Department of Water and Sanitation 2018-19 Annual Report briefing with AGSA and Minister

Meeting report

The Chairperson started the meeting by requesting a moment of silence for personal prayer and meditation.

It was common knowledge that Annual Report and financial statements of the Department of Water and Sanitation (DWS) for 2018-19 had not been tabled in 2019, as is required by law. This issue would be addressed by the Auditor-General and the Department.

[The delayed submission of the DWS 2018-19 Annual Report was also considered by SCOPA on 11 March 2020 – https://pmg.org.za/committee-meeting/30024/ ]

The Auditor-General of South Africa (AGSA) was invited to brief Members on the Annual Report for the 2018/2019 financial year.

Presentation from Auditor-General

Mr Andries Sekgetho, the AGSA Business Executive responsible for the Water Portfolio, took the Members through the presentation, which had been shared with the Committee prior to the meeting. The purpose of the briefing was to enable oversight, as is constitutionally mandated, following the annual tabling of departmental reports. The tabling of the DWS report did not happen as a result of the lateness of the Trans Caledon Tunnel Authority (TCTA) and Water Trading Entity (WTE) audits. This resulted in the overall late tabling of the DWS 2018-19 Annual Report. The AGSA’s annual audits examined fairness in the presentation of finances, reliability of performance information and compliance with regulations. Feedback was given with various audit opinions indicated on a colour scale from most desirable (green) to least desirable (red). These audit opinions were: unqualified opinion with no findings (clean audit – green), financially unqualified opinion with findings, qualified opinion, adverse opinion, disclaimed opinion (red). In the case of DWS real progression in the annual audit outcomes had not been seen over the previous 10 years. This would be addressed if the accountability model illustrated on slide 8 were followed by the Department. A handbook on accountability had also been published by the AG. If this process was adhered to, the AG was confident that audit outcomes would be improved because of the direct correlation with sound financial management and service delivery.

Audit Outcomes over Five Years (excluding Water Boards)

Outcomes of the following institutions were presented: DWS, Water Research Commission (WRC), WTE and TCTA. Over five years, the audit outcomes of the portfolio had remained stagnant, if they had not regressed as in 2018-19 there was no clean audit in the portfolio. The WTE and TCTA audits were qualified due to certain limitations of the financial statements on the TCTA. It was the first time that the AGSA was auditing the TCTA [which had previously been audited by a private sector practice]. The AG’s [more stringent] requirements ultimately resulted in the delay of submission. Weaknesses and deficiencies within the TCTA were highlighted in red in the presentation slides. The treaty between the governments of South Africa and Lesotho [on water infrastructure] lacked certain regulations such as a requirement that the Lesotho Highlands Water Commission (LHWC) should provide the cost-to-funding reports that would evaluate and allocate funds spent, for example. Even where reports were received from LHWC, they were not interrogated sufficiently by TCTA. This meant there was no evidence that the TCTA performed adequate reviews on LHWC reports.

Disregard for Compliance with Legislation

All four trading entities (DWS, WRC, WTE, and TCTA) in the 2018/2019 financial year had significant material findings on their status of compliance with key legislation. There were 6 key areas of non-compliance, which ultimately meant that financial statements were either not submitted to the standards of the Public Finance Management Act (PFMA), or were not submitted at all. These six areas of non-compliance included: quality of financial statements, prevention of irregular expenditure, prevention of fruitless and wasteful expenditure, lack of consequence management, conditional grants not spent for their intended purpose and payments not made within 30 days. Where legislation was not adhered to, consequence management was required – there had been little evidence of this during the years in question.

Assurance Provided

Concerns were noted regarding the levels of assurance provided by senior management with regard to internal controls at all entities except for the WRC. Audit outcomes had not been favourable. The high number of changes in Directors-General - 13 over five years – with many employed in an acting capacity, was raised as an indication of a need for stability in the DWS.

Management and Delivery of Key Programmes

Decisions made in the past had directly been linked to low programme achievement, which needed to be managed. The DWS’s inability to collect receivables resulted in low revenue. The bulk of the client base is municipalities facing their own challenges. The ‘Follow the Money’ initiative of the AGSA followed selected projects over three to four years to provide feedback to the Portfolio Committee regarding the basic principles of budgeting, accounting, reporting and compliance with pre-determined objectives. There was a concern about a high number of material findings with project management in the DWS. Project management within the TCTA also showed that targets had not been achieved. This called for engagement to determine reasons and root causes for underachievement.

Financial Health and Financial Management

Though a department is not allowed for to function out of overdraft, the DWS had been doing so over the past three financial years. Intervention was thus required. Some loans required TCTA to obtain financially unqualified audited outcomes. A qualified audit amounts to an event of default. This could mean that approximately R20 billion worth of financial liabilities could become callable, should lenders or funders enforce default. There were no immediate concerns identified going forward into the following financial year, but significant conditions within funding arrangements were highlighted. This required careful management by the TCTA. There had been an increase in irregular expenditure over two years. An amount of R6 billion had been recorded during the year in question, while the prior financial year alone recorded R3 billion in irregular expenditure. The bulk of this emanated from implementing agents, which did not always follow proper procurement processes. This showed internal control weakness.

Water Boards Audit Outcomes (2018/2019)

Water Boards’ reporting is aligned to the municipal year (ending in June) which meant that it is a separate part of the AGSA brief. There had been a slight improvement noted across the three financial years. However, the last clean audit within the portfolio had been lost. Sedibeng had consistently obtained qualified audits with findings. This meant that the financial management state of affairs could not be dealt with by the time of the audit. The Lepelle and Mhlathuze entities were commended for improving their audit outcomes due to the use of the Audit Action Plan and the Interim Audit Phase. All nine water boards showed significant material findings, which remained a concern. Irregular, fruitless and wasteful expenditure had also increased over the years. R9 million in fruitless expenditure among the water boards was recorded in 2018-19. Irregular expenditure had amounted to R2.1 billion. Of further concern was the lack of consequence management in these instances. This meant that not only did some water boards incur irregular expenditure, but where they incurred irregular expenditure, they did not have mechanisms in place to fully detect and disclose it, resulting in an audit qualification.

Public Audit Act Amendments and the Way Forward

While the key mandate of the AGSA remained the same, this would be expanded to support dealing with matters of accountability, investigations and consequence management. The rollout of the Public Audit Act occurred in phases, as communicated to Parliament. In total, 28 material irregularities (MIs) were identified in 8 out of 12 completed audits in the water portfolio. A loss of R2.81 billion was involved. Of the 28 MIs, 25 had seen consequence management and follow-up investigations for the 2018/2019 year. Root causes across four entities and nine water boards included: slow response to improving controls and mitigating risk, inadequate consequence management and instability or vacancies in key positions. Preventative controls were important to prevent and address undesirable activities. This included the status of records review. Emphasis was placed on the request that the PC heighten their oversight and monitoring of the Department during COVID-19 expenditure to manage risk. Recommendations were provided, specifically to capacitate action plans, consequence management, oversight structures and implementation within the DWS going forward.

The Chairperson initiated a vote via the virtual platform to determine whether the next presentation would be given forthwith, with questions directed afterwards to both presentations (“yes”) or whether questions would first be posed directly to the AG, with the DWS presentation following afterwards (“no”). Votes were recorded as follows:

Ms N Mvana (ANC) – yes

Ms R Mohlala (EFF) – no

Mr M Mashego (ANC) – yes

Ms G Tseke (ANC) – yes

Ms N Sihlwayi (ANC) – yes

Mr M Tseki (ANC) – yes

Mr L Basson (DA) – yes (happy to hear both presentations, would have preferred to deal with AG separately)

Ms E Powell (DA) – yes

The Chairperson ruled that as the majority was happy to have the DWS present to the Committee, the Minister and DGs were invited to address the Members on the 2018-19 Annual Report.

Presentations from the Minister and Department

Ms Lindiwe Sisulu, Minister of Human Settlements, Water and Sanitation, addressed the meeting with an overview, since the AG presentation had occupied an extensive amount of time in the meeting. An in-depth discussion would still need to be had. The DWS indicated that it had wanted to give its Report prior to the AGSA’s briefing, in order to indicate what it had done from the time it took office until present. Some issues referred to by the AG had been recurring in the DWS. At the time of taking office [May 2019], the Finance Minister had decried that the DWS was bankrupt. The Committee had been emphatic about this, requesting it was ensured this did not occur again. The situation of financial management resulted in the top- and municipal-level management being under investigation, which the DWS has fast-tracked to ensure follow-through as requested by the AG and Committee. This process has been concluded, with findings showing 48 cases of serious misconduct within the DWS. Of these, six Deputy DGs and Chief Directors were prioritised as a result of irregular expenditure to the amount of R7 billion. In total, R16.6 billion was regarded by the AGSA as irregular expenditure across the DWS, which was inherited by those holding office. Irregular expenditure, however, was not always fruitless expenditure. ‘Irregular’ denoted that the expenditure process was irregular and therefore wrong. The Department lost R1.7 billion in fruitless and wasteful expenditure. The Committee would be briefed by DWS regarding this to make explicit DWS intention to turn itself around and make sure that it had as clean a record as possible. Concern regarding the water boards was acknowledged, especially because emphasis had always been on the lack of consequence management and proactive investigation. A process had been initiated to show consequence management. At the time of the meeting, DWS had managed to contact two of the water boards regarding this: Amatola and Lepelle. Others identified by the AG would be contacted and investigated by DWS. The two boards mentioned that had been under investigation had responded in a manner that was outside the prescripts of the public service. The Minister said it was her responsibility to Parliament to ensure that the resources at the Department’s disposal are well looked after. Through the DG, the Minister’s other responsibility was to ensure that investigations were done to clear or lay charges as and when irregularities were found. The DWS was fully behind the report by the AGSA and would be putting a concerted effort into ensuring that the next time the AG reports on the performance of the DWS, they would be deemed ‘fully compliant’. Legal steps were being taken by the DWS in relation to two of the Chief Executive Officers of the boards being dealt with. A legal team had been put together to deal with these matters. The Minister then requested to be excused from the meeting as she was required to attend a special Cabinet meeting.

The Chairperson thanked the Minister and allowed the Acting DG and his team to guide the Committee through the DWS annual report for 2018-19.

Mr Mbulelo Tshangana, DWS Acting Director-General, acknowledged the presentation by the Minister, where she mentioned R16.5 billion in irregular expenditure. The presentation of the AGSA was an accurate reflection of the status of financial management in the Department. The presentation would have an emphasis on the financial turnaround plan. But it would briefly review non-financial organisation performance and financial performance in 2018/2019, and provide feedback on the AG’s report and the state of Human Resources (HR) in DWS. Figures regarding consequence management would also be provided. The DWS finances showed significant accruals and payables to the value of R2.004 billion from previous financial years. This had been reduced by close to R1 billion since then, but these budget pressures impacted the Department’s operations and hence the achievement of some of its planned targets. This showed the need for consequence management. Key highlights included the Department’s Learning Academy, along with its professional development component, as well as an unqualified audit outcome for the main account financial statements and the audit of predetermined objectives.

Overview of Non-Financial Performance

The turnaround time for water use authorisations had been drastically reduced, among other highlights outlined. Overall, 55% of what was contracted to be achieved, was achieved by the Department. Programme One was the worst performing programme (45% achievement). Reasons for this were financial constraints and poor financial management. The DWS struggled in the year under review, resulting in many outcomes not being achieved. The Mzimvubu Water Project, which included Lalini and Ntabelanga dams showed a number of processes that were not managed very well and resulted in poor performance. The projects listed in the annual report were linked to irregular expenditure, with officials directly involved in procuring service-providers under investigation. R10 billion of irregular expenditure had been revealed and confirmed to National Treasury to be under investigation. Some officials had already been disciplined and charged. The law was taking its course.

Overview of Financial Performance

Mr Tshangana asked the Chief Financial Officer (CFO) to take Members through the financial performance slides.

The CFO highlighted key areas of financial performance. R16.6 billion had been spent by DWS, with 10% change from the previous year. During the year under review, underspending had occurred. The unauthorised expenditure carried over from the previous year resulted in an overdraft amount. R38 million was revenue that needed to be recovered. The financial performance of WTE showed underspending, leaving a surplus of R2.3 billion. The current assets within the DWS at the time of the meeting indicated an overdraft on the main account. The annual report included notes on unauthorised expenditure from the previous financial year, particularly overspending on the bucket eradication programme and overspending on the War on Leaks programme, with a closing balance of R641 million. This had been reported to National Treasury for processing to Parliament. No unauthorised expenditure was incurred in the 2018/2019 financial year. There was a trend which showed an overall slight decrease in irregular expenditure, this was in part because of under-reporting in previous years. Ultimately there was a decrease in irregular expenditure after reporting from the previous years was done. An amount of R46.7 million related to the management fees charged by the Lepelle Northern Water and an investigation was at an advanced stage to clear the amount. R13 million related to the charges on standing time and interest overdue for the projects implemented by Amatola Water. Here also an investigation on the matter was in an advanced stage. Overall, fruitless and wasteful expenditure on the main account amounted to R76.3 million in the 2018/2019 financial year.

Overview of the Auditor-General’s Report

Growing concern was raised about material irregularities, for example where payment was made to a consultant firm without evidence of work performed. Another concern was about payments not happening within the 30 day time period. The DWS did not pay the Amatola Water Board on time, for example. The root cause of this is that movements were made from the budget, while the project in the Eastern Cape became stagnant. There were also growing concerns about revenue accruals, interest on advance payments, and employment processes. During the year under review, there were errors not corrected in time, which resulted in non-compliance with legislation and in material irregularities. There had been processes where due diligence was not applied in appointing consultants. An example was of the project in the Eastern Cape, where the matter had been investigated and it had been found that a fraudulent appointment had been made. This was reported to the South African Police Service (SAPS).

Feedback on the Financial Recovery Plan

Members were referred to the breakdown of priority intervention areas which included: alignment of strategic intent, capacity, policy, legislation and institutional matters. It had to ensure that a conceptual framework for DWS was developed, as was required by National Treasury. All the figures from 2018/2019 to 2019/2020 indicated moves in the right direction. The only major area of concern was on fruitless and wasteful expenditure in the WTE which related to the construction unit. However, all the other accounts showed indications of recovery. There had been concerns about invoices that were not paid as a result of financial constraints. To avoid incurring incidents of unauthorised expenditure, as well as irregular expenditure, arrangements were made where DWS had valid invoices to pay implementing agents over time rather than transgressing on financial prescripts.

Consequence Management

Mr Tshangana continued by taking Members through details of irregular expenditure and consequence management. Condonation requests for R9 billion had been submitted to National Treasury which was linked to specific projects: Giyani Water Services Project, War on Leaks Project and the Bucket Eradication Project being some of the largest of these. With all of these projects, officials involved had undergone disciplinary investigations and in some cases these had been reported to the SAPS. Consequence management was therefore being implemented. A summary of outcomes of disciplinary action in relation to forensic matters showed that – over the period 2012/13 to 2019/20, 97 officials were found guilty, 16 were found not guilty, 24 resigned and 1 was reinstated following an arbitration award. In cases where officials resigned, cases were still registered with the SAPS, such that these officials could not simply ‘run away’. These disciplinary actions resulted in various sanctions. Overall, no senior management service members were dismissed but 13 salary-level officials were dismissed. 38 Final Written Warning Letters were given to both senior and salary-level officials in total. An amount of R966 357 had been recovered. 20 cases had been opened with the SAPS and investigations were in presently in progress. Fraud awareness sessions were also being held within the DWS, which was important for proactivity. More than 800 officials had been covered in this process, according to Mr Tshangana. There were also various investigation proclamations with the Special Investigation Unit (SIU). These included, amongst others: allegations at the Mhlathuze Water Board (Proclamation No R35 of 2008), various allegations at the Department of Water Affairs (Proclamation No R54 of 2012) and the awarding of contracts to LTE consulting by the Lepelle Northern Water and Gauteng Department of Human Settlements (Proclamation No R22 of 2016).

Overview of Human Resources

An analysis of employment and vacancies showed that 86% of posts in the DWS had been filled, however 14% remained, which was worrying. This was above the 10% threshold for vacancies [set by the Department of Public Service and Administration] and was still being addressed within DWS. Employment equity showed that 2 371 African females were employed in DWS and 3 273 African males. Indicators were also provided for other demographics. An analysis of the employee attrition rate during 2018/2019 indicated that 92% of employees remained, while 8% (total 560) of employees left DWS. Retaining staff was important for institutional memory, continuity and indicated the implementation of the retention policy.

Ms M Mohlala (EFF) raised a point of order. She was concerned that there was no time to engage on the presentation and felt this was unacceptable. She asked if Members would be given sufficient time to engage. Why were Members invited to the meeting if they were not being allowed time to respond and speak – this would not work.

Mr M Mashego (ANC) said to Ms Mohlala that the last slide was being presented.

Ms Mohlala maintained that her concern was regarding whether enough time would be given to engage. The AG was present in the meeting, which was an opportunity to engage on all the issues. Members wanted to know what was happening, so it was unacceptable for the meeting to be adjourned straight after simply listening to presentations.

Mr Tshangana communicated that all slides had been covered. The only challenge had been that the Annual Report was being presented ten months late, due to the challenges that the AG explained (various projects and institutional project delays). The DWS accepted the report by the AGSA and affirmed that it was a true reflection of the financial status within the DWS of the year under review.

The Chairperson had temporary difficulties with connection. Ms Mohlala said she was “running away” from the meeting.

Discussion

The Chairperson apologised, adding that she had been muted. She thanked the DG and AG. Questions would be taken, however at 15h00 another meeting would be coming in. As such, the DWS and AG would write down questions raised and another meeting would be arranged for responses.

Ms Mohlala said to the Chairperson that in future, time needed to be better managed. Members could not simply listen to presentations without further engagement, this was out of order. If this behaviour was continued, Ms Mohlala added, the Economic Freedom Fighters (EFF) should not be invited to such meetings. The documents were received online.

The Chairperson told Ms Mohlala that she was out of order. Members would be given an opportunity to engage.

Ms Mohlala was frustrated that members had been told that by 15h00 the meeting would be adjourned.

Ms G Tseke (ANC) requested the Chairperson resolve the issue as there were only 13 minutes remaining of the meeting.

The Chairperson reminded Ms Mohlala that she had the responsibility to listen.

Ms Tseke requested the possibility that a slot be provided for answers to questions.

The Chairperson stated that because of the nature of the annual reports by the AG and DWS, she did not cut these short intentionally. She therefore did not know what the problem was among Members. She reiterated that a subsequent meeting would be arranged for responses.

Ms Mohlala reiterated that the problem was the Chairperson saying questions should be written to the secretary of the PC. She urged the Chairperson to arrange another meeting where the executive could be held to account.

The Chairperson said she never thought Ms Mohlala did not have the capacity to listen, stating that there would be a subsequent meeting with the AG and DWS to respond. At no point did she indicate that written responses would be given. The Chairperson then realised that further time had lapsed during the discussion. The Chairperson therefore asked that the meeting be adjourned and reconvened at a different point where members could have their answers addressed. The Chairperson asked Ms Powell why she had been taking photographs of the meeting.

Ms E Powell (DA) said she was sending a message and not taking photographs. Even if she had been, the meeting was being recorded publicly. If proof was required, she would provide it. Ms Powell wholeheartedly supported what Ms Mohlala had said. Members became frustrated when they ran over time and their questions could not be answered properly and they were told to put questions in writing. Ms Powell had personally submitted more than 34 questions to the Ministry since January 2020 and had one response. Questions were not answered. Since it was clarified that the meeting would be reconvened, could the Chairperson undertake to ensure members reconvened within the subsequent one to two weeks and certainly reconvened within the term’s programme. Members needed to robustly engage with the AG as this was members’ constitutional undertaking.

The Chairperson confirmed that if the agenda of the meeting was not concluded, it was automatically allocated to the next meeting slot. The PC could not progress to other matters and engage entities until the unfinished meeting’s agenda points were discussed with the AG and DWS. As such, the scheduled Entities Report would be deferred until questions and answers were engaged on. The Chairperson asked if there was agreement on this. The AG was thanked with apologies that an engagement could not take place then. The Chairperson assured the AG that the report was regarded as most important in Members’ oversight role and that that Members would engage with the report in a subsequent meeting. Members were thanked for attending the meeting.

The meeting was adjourned.