The Portfolio Committee on Water and Sanitation met for a briefing from the Lepelle Northern Water Board on its annual report for 2017/18 financial year, and a briefing by the Overberg Water Board on its report for the 2015/16 financial year.
The Minister introduced the acting chairperson for the Lepelle Northern Water Board, as the current chairperson was still on a technical suspension. The Minister expressed his satisfaction with the report, as remarkable progress had been made with the Giyani project. The acting chairperson conceded that indeed there had been many problems with the Giyani project, but that things were now on track and that there were no more dangers. The board was committed to ensuring that all the communities had water by September 2019. The chief executive officer (CEO) provided an overview of the water board’s financial and non-financial performance.
During the discussion, the Committee raised the following issues:
- The 76% decline of the board’s cash and cash equivalents and the impact of this on its viability;
- The performance bonuses paid to the executives;
- The outcome of the audit report, which had been downgraded from unqualified to qualified;
- The action plans that were outlined in the report, and the effectiveness of these plans;
- The lack of innovation on the part of the board with regard to reducing electricity costs;
- The board’s late payment to creditors and its struggle with debt collection.
The acting chairperson said that a forensic investigation of the board was being conducted. The CEO indicated that they were aware of the issues with regard to maintenance and the ageing of infrastructure. They were in discussion with the Water Research Commission with regard to innovative ways to reduce electricity costs. They were aware of the dire debt collection issue, and constant engagement with the various stakeholders was currently happening. The involvement of the National Treasury played a big role in addressing this issue. The main reason they had received a qualified audit report was because of the unbundling of their assets. They agreed that late payments to creditors were extremely detrimental, and the board had made great efforts to improve this. They had come up with an action plan to ensure that the board complied with the Auditor General’s (AG’s) report.
The Minister said that the Overberg Water Board did not currently have a board, and that the executive was doubling up as the board. He would be submitting the prosed new board to Cabinet tomorrow, and the new board should soon be constituted.
The Overberg Water Board presented its 2015/16 annual report. One of its major challenges was the fact that the board had been terminated on 1 June 2017. The second challenge was instability at the executive level. Another major challenge was the lack of records and non-submission of reports. However, much had been done to deal with backlog, and that was why the board had been able to submit the 2017/18 report on time.
The Committee raised questions about the viability of the board and its progress, despite not having a board. They expressed satisfaction with the board’s fast creditor payment time. They commented that the board was quite small, and asked how it intended to grow its footprint.
Two representatives from the AG spoke briefly about a pending amendment to the law, which would give the AG more power to take action against irregular and unauthorised spending.
The Chairperson said that at the start of the fifth Parliament, all entities -- including the water boards –had been represented by the Department, but this Committee had then taken a drastic step to request that the boards come and present to this Committee themselves in order for the Members to ask them questions directly and to receive direct answers when it exercised oversight.
He said that two entities would present, Lepelle Northern Water Board on its annual report for 2017/18 financial year, and they would be followed by the Overberg Water Board, which would present on its annual report for the 2015/16 financial year.
Mr R Hugo (DA) asked whether the meeting had a quorum to proceed.
The Chairperson clarified that according to the prescript of Parliament, the Committee needed four Members to proceed. This meeting had four Members and therefore they had quorum.
The Chairperson asked Mr Gugule Nkwinti, the Minister of Water and Sanitation, to address the Committee, and commended him for giving the Committee the necessary time it deserved.
Minister’s introductory remarks
The Minister introduced the acting chairperson for the Lepelle Northern Water Board, Advocate H Matsepe. The chairperson of the board, Mr Midiyavhathu Tshivhase, was still on a technical suspension and the board had requested that he desist from participating on the board on the grounds of serious allegations published in The Sowetan newspaper. The Minister was happy to present the report, as a lot of progress had been made in terms of the Giyani project. This project was often in the news, but progress had been made as the board had decided to terminate its relationship with LTE.
The Minister said that the Department of Water and Sanitation (DWS) was doing a lot of work in the Giyani area. Construction was focused on getting water to communities. One of the problems were boreholes that had been drilled, but no water had been accessed. The board was doing its best and the Minister was satisfied with the performance of the board.
He raised concern that Clanwilliam was supposed to have its own board, but he had found that both the ANC and DA had not yet submitted their proposed names.
Lepelle Northern Water Board
The Chairperson requested that the acting chairperson of the board first address the Committee
Adv Matsepe said he wanted to clarify a few things before he handed back over to his chief executive officer to present the financials. He said that indeed they had problems in the Giyani area, but that things were now on track and there were no more dangers. The current target date was that by September 2019 all the communities must have flowing water. This past Friday he had had a meeting with the Premier, in which he had committed that Lepelle would ensure that all the areas of Limpopo had water. That was their commitment.
There had been some strikes, because people had demanded water. In order to achieve this goal by September, mayors would have to come on board and the board would assist them, but they would ensure that every part of the province had water.
Mr P Legodi, Chief Executive Officer (CEO), Lepelle Northern Water, said that the first part of the report was an overview of the financial performance and the second part was an overview of the non-financial performance of the board.
The financial performance of 2018 was contrasted with 2017, and the variance between the two were indicated. Current assets had decreased by 9% from R1.032 billion to R936 million as a result of the unbundling process of the board’s infrastructure, which had brought about credibility and certainty.
The ‘receivables from exchange transactions’ was the money that the board was owed from the municipalities as well as the DWS for the projects that the board was implementing. The board was in constant discussion with the Department to try and solve the amount of money that it owed the board. They were also engaging the municipalities that owed them on a constant basis in order to ensure payment. The issue was that most of the municipalities were poor and did not have a sustainable revenue base, which had a ripple effect. The board had entered into debt repayment agreements with most of these municipalities and had converted them into court orders. The board had also requested that National Treasury (NT) notify the board when they made equitable shares available to municipalities to better ensure debt collection.
Regarding the cash ratio, a strained liquidity status was affecting the board badly. The ratio had decreased from 0.2 to 0.1. The 2% variance between the budgeted expenditure and the actual expenditure was owing to the increase in electricity costs.
Although there had been no unauthorised expenditure, irregular expenditure had increased by 47%. This was largely as a result of the renewal of an expired contract, non-compliance with the panel selection criteria, and deviations that the Treasury said were not in their guidelines. The board had requested Treasury to workshop and train all the supply chain management (SCM) officials. The fruitless and wasteful expenditure was largely owing to late payment to suppliers, mainly the South African Revenue Service (SARS), which had resulted in interest and penalties. This had been as a result of cash flow constraints.
In the Auditor General’s (AG’s) audit report, the board had been downgraded from unqualified to qualified, which was largely as a result of the unbundling of the infrastructure assets. The board had employed a service provider to help the board come up with a credible asset register to meet the AG’s requirements. The process had been lengthy and tedious, and they could not finish it within a year.
As part of their internal projects, the board was upgrading the Olifantspoor and Ebenezer schemes which supply Polokwane with water. Currently, there was a serious water crisis in the area due to the depleted water infrastructure. In order to properly service Polokwane, a lot additional funding was needed, so the board was in constant discussion with the National Treasury and the Development Bank of South Africa (DBSA) in order to obtain a loan to finalise this project. The DBSA was interested, as they see the project as bankable.
Mr Matsepe referred to the issue of allegations of corruption, and said the board had taken the position to hire a forensic investigator to investigate the entire board and the entire executive. They also had an anonymous tip-off line run by Deloittes.
The Chairperson said he thought the Minister would say something about Special Investigation Unit (SIU) investigation, which had been omitted. He also thought something would be said with regard to the maintenance of assets and the replacement of aged assets and infrastructure. He was hoping for some clarity on the meeting that was supposed to have happened to address the issue of outstanding debts.
He mentioned that the Rand water board had started a process of exploring ideas on energy mix and renewable energy. In order to reduce the cost of electricity, he believed that not only would an idea like this be beneficial to the board, but also to consumers.
Mr H Geyer (DA) asked for clarity with regard to the 935% variance in ‘fair value adjustments’ on the fourth page of the financial performance report. He wanted to know whether this was a positive or a detrimental factor. What was the board doing with regard to the 76% decline in the cash and cash equivalents? Had he heard correctly that they were going to utilise the equitable share that was allocated to the specific municipality areas? Lastly, he said that despite all this, there was a responsibility on DWS to ensure that things run smoothly, and he wanted to know what the it would do with regard to all the challenges during the late finalisation, over and above just the Lepelle water board.
Mr Hugo raised concern that it seemed that the Lepelle water board was not financially viable, as the deficit kept on growing each year due to the poor debt collection in their system. He wanted to know what their plans were to address their poor debt collection. He raised concern that it seemed that some of the executive members had paid themselves performance bonuses, despite receiving a qualified audit from the AG. He requested that this be discussed, as this practice was not sustainable,and for more details of the forensic investigation mentioned by the acting chairperson.
Mr Mnguni raised concern that from 2013 to 2016, the reason for getting an unqualified report had been the same, and from 2016 to 2018 the AG had downgraded the board based on the fact that there had been no improvement. He wanted to know what plans the board had to ensure that when the AG had given the board a report, that they followed up on it. What exactly would they do to ensure that the report that the AG gave was s properly dealt with? He asked how effective the actions given on page 19 were, because there was no indication of seriousness on part of the board. He highlighted an example, under ‘major finding’ the board had listed, where there was no process to avoid or detect wasteful and fruitless expenditure. Then, under ‘root cause’ they had listed, there was a lack of understanding of SCM processes with respect to deviation procedures, and then under ‘action’ they had simply said that the board was improving on SCM and had conducted SCM training through National Treasury. He wanted to know how effective this was.
When looking at the financial report, the AG had indicated that there had been inappropriate record keeping. Supply chain had to do with inappropriate record keeping, so he wanted to know what plan the board had to avoid problems like this. Did the board have an internal audit system which addressed issues like these on a monthly or weekly basis?
He was concerned that electricity was a major cost, and wanted to know what new technological solutions the board had explored in order to decrease electricity usage. Why had the board not yet engaged the Water Research Commission on possible solutions to decrease electricity usage?
The Chairperson expressed grave concern with regard to the extension of an expired contract. Someone had willingly extended an expired contract and by law there was a consequence for extending an expired contract. There had to be a penalty for the person who willingly did something illegal.
He then asked the Minister about debt collection. The debt was around R12 billion and the situation was not improving. This was with reference to all the water boards and he wanted to know when this would improve. There were signs that this figure might be decreasing, but he wanted some clarity on the issues in the context of what Lepelle had reported.
Mr Mnguni asked what the board’s plans with regard to creditor payments were, as it took the board 273 days to pay creditors. He referred specifically to doing business with black-owned companies with limited means. What was the board doing to ensure that these businesses were not going bankrupt?
Water board’s response
Mr Matsepe said that as a starting point, the board did not condone any misconduct by officials. The board had policies in place and it was the responsibility of the executive to ensure compliance with these policies. He agreed with the Chairperson that there could not be an official that extended an expired contract, but it had happened and the board was expecting to see action taken against these officials.
He commented on payment of creditors, and agreed that if a person did a service, one shouldpay them on time -- if not 30 days, then 60 days at most -- but almost a year was unacceptable. The board was faced with this problem due to a cash flow problem. However, the Department had made a promise that there was light at the end of the tunnel.
He clarified why the board had initiated the forensic investigation. The allegations in The Sowetan newspaper against the chairperson of the board had raised some serious issues. The board felt that a forensic investigation would be the only way to restore confidence in the board. The forensic investigation team would investigate the whole board in order to ensure that those currently running the board were really clean. The board expected the initial report from the forensic investigator at the end of March 2019. This investigation would be an ongoing thing and it would also extend to the tenders, to ensure that things had been done according to the book. The board felt that they wanted to do some self-cleaning, and that they did not need a court order to tell them to do this.
Mr Legodi said that the situation on the maintenance of assets was not an issue particular to this province, as he was sure many other boards had a similar problem. Most water boards serving rural areas had the same problem. Assets had been installed many years ago to service a small population. Now, with urbanisation and rapid population growth, these assets were not properly maintained or enlarged to keep up with the size and the population demographics of the areas that they were serving. As a result, these assets were unable to meet the demand and when they did, they burst. An example of this was Polokwane, where the population had tripled and the infrastructure could not keep up with population growth. The board had contracted a service provider to help with the conditional assessment of the infrastructure. The process was at an advance stage and the board would finally have an asset maintenance plan which would indicate the age of the infrastructure and the timelines for maintenance and repairs, and when to replace the infrastructure.
He said the board was currently in discussion with the Water Research Commission to survey all of the board’s water plants to assess which would be viable for the energy mix in order to curb electricity costs.
He admitted that the board was in a dire state as a result of the debt collection issue. It was owed a combined total of R1 billion by both the Department and municipalities. The board was in constant engagement with the owing municipalities, using all the government sectors. Over and above this, the board had its own debt collection strategy, which categorised the set of actions that needed to be taken against any entity owing the board money. The final stage of these actions would be to switch off the taps, but this action was not sustainable as it did not make sense that communities had to suffer when government departments were in dispute. The board had therefore rather taken the approach of forcing the owing municipalities around a table to negotiate debt repayment agreements, and had asked the National Treasury to help the board in monitoring it.
With regard to the equitable share debt recovery, the National Treasury played an important role. The NT gives the board an indication before the equitable shares are paid to municipalities. This enables the board to engage with the municipality and ask them to pay, and the board knows that the municipality has received money. This was documented in terms of the debt repayment agreement.
The problem was that these municipalities were owing so much that they could not pay historical debt and service their current account. He agreed with the Chairperson that there needed to be decisive engagement with the departments and municipalities involved. The board was also aware that these municipalities were serving indigent communities like Mopani, where 62% of the community was indigent.
He said the bonuses paid to executive members were regulated by the human resource policy, which guided how the bonuses should be paid. The executives had not just paid the bonuses to themselves. The board had not made any submission for an increase for the chairperson to the Minister, because the former Minister had stated that certain executive members should not get an annual increase.
The main reason the board had received a qualified report was because of the assets unbundling. In the past three financial years, they had received an unqualified report as a results of the debts. The last two financial years, this had been downgraded to ‘qualified’ as a result of the debts and the assets unbundling. The unbundling process was quite tedious, and during the financial year in question the board could not start and finish it. The board was at the tail end of the process, where they were developing a credible infrastructure asset register that would meet the AG’s demands and requirements.
The senior officials that had extended the expired contract were currently on suspension, and over and above that the board had engaged NT to train all the staff involved in SCM. They also had an officer to keep track of any changes from NT, and to then inform staff. The board had also committed to subject officials to disciplinary action if there was evidence of gross negligence and intention. The board had also appointed three officials to help the board with internal audits and assurance with the systems in the institution.
Ms Sibongile Valoyi, Chief Financial Officer (CFO), addressed the question with regard to the ‘fair value adjustment.’ Money had been put aside for post-retirement benefits, so the adjustment predicted that there was a motive move, as the investment had performed very well.
She indicated that the unbundling of the asset register had had a massive impact on the financial performance, in that the board had to carry a huge amount of depreciation cost, which had been unexpected. With that said, it was necessary to indicate that in order for the board to improve its financial performance they would have to increase their production. However, currently all the projects aimed at increasing production had been put on hold due to cash flow problems. The board had then decided to implement cost containment measures. It had outlined all the issues and stated what they could go without and what was critical for operation.
She agreed that it was detrimental to creditors when the board was unable to pay on time. They had had a lot of complaints from creditors with regard to late payment. The board had made a cash flow projection to ensure that they were reducing the payment period, and currently the board was sitting on 31 to 60 days, which was a huge improvement from the previous financial year.
In line with the guidelines set by National Treasury, when the board incurred irregular expenditure they had to apply to have the irregular expenditure condoned, which included an investigation and a report on what caused the irregular expenditure. The board was in the processes of submitting a request to National Treasury to have the irregular expenditure condoned.
Lastly, she addressed AG’s report as to how the board should improve their performance. The board had come up with an action plan which they were monitoring on a monthly basis to ensure that everything they had said would be implemented had been implement within the time they had given themselves. This should ensure that by the time AG came to audit the 2018/19 financial statements, they should be able to provide the necessary documentation in order to improve the board’s audit performance.
Mr Hugo asked why Lepelle water board was issuing tenders without following a competitive tendering process even though there was enough time to conduct the competitive tendering process.
The Chairperson asked how many small and medium sized black-owned enterprises had shut down due to late payment by the board.
Mr Matsepe said that it was not a factual statement, that the board had been involved in tender irregularities. The board was also willing to take action if there was evidence of such allegations. According to the board, the supply chain was doing things according to the book.
The Chairperson asked Mr Hugo to direct his question properly.
Mr Hugo said that it was stated, under ‘irregular expenditure,’ that there had been a deviation from competitive bidding, and that proper tender processes were not followed.
Mr Legodi said that reason for these irregularities were not something that the board could condone in terms of their supply chain policies, and as a result they had put people through a disciplinary committee (DC) process. It was not a regular occurrence -- they had just been isolated instances which the board was dealing with decisively. The board was happy to give the Members a list of the projects to show compliance with SCM policies.
Ms Valoyi said that there was not really an official list of suppliers who had gone out of business due to late payment by the board, or if ever the board had been the main factor for going out of business. However, they had had complaints that a supplier would go out of business because of the board’s failure to service the account.
The Chairperson asked for these complaints to be provided in writing by Friday next week.
The Minister said that he had conferred with the acting DG of the DWS as to why it had not been paying the Lepelle board.
Ms Deborah Mochotlhi, Acting DG, DWS, addressed the issue of non-payment by the Department to the Lepelle board, said that it was as a result of disputes with regard to the certification on the correctness of the invoices. Immediately after this meeting, she would check with her colleagues as to when the disputes would be resolved and to confirm the amounts of the disputes. She would also process the invoices without disputes as soon as possible.
The Chairperson asked what had happened to the training with LTE. He was aware that the contract had since been terminated.
Mr Legodi confirmed that the contract had been terminated and there had been no objection or dispute raised by LTE. On the amount of money they claimed the board owed them, they could not establish a legal substantive base why the board should pay them that money, and therefore the board had not paid them. For every invoice they brought, the board would go and check on the site whether the work had been satisfactorily done. One of the reasons the board could not continue their relationship with LTE was because they were demanding an additional R600 million over and above the scope in terms of the costs of the assigned contract. According to the Treasury regulation, the maximum amount of variance from the contract was 20%, and R600 million was definitely above this threshold.
The Minister said that it was difficult to collect debt from certain municipalities, as they were rural and it was very difficult for them to pay. He did not want to justify the non-payment from municipalities, but just wanted to state the fact. The Department would have to find a very creative way of help the municipalities. That was why he had made a recommendation to Cabinet that they re-examine the model of service delivery. It was a delivery model issue.
Regarding the investigations, some of the reports had been sent to the President. There had been a recommendation to suspend an official in the Department, which the DWS had done. The investigation was still continuing, and the Department was awaiting the final outcome of the investigations.
The Chairperson thanked the Lepelle Water Board for their submission, and said that the Overberg Water Board would now present.
The Minister clarified that unfortunately in this case, the CEO doubled up as the executive authority, as currently there was no board. However, tomorrow he would submit a proposal to Cabinet, as the final list of names had been submitted to him. By the end of this month, there should be a board. He hoped to appoint a board that could take over and run with it immediately. In the report that was about to be presented, there were some areas that were commendable, but also areas of deterioration.
Overberg Water Board
Mr Phakamani Buthelezi, CEO: Overberg Water Board, said that they were presenting the report for 2015/16 because they had been running behind, but they were no longer behind. The presentation would be divided into three parts -- the challenges the board has, the financial information, and the performance information, which includes the action plan which emanated from the findings of the AG.
One of the major challenges of the board was the fact that the board had been terminated on 1 June 2017. The second challenge was instability at executive level. Another major challenge was the lack of records and non-submission of reports. However, much had been done to deal with backlog, and that was why the board was able to submit the 2017/18 report on time. The board had already been upgraded from a disclaimer to qualified. In 2015/16, there had been no tariff increase, which had impacted the viability of the entity. They could not double up the following year, as it would have resulted in unfair treatment towards their consumers.
When looking at the board’s performance information, it was clear that despite the challenges it never compromised the quality of water that the board produces. They continued to comply with all the targets, often achieving more than the targets.
The board aimed to produce unqualified reports, but had been disclaimed as many records were missing.
Under general performance and governance, there were a lot of challenges as many of the records were missing so it was difficult to report on what actually had happened. The board also aimed not to have any audit repeats, but this was not possible as many documents were not there.
Regarding the audit report outcomes, the board had appointed an expert to ensure that assets were in line with accounting standards and also to ensure that the board was responding to what the AG wanted. The following year, the board had appointed a service provider to separate and unbundle their assets. The other responsibility given was to review all the assets and to assess whether the payments existed.
In order to address the poor record keeping, the board now ensured that invoices were captured on a daily basis.
The board was determined to increase its footprint. It was engaging the Department to take over some of the infrastructure projects that were in the hands of the irrigation boards.
Due to the drought, revenue had dropped by 1%, which had also affected the board’s gross income, which had decreased by 6% as a result of less water being sold.
In conclusion a lot had been done and the board had made remarkable progress. Efforts had been made to complete all annual reports on time. The 2017/18 financial report submission had been done on time, but the AG had asked for more time to do a 100% audit.
As the Minister had stated, the process of appointing a board was in the final stages, and once there was a permanent board in place there would be proper governance.
Irregular expenditure was being investigated, and action was being taken.
The Chairperson said it was a small, but very ambitious, water board.
Mr H Geyer (DA) commended the board on being positive. He wanted clarity on whether it was viable for the board to be operating or whether it would be finically unsustainable in the future, as the year to year audit outcome was showing that it was doing particularly poorly.
Mr Mnguni said the Overberg water board wax in need of governance, as there was no board and the CEO had basically been doing everything. Despite this, he was happy with the report and said that it positive. He wished that he could see the 2017/18 report, as there was an indication that they were going somewhere.
He asked for more details around the bursaries for employees and whether this had a financial impact. He also asked for clarity on the jobs created, and the variance between the projected and the actual.
Did the performance of the board refer to the previous or current board?
Lastly he just wanted to commend the board, because even though they were themselves in troubled waters, they were still able to pay their creditors. He was very happy with their 40-day payment period. The reason he kept on emphasising this was because businesses were dying in South Africa. Services were being provided, but then there was late payment.
Mr Hugo was concerned that the board was quite small -- they consisted of only four municipalities. He wanted to know how the board planned to grow its footprint.
Mr Mnguni wanted clarity on the challenges in Swellendam and the problem with the billing system in one of the communities. He was aware that this was not an issue of the water board, but actually the municipality, but maybe the board had a way of dealing with it.
The Chairperson asked a representative from the AG’ office to comment on an amendment that had been signed into law. Even though it would not be applicable to the current meeting, it would be applicable in the future. In terms of irregular expenditure, the water boards had been getting away with murder. With the new amendment, the Office of the Auditor General would have teeth to bite and reprimand.
Mr Z Biyela, of AGSA, said that before the amendment the AG was limited to only reporting, but after reporting it had no power to take action for the issues that were noted. The amendment now gave the AG the platform to further refer matters to law enforcement authorities. The AG could also now specifically identify a person that had contravened the policies which would make the process of recovering funds easier.
Ms F Mbatha, of AGSA, added that the AG was planning a roll out a process where all the stake holders would receive a detailed breakdown on how AGSA would undertake this process. This breakdown would happen before the end of this year.
The Chairperson said that it would no longer be business as usual.
Mr Buthelezi sated that if the question pertaining to the viability of the Overberg board was based solely on the report by the AG, he was happy to report that since that report things had changed drastically. The 2016/17 and 2017/18 financial years would show that the board had tried their best to respond to the issues in the AG’s report, and things had improved. For instance, the asset management portfolio was completely different to what it had been during the 2015/16 year.
The board had already come up with a growth path strategy. This strategy helped the board
to identify various areas of growth, both in terms of geographical expansion and in increasing revenue. One of the ways of implementing this was to explore more on taking on secondary activities, such as taking over from other departments. More importantly, the board wanted to increase their customer base, but knew this would be possible only through partnerships. This required the active involvement of the Department. It also entailed working with the South African Local Government Association (SALGA) to build a good rapport with municipalities so that they believed in the capability of the board. The maintenance of high water quality showed that the mandate had never been compromised.
With regard to the Swellendam matter, it did not involve the Overberg board directly.
He clarified that governance in terms of this 2015/116 report referred to the board at that time. The Members could be assured that there was no abuse of power with the current board. He had been an executive in the public sector for more than 20 years, and understood what it meant to be loyal to one’s call of duty, but to also comply with one’s requirements. Most importantly, he worked with a team as a collective.
The meeting was adjourned.