the Department, and not the National Treasury.

AGSA said its report on the financial status of the DWS had been validated to be correct and accurate, despite the appeal by DWS, which had subsequently been withdrawn. An audit by the AG’s office was still in progress, and the findings would be presented to the Committee when the audit was completed.

The Committee urged the NT to intervene more strongly at the DWS, which was facing serious governance and financial management challenges. It suggested amending the Public Finance Management Act to allow the NT to intervene in departments before they reached financial crisis levels, and discussed the possibility of placing the DWS under administration. It blamed Treasury’s lack of timely intervention for resulting in a dysfunctional Department, barely able to deliver on its core mandate.

The sorry state of affairs in the Department had led to R1.8 billion in preliminary accruals and payables for the 2017/2018 financial year. Of this amount, R904 million had been for infrastructure projects, where payments could not be made due to the DWS having insufficient cash in the bank. As a result, the Department had had to adjust its annual performance plan downwards to prioritise the payment of accruals. Consequently, no new projects would be entered into in the current financial year. New controls introduced in the Department had drastically reduced new instances of irregular expenditure, but irregular expenditures were still expected to keep increasing because of payments for old irregular contracts.

The Committee welcomed the new Minister of Water and Sanitation’s turnaround strategy, and urged him to collaborate with the NT and AGSA to improve the financial management and administration at the DWS. It also called for the speedy appointment of a Director-General who would drive the Department’s new vision and strategic objectives.

Minister Nkwinti committed to restructuring the six branches of the Department and supporting the nine Deputy Directors General in their mandates. He also referred to the establishment of a planning, monitoring and evaluation component that would be essential in dealing with the Department’s planning deficiencies.

Meeting report

Opening remarks

The Chairperson opened the meeting and outlined the order of the presentations. He informed the Members that the report would be tabled the following morning for the adoption of the budget. He conveyed the apologies of Ms Pamela Tshwete, Deputy Minister: Department of Water and Sanitation (DWS), who was present but would leave at 11 am to attend to other urgent matters. He asked the Auditor General’s (AG’s) office and the National Treasury (NT) to give a briefing on the matters deliberated upon at the previous session on 9 May 2018.

DWS overdraft: Response from NT

National Treasury responded to the four questions asked in a letter by the Chairperson of the Portfolio Committee on Water and Sanitation. The questions sought details of the legal basis on which an overdraft had been issued to the DWS, the disciplinary, corrective and legal actions that had been instituted, and the intervention measures instituted by the Treasury.

NT said it did not allow or authorise overdrafts to any Departments. It was the Treasury’s opinion that the overdraft by DWS was unauthorised expenditure, since it had not been approved. The DWS accounting officer was ultimately responsible for financial management in the Department, and not the National Treasury.

The National Treasury contended that it should have formally informed the Minister in charge of the DWS to take disciplinary action against the officers responsible. This had been an oversight on the Treasury’s part. NT was currently conducting oversight and would report in four weeks’ time on its findings.

Discussion

The Chairperson asked NT to comment on section 216 of the Constitution that seemed to suggest that it was Treasury’s function to intervene in a department in case of financial misappropriation.

The National Treasury replied that the norms and standards set out in the Constitution were then set out in the Treasury regulations and the Public Finance Management Act (PFMA), and those were the guidelines that guided its actions and interventions.

The Chairperson outlined Section 6 sub-section 2, from (d) to (f) of the Constitution, which outlined what was expected of the National Treasury, and stated that the National Treasury may assist departments in building capacity for financial management, and intervene by taking steps to address breaches to the Act. He reminded the NT that the Committee Members had in the previous session told the Treasury, “You have failed us as a National Treasury”.

The Chairperson requested the AG’s office to provide information on the outcome of the various contestations in their report on the financial state of the DWS.

Financial state of DWS: Response by AGSA

The Committee was told that the Auditor General of South Africa’s (AGSA’s) report on the financial status of the DWS had been validated to be correct and accurate, despite the appeal by DWS, which had subsequently been withdrawn.

An audit by the AG’s office was still in progress and the findings would be presented to the Committee when the audit was completed. A detailed summary document on the status, response and outcome of the various contestations would be provided at a future session.

Discussion

The Chairperson agreed that DWS had the right to query the findings and the report by the AG’s office, but said the spirit of that query had seemed to challenge the constitution because the AG’s office was a constitutional body, and challenging its integrity and work in the manner that the DWS had done would compromise its future activities.

Mr H Chauke (ANC) asked at what level the Treasury had had discussions or engagements with the Minister in charge of the DWS. What was the NT’s view on the financial status of the Department going forward? Had the AG’s office had an opportunity to engage with the new Minister on the report and brought to his attention its concerns regarding the financial status of the Department?  He asked both Treasury and the AG to clarify their position on the financial status of the Department and the details of the withdrawal of several contestations, and to indicate why and when they had been withdrawn.

Mr LBasson (DA) probed about the additional steps, apart from withholding funds, that the National Treasury could take to assist the Department and the new Minister. 

Mr D Mnguni (ANC) said that since there had been a retraction of the appeal by the DWS to the AG’s report, what had been the particular issues raised by the Department in relation to the audit findings?

Mr M Galo (AIC) wanted to establish what authority the representatives of both the NT and the AG’s office had to answer the Member’s questions, and whether it would be like the previous sessions whereby they had claimed some of the questions were outside their purview and that they would need to consult and respond at future meetings.

Both the Treasury and AG delegations indicated that they had the authority to respond to all the questions asked by the Committee.

Mr Galo continued by asking what the plan was, going forward, with regard to oversight and the overdraft. He recalled that at the previous meetings, they had indicated that Treasury did not have the authority to grant or approve overdrafts. He therefore wanted to know who had signed the approval for the overdraft granted to the DWS.  He made it clear that he was asking for the exact particulars, including the name of that individual.

Treasury responded that they would have to wait for the completion of their investigation and the audited financial statements of the DWS. The preliminary statements seemed to indicate an under-spending of over R500 million for the 2017 financial year.  Only after all the investigations and reports were finalised, would Treasury decide if had to intervene in the Department, and whether to put it under administration. Whatever interventions or measures Treasury took would be reasonable and implementable, because a measure such as taking over the administration of the Department would be impractical, because Treasury had only 1 200 employees, and moving most of them to the DWS would affect its other functions. The Cabinet would have to approve whatever measures NT proposed, because the Constitution required it to be a Cabinet decision.

Mr Basson interjected that the Members did not wish to hear about staff challenges at the Treasury if they had to take over the administration at the DWS, because they could opt to hire an auditing firm to do the work for them.

In response, Treasury emphasised that since 1994, all interventions by NT had avoided taking over a Department’s administration, and they had never taken such action before. In addition, it only had information on the spending performance from the interventions it had already implemented, which showed improvements, even though it was still way too early to make a definitive conclusion. The DWS’s financial statements would be finalised in August 2018, and only then would the true financial position of DWS be known for sure. Treasury had noted a significant deterioration in the negative cash balances at the Department, and only then had they become aware of the problem at the Department. They had asked the Department to tell them what they intended to do about the negative balances to avoid compromising on service delivery.

The Chairperson wondered how the problem at DWS could have started in 2014, yet corrective measures were being thought of only now. He called for the speedy appointment of a Director-General who would drive the Department’s new vision and strategic objectives.

The AG responded that they had communicated their findings to the accounting officer at the DWS and the Minister at the time. They had not communicated the matters to the new Minister, because of the legal challenges and appeals that were ongoing. However, since the appeals had been withdrawn, after the conclusion of the last meeting with the Committee on 9 May, they had started working on an official letter and communication to the new Minister, and it would be issued soon. In the letter, they would officially notify the new Minister on the latest developments on the appeal contestations and the latest financial issues at the Department.

DWS turnaround: Minister’s response

Mr Gugile Nkwinti, Minister of Water and Sanitation, responded to the question of whether Treasury would turn the DWS around by saying it was his responsibility, and not Treasury’s, to turn it around. He would do so with the assistance of the National Treasury, but the responsibility was ultimately his. He had worked with both the AG’s office and Treasury in his previous office. He also wondered how the mess at DWS had continued unabated for so long, and said he had restructured the six branches within the Department and made plans with his senior management team to provide more support to the various Deputy Director Generals (DDGs). He spoke about the establishment of a planning, monitoring and evaluation component that would be essential for dealing with the Department’s planning deficiencies.

Discussion

Mr Chauke asked for comments from both Treasury and the AG on the Minister’s pronouncements.

Mr Basson emphasised that there had to be thorough investigations and not just lip service. The previous Minister had been given more than enough time to tackle the challenges at the DWS, but things had only got worse. He completely disagreed with Treasury’s preliminary assessment that DWS’s financials for the financial year 2017 looked promising. The Department still had billions of rands worth of debts to pay, including expenditures such as rent, accruals and their ‘War on Leaks’ programme, just in the 2017/2018 financial year alone. He was of the view that its financial state was actually getting worse with every passing year, because when the previous Minister had been appointed, the Department had owed R330 million, but it currently had debts amounting to over R6.4 billion.

Ms C Visser (DA) complained that there was a total standstill in respect of DWS projects on the ground, and wondered what would happen when the Department was unable to pay its service providers and they opted to refuse to provide those services.

Mr Galo thanked the Minister for his sentiments, and wished him all the best in turning the ship around at the DWS.

Mr Mnguni said he supported the Minister’s remarks on turning the ship around, and asked the AG and Treasury to specify exactly how they planned to assist the Minister with his efforts. He added that if Treasury and the AG did not have an answer to his question at that moment, they should inform the Committee on exactly when they planned to provide a detailed response to the question.

Ms N Bilankulu (ANC) welcomed the Minister’s turnaround strategy, and asked what the role of the National Treasury and the AG’s office in that strategy would be.  

DWS response on financial issues and Bucket Eradication Programme

Mr Sifiso Mkhize, Acting Director General: DWS, said that at the end of the 2014/2015 financial year, irregular expenditure had amounted to R 330 million. An investigation had indicated that irregular expenditure for previous financial years, since 2009, had largely been misstated or never reported. The understatement had been by R452 million, bringing the overall irregular expenditure to R781 million.

The Department had already paid back R296 million of the unauthorised expenditure to the National Treasury in the 2017/2018 financial year. New controls introduced at the Department had drastically reduced new instances of irregular expenditure, but the irregular expenditures were expected to keep increasing because of payments for old irregular contracts. Among the controls for all new contracts were:

  • Standard operating procedures for Ministerial directives;
  • Finance Circular 7 requiring implementing agents to comply with Supply Chain Management (SCM) procedures;
  • Finance Circular 8 requiring supporting SCM documentation to be provided by IA before payment;
  • The Memorandum of Understanding (MoUs) for implementing agents (IAs) had been revised.

The Department had appointed a service provider to assist with investigations into fruitless and wasteful expenditure and value for money relating to the four areas identified by the AG. The investigation by the consultants would be finalised before the issuing of the annual financial statements, and the findings thereon would be incorporated.

A troika had been established between the Departments of Human Settlements (DHS), Cooperative Governance (COGTA), and Water and Sanitation (Water Affairs) in September 2013 to address backlogs in basic services and in particular, sanitation. It had resolved to assist 27 district municipalities to accelerate the eradication of sanitation backlogs and initiate the intervention programme of eradicating bucket toilets. The troika’s mandate had been to ensure all households utilising the bucket toilet system be provided with dry or waterborne sanitation. The change in scope would require a longer implementation period, as well as having additional costs. The unauthorised expenditure was not expected to continue for the bucket eradication programme, because the programme was expected to come to an end in the current financial year.  

The ‘War on Leaks’ programme had previously been budgeted for from revenue through the Water Trading Entity (WTE), and it had been the Department’s intention to fund the programme through revenue, and not from the fiscus in the main account. Additional funds were not obtained by the Department, and the only way it could fund the programme was through the WTE.  In 2016/2017, R1 billion had been budgeted for and paid by the WTE. A problem had arisen in April 2017, when the bank account of the WTE had been closed by NT due to the overdraft. R737 million would be required for ‘War on Leaks’ in the 2018/2019 financial year, but the Department would not be able to budget for the programme through the main account from the available R165 million. The Department would nonetheless continue looking for alternative means of funding the programme. So far, the Department had paid R1.1 billion in accruals, and the outstanding accruals and payables amounted to R640 million, of which R490 million was for the ‘War on Leaks’ programme.

Discussion

Mr Chauke interjected that there was no need to repeat information that had already been presented, even if it had been presented by different people. He suggested that they should move on to the next presentation. He asked for a presentation of the Minister’s turnaround strategy to facilitate the Minister being held accountable for the plan, were it to fail at a later stage.

Mr Basson said that the document presented had not provided a progress report on what had been done in the current financial year, and what would be expected during the next financial year. He advised the Minister not to allow the over R700 million for the ‘War on Leaks’ programme to be taken from the Department’s budget, because the programme had come from the President’s State of the Nation Address (SoNA), so additional funding should be provided for it, and not necessarily from the Department’s current budget.

Ms B Maluleke (ANC) asked what some of the risks and challenges facing the DWS were.

Mr Mnguni wondered how the Department operated, because the presentation had outlined assumptions rather than facts. He questioned whether the DWS did its own feasibility studies and geotechnical investigations, and why it gave implementing agents work to do, yet it did not have money to pay for the work.

The Chairperson complained that the Committee expected more details from the presentation on the budget for the Department to facilitate the Committee’s finalising its report and outlining its recommendations.

The Minister responded that the ‘War on Leaks’ programme was ongoing and currently in the second phase of training young people and transferring skills.

The Department did, in fact, have a debt of R421 million that was required immediately.

The DWS would work with municipalities on operations and maintenance, but would focus more on maintenance while also training the municipalities on infrastructure provision. He had visited Limpopo where councillors had told him to focus on reticulation, because the infrastructure was already in place, and the municipality did not have the capacity to reticulate. Because of the lack of flowing water, people were angry, leading to the destruction of the infrastructure, which would again need to be refurbished. He added that if the municipalities did not have the money for reticulation, he would have to go to NT to provide the Department with that money. The Department needed money to build, operate, train and transfer.

Mr Basson commented that if completion of the Clanwilliam Dam was successful, farmers could be moved into the area, and they would benefit greatly. He thanked the Minister for bringing the construction unit back to the dam.

Ms Maluleke asked how the DWS was planning to make the various municipalities pay their dues and debts to the Department.

The Minister responded that a task team was currently working on that objective, and would provide a report with actionable recommendations.

The meeting was adjourned.

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