ATC120707: Report Follow-up oversight visit to the provinces of Limpopo & Mpumalanga, dated 7 March 2012.

Standing Committee on Auditor General

REPORT OF THE STANDING COMMITTEE ON APPROPRIATIONS ON A FOLLOW-UP OVERSIGHT VISIT TO THE PROVINCES OF LIMPOPO AND MPUMALANGA, DATED 7 MARCH 2012.

 

The Standing Committee on Appropriations, having undertaken a follow-up oversight visit to the provinces of Limpopo and Mpumalanga from the 5 to 9 September 2011, reports as follows:

 

1.         Introduction

 

The follow-up visit took place from 5 to 9 September 2011. The delegation was as follows: Hon E M Sogoni (Chairperson of the Committee); Hon R J Mashigo; Hon G T Snell; Hon M Mbili; Hon L Yengeni; Hon L Ramatlakane; and Hon N N P Mkhulisi.  The delegation was accompanied by the following parliamentary officials: Ms TP Xaso and Mr D Arends (Committee Secretaries); Mr M Zamisa and Mr P Dlomo (Committee Researchers); and Mr F Bulawa(Committee Assistant).

 

The Committee met with the following departmental officials at various sites during the oversight: Dr C Ruiters (DDG:NWRI); Ms Z Y Mathe (Chief Director: Finance); Mr V Monene (Parliamentary support); Mr J Van Niekerk (Design Representative); Mr M Nitzsche (Advisor to contract Manager); Ms M J Musekene (Director: Regulations); Mr G Siziba (DWA Mpumalanga); Ms Z R Mdluli (HR Practitioner); Mr J Wilkins (Site Manager: Inyaka Dam); Mr M MRatanda (Inyaka Dam); Ms M Khensani (Chief Development Expert); Mr D Mokone (DD: Finance); Mr B T Khoza (ASD Communication); Mr W Matsabe (Scheme Manager); Mr A Msimango (Senior Water Control Officer); Ms P GMkhonto (Senior Water Control Officer); Ms E S Nkosi (Senior Water Control Officer).

 

2.         Background

 

On 6 September 2011, the Standing Committee on Appropriations (the Committee) undertook a follow-up visit to the Limpopo and Mpumalanga provinces. The aim of the visit was to follow-up on a similar visit undertaken by the Committee in the year 2010. Central to the 2011 visit was the need to determine the extent of progress in respect of various projects done by the Department of Water Affairs (the Department). These included the Nandoni Water Treatment Works and Distribution Network, the De Hoop Dam, and the Inyaka Water Treatment Works. Previously the visit had been informed by ongoing interactions between the Committee and the Department during the in-year monitoring of its expenditure. The Committee had observed a trend wherein the Department was reporting under-expenditure which subsequently led to requests for rollovers of funds.  During that exercise the Committee met with the Department and a number of findings and recommendations were made with regards to the implementation of the three projects. The Committee also wanted to follow-up on issues such as the construction of the pipeline at theNandoni Dam; the construction of De Hoop Dam; and the construction of the Inyaka Dam Water Treatment Works. Due to a slow pace in implementing the recommendations of the last visit, the Committee decided to undertake the follow up visit on the 5-9 September 2011.

 

3.         Terms of reference

 

Section 27(1)(b) of the Constitution provides that everyone has the right to have access to sufficient water. As such government has embarked on a number of strategic policies and projects aimed at ensuring that all South Africans, whether rural or urban, enjoy this right to water.  Accordingly, budget allocations for the Department have been crafted to cater for this constitutional mandate. The 2011 Estimates of National Expenditure (ENE) reported that the spending focus for the Department over the Medium Term Expenditure Framework (MTEF) would be on infrastructure and bulk distribution in order to provide a reliable supply of water. It added that since the 2007/08 financial year, spending had grown from R4.8 billion to R8.2 billion in the 2010/11 financial year. This increase was driven by spending on the development of bulk water infrastructure including the construction of the De Hoop Dam and ancillary infrastructure such as the distribution pipelines, and the rehabilitation and repair of existing bulk infrastructure.  Spending over the MTEF was also expected to increase from R8.2 billion to R10.9 billion at an average rate of 9.9 per cent. This included the additional allocations of R1 billion in 2011/12, R1.3 billion in 2012/12 and R984.2 million in 2013/14 to be spent as follows over the MTEF:

• R245 million for the completion of the construction of the De Hoop Dam;
• R780.3 million for the bulk distribution system of the De Hoop Dam; and
• R520 million for the replacement of the Nandoni pipeline. 

 

According to the 2011 ENE the estimated costs for the completion of the De Hoop Dam were approximately R3.1 billion. Of the estimated budget, R2.1 billion had been spent up to 2010/11 and R926.4 would be spent over the MTEF period. Construction of the Dam started in 2007 scheduled for commissioning by the end of 2012. Commissioning was delayed by a year due to poor foundation conditions and industrial actions. Approximately 3 million people in the domestic sector would benefit from this Dam in the Greater Sikhukhune, Waterberg and Capricorn district municipalities.

 

The distribution system in respect of the De Hoop Dam had an estimated cost of R13.1 billion. Of this amount, R391.8 million had been spent up to 2010/11. A further R780 million has been allocated over the MTEF period. This further allocation was subject to the Department finalising the signing of off-take agreements in 2011/12. In addition to the baseline, the total budget available for the distribution system over the MTEF is R1.9 billion.

 

The Nandoni Water Treatment Works and distribution system was a project aimed at augmenting the water supply to the Vhembe District Municipality in Limpopo. According to the 2011 ENE, the total value of the project was R2 billion of which R532.9 million has been allocated over the MTEF period. The project commenced in 2006/07 and was scheduled for completion during the  2013/14 financial year.

 

The Nandoni pipeline project aimed to convey water for domestic use in the Vhembe District Municipality. This part of the project also commenced in 2006/07 and was scheduled for completion in the 2012/13 financial year. Delays on this front were attributed to the poor quality of pipes which have increased the project cost from R200 million to R720 million. R520 has been allocated over the 2011 MTEF period.

 

Table 1: Allocations for Nandoni, De Hoop Dam and Inyaka Water Treatment

  

Programmes and Projects R’000	2011/12	2012/13	2013/14	2014/15	Total
De Hoop Dam: Phases 2C-G construction	526,835	534,449	1,114,086	848,423	3,023,793
De Hoop Dam: Phases 2A construction	646,306	369,804	73,698	0	1,089,808
Nandoni Pipeline : Construction	203,000	317,000	230,000	0	750,000
Inyaka Water Treatment Works	136,800	10,455	0	0	145,255

National Treasury (2011)

 

3.1        Inyaka Water Treatment Works

 

The Committee was informed that Phases 1 and 2 of this project had been completed. The Department anticipated that Phases 3 and 4 would be completed by May 2013. The budget allocations for phases 1 and 2 were R93 million and R120.56 million respectively. Both amounts were at 100 per cent spending at the time of the visit.

 

Phases 3 and 4 of the Inyaka Water Treatment Works had a contract price of R427 million of which R115 million had been allocated for the 2011/12 financial year. An expenditure of R244.4 million or 57 per cent of the total budget was recorded at the time of the visit from the commencement date of the contract which was 1 September 2008.

 

Progress in terms of construction stood at 67 per cent with two contracts for the Raw Water Pipeline and the Mechanical and Electronics scheduled to commence before the end of the current financial year. These contracts were awarded to external service providers.

 

In respect of job creation for the local people, it was reported that a total of 316 people were employed on the site, with 240 being male and 76 being female. Out of the 316 employees, only 37 came from elsewhere in the country with the rest being local people and 66 employees received training ranging from operators to graduates with B-Tech degrees during the 2011/12 financial year. However, it was noted that while the training of staff was a fairly easy exercise, the retention of the trained staff was a challenge since the private companies offered more lucrative contracts.

 

The Regional Branch of the Department reported that the construction of the Achornhoek Bulk Pipeline had commenced in August 2011. This pipeline would service 410 000 people in 19 villages and would be financed through the Regional Bulk Infrastructure Grant. This pipeline would be completed by August 2012. Concern was expressed in this regard since the completion of the water treatment works would be completed by May 2012. This would delay the distribution of water to the communities even further because there were funding gaps for the reticulation of water.

 

The Committee was informed that Phases 3 and 4 of the project had lost a total of 312 days of work. This was attributed to 201 days lost as a result of rain and 111 days lost due to industrial action. The industrial action was caused by unhappiness among the employees who would not receive gratuity packages on completion of the project. The Inyaka Dam employees were made aware that employees at the Nandoni Dam project would receive such a benefit and also demanded the same. The Department argued that gratuity packages were not part of the agreement that was made with employees at the inception of the project. Despite the fact that the CCMA ruled in favour of the Department, the Committee expressed its concern at the different standards applied in respect of workers at the two projects, Nandoni and Inyaka. 

 

The point was made that 836 904 people and 120 211 households would receive water from the Inyaka Water Treatment Works upon completion. The facility would be handed over to the Bushbuckridge Water Board after completion which would then be responsible for the distribution of water to the communities on behalf of the municipalities. The Committee expressed concern at the fact that the Bushbuckridge Water Board was not represented at the meeting. It was reported that only the Bushbuckridge and Mbombela municipalities had agreements with the Water Board. This was a cause for concern for the Committee since it would create a gap in the distribution of water to the targeted communities. The regional office of the Department stated that there were delays in the finalisation of the Service Level Agreement between the municipalities and the Bushbuckridge Water Board as a result of historical debt.

 

The Department reported that the Bushbuckridge Municipality (the Municipality) had acknowledged the debt and committed to pay 50 per cent of the R190 million of the outstanding amount.  The Municipality had further committed to start paying R5 million towards the committed 50 per cent of the debt from January 2012. According to the Department there was a short-term Service Level Agreement between the Municipality and Bushbuckridge Water Board at the time of the visit.

 

The Committee commended the Department for the construction of the access road to the treatment works. It however noted with concern that there was a lack of coordination between the local municipality, the provincial government and the Department regarding the construction thereof.

 

3.2        De Hoop Dam

 

The Department reported that it was in the process of installing pipes for the distribution of water to the communities that are to be serviced by the dam. It added that R131 million would be spent during the 2011/12 financial year for that purpose. The completion date for the construction of the dam was scheduled for September 2012. The Burgersfort pipeline would be completed by the end of December 2011, with the date for the completion of the whole water distribution network being mid 2013.

 

The Department reported that the Municipal Infrastructure Grant (MIG) funding would not be sufficient for the reticulation of water to all affected communities. Proposals had been made to the National Treasury regarding a new funding model for the dam in order to cover the whole distribution network. The Committee was concerned that there was a gap in funding for the distribution and reticulation of water to communities. It was stated that there was a lack of planning within the Infrastructure Cluster.  

 

Apart from the prevailing water shortage in the area, the most concerning issue was the fact that most rivers, from which communities sourced water, contained high levels of zinc. This was a major health risk.

 

Even though there were funding gaps regarding the distribution of water from the De Hoop Dam, progress has been made on the construction thereof. The finalisation of the Service Level Agreement with the mines, which included the funding model and arrangement still needed to be addressed.

 

3.3        Nandoni Dam

 

The Nandoni Water Treatment Works in Limpopo commenced in 2009 and the completion was originally set for 2010. This project and its distribution scheme would supply water to the Vhembe District Municipality. At the last visit which took place in March 2010, the Committee was informed that the various components of Nandoni Dam had been completed and the water treatment works had been commissioned. In a written response submitted after the visit, the Department explained that its timeframe is now to provide treated water to the NR6 Reservoir by March 2012, to the NN20B Reservoir by March 2012, to the Vuwani Reservoir by December 2012, to the Valdezia Reservoir by December 2012 and to the Lukalo-Lambani area by March 2012. It added that the bid process had taken much longer than initially anticipated because the National Treasury must, as from beginning June 2011 provide its concurrence to all bid processes. Therefore in view of the new arrangement, it was anticipated that the above mentioned dates may not be met. A revised project schedule would be submitted in that regard.

 

An amount of R750 million has been allocated over the 2011 MTEF period towards this dam. Of this amount, R200 million is for the replacement of the faulty pipes. In the outer year of the MTEF, the Department anticipated that an amount of R245.6 million would be shifted. For the 2011/12 Financial year, the Department received an allocation of R203 million. This amount was there to cover the expenses of the new steel pipes which were to be laid parallel to the existing pipes. Of this amount, a total of R22 million has been spent albeit not on infrastructure, but on project management expenses. It was reported that consultants had been appointed and that the design and tender bid stages were 80 per cent complete. The Department reported that contractors would be on site by the end of 2011 to commence with the installation of the new pipeline. Out of the 13 communities meant to benefit from the NandoniDam, 6 were affected by the challenges relating to the pipes. These six communities were thus not receiving water.

 

The Department also reported that there was an increase in the number of communities to be supplied by the dam. Initially, the dam was meant to supply 750 000 people once completed, but would now supply 1.2 million people. The Committee was concerned about whether the initial 750 000 people were already benefiting from the project before the additional population could benefit. In a written response submitted after the visit, the Department reported that the initial 750 000 people were already receiving water. It added that this amounted to 195 000 people or 43 050 households in 33 communities who were being supplied. The Thohoyandou community was already benefiting from the supply of water, despite the six communities which were still unable to receive water.  

 

Part of the problems at the Nandoni dam included the failed pipeline which needed to be re-installed. It was noted that at the inception of the project, the original plans were to use steel pipes, however this changed to the glass reinforced pipes (GRP’s) at the advice of engineers within the Department. The Department had however reported challenges in respect of the GRPs provided by one service provider for the distribution of water. These challenges led to a design change from GRP’s to back to the initially intended steel pipes. The Department was undertaking legal action to recover money lost in this regard. It was also looking at the possibility of invoking the liability clause which formed part of its agreement with the service provider. The Committee was also informed that there were other countries that had used the same suppliers and were experiencing similar problems in respect of the quality of pipes supplied.

 

The Committee sought to determine whether the problems in respect of the pipes emanated from the factory process or from the design of the pipes. The Department reported that the problem was identified to be at the manufacturing stage. This was only discovered once the pipelines had been laid and were being pressure tested by the Contractor (Chief Directorate: Construction Management). A review by a panel of experts indicated problems with manufacturing quality of the supplied pipe product and inadequate quality control and assurance by the supplier that together resulted in the delivery of pipes with deficient structural and hydrostatic integrity of the pipe wall. Some manufacturing defects identified were of the type that could not be detected even at the factory without detailed testing (e. g. ultrasonic testing), which was part of the Supplier’s quality control program. Other defects (e.g. resin starved areas, porosity and damaged pipe ends), however, were also manifested on the exterior of some pipes awaiting installation and these should have been corrected or culled by the supplier. These could have been identified by the engineer, contractor and the supplier’s Representative through inspections upon delivery as called for by the specification.

 

At the time of the visit the matter was still before the courts. It was reported that the State Attorney was proceeding with legal action against the two companies who provided the defective pipes and summonses had been served on them on 5 May 2010. The Committee expressed its concern at the slow progress in respect of the legal action.

 

It was the Committee’s view that the Department should have a system in place to test the quality of pipe material before the actual installation. Concerns were expressed that engineers within the Department had given incorrect advice which led to changes in the scope of the project, not only once, but twice. Needless to say, this has also led to increased expenses as well as delays in the delivery of water. Questions were therefore raised on how the Department would ensure that technical errors of a similar nature do not re-occur.

 

In its written submission, the Department reported that the NR6, Vuwani, Valdezia and the Raw Water pipelines (No. 3, 4, 5 and 8) were originally designed as continuously welded steel pipelines. However, the Lukalo-Lambani, NN20B, NR5 and MW3 to PI9 pipelines (No. 1, 2, 6 and 7) were originally designed as GRP pipelines. The raw water, NR5 and MW3 to PI9 pipelines have been commissioned and are delivering water, without any technical impediments.

 

The Contracts Manager: Construction North (CM: CN) was the Contractor on all the pipelines. The CM: CN advertised a bid for the NR6 pipeline’s originally designed steel pipe materials (Bid W9041) during August 2006. The GRP suppliers provided an alternative offer for GRP pipe material, for R11 million (final cost = R13,308 million) , which would have been R 8 million cheaper than the lowest offer of R19 million for steel materials. Steel pipes would have a delivery period of between 4,5 to 9 months from the date of order due to the requirements of the Vaal River Eastern Sub-system Augmentation Project (VRESAP) scheme.

 

Apart from the time consideration, the GRP’s had certain advantages in that they were lighter and did not require cathodic protection as the steel pipes did. Thus, it would have been easier to work with the GRP’s given the urgency of the situation.

 

The DWA Term Contract at the time, W8891, included the supply and delivery of GRP pipes and these pipes were available in a shorter period, three weeks, as the bid process was not required. The equivalent size steel pipes were not available on the Term Contract.

 

The manufacturer and supplier factory was deemed ISO 9001 compliant, its products bearing the SABS mark, hence there was no reason for concern about the quality of its products. Therefore a due diligence investigation was not done on the factory to establish the quality of GRP pipes manufactured. Another important consideration was the fact that the recipient community of Thohoyandou was urgently in need of additional treated water from this proposed pipeline.

 

For the abovementioned reasons, the Contractor CM: CN requested the Engineer Directorate: Civil Engineering to change the pipe material from steel to GRP for NR6 pipelines. The Directorate Civil Engineering was hesitant and concerned about granting the approval to use the GRP pipes on large diameter high pressure primary pipelines. Thus, it was specified to the Contractor that the NR6 pipeline must be laid and tested strictly in accordance with Specification DWS1150 and that the Manufacturer must provide an extended ten year guarantee on their products.

 

3.4        Supply Chain Management issues

 

The Committee was informed that the nature of operations within the Department was such that the Supply Chain Management and the Finance Offices were not involved in the preparation of specifications. In a normal environment, the options analysis prior to the procurement of goods or services is done by the engineers and the Finance Office in order to come up with the most efficient options that deliver effectively. At the time of the visit, the Committee was informed that both specifications and options analysis were done solely by the engineers. Moreover, the Department did not have a Bid Specification Committee. It was also reported that where an amount of R1 billion or more was being spent on capital projects, there ought to be a capital expenditure committee. It emerged that the Department was operating without a functional Capital Expenditure (CAPEX) Committee which is supposed to take major financial decisions. The Committee was further informed that these were amongst the reasons which contributed to the Department receiving a disclaimer in the Auditor-General’s report.

 

It was reported that the Department had an internal construction unit which carried out its infrastructure projects. Challenges in this regard were that this structure did not have adequate capacity. Often it outsourced projects to external contractors without following procurement procedures. Further challenges of failure to comply with supply chain procedures were reported in respect of this unit. The Committee was concerned that the way in which this unit operated was in conflict of the provisions set out in the Public Finance Management Act, No 1 of 1999.

 

The National Treasury reported that since 1 July 2011, a practice notice had been put in place with government departments. In terms of this, the National Treasury would be invited to make an input in the procurement of all services exceeding R10 million.  The National Treasury confirmed that the Department had numerous challenges especially pertaining to its funding model. It added that it was taking drastic measures to ensure that the Department spent its funds effectively, efficiently and economically. However, the Committee recorded its displeasure at the National Treasury’s role as a custodian of state finances as it related to this matter; and this was particularly the case with procurement related issues as these reside directly with the National Treasury.

 

 

 

 

4.         Findings

 

The Standing Committee on Appropriations made the following findings:

 

4.1   The Committee found that the Department’s internal construction unit was not in compliance the procurement processes and payment prescripts as set out in the Public Finance Management Act 1999 (No 1 of 1999).

 

4.2   The Department failed to operate in a well coordinated and integrated manner in the construction of the Inyaka, Nandoni and De Hoop Dams and thereby failed to exploit the economies of scale and buying power.

 

4.3   There was a lack of integrated planning and coordination between the Department, the Provincial departments and the municipalities since there was no links between the construction of the dams and the reticulation of water by municipalities.

 

4.4   There was a lack of coordination between the Department’s internal units within the Infrastructure Cluster and this impacted negatively on the total value chain of the projects. 

 

4.5   The Service Level Agreement between the Department and the mines that would benefit from the De Hoop Dam had not been finalised and this impacted negatively on the cost of construction.

 

4.6   The failure to lay the distribution pipes from the Nandoni Dam to benefiting communities and the resulting court case between the Department and the service provider impacted negatively on the delivery of essential services.

 

 

5.         Recommendations

 

The Standing Committee on Appropriations recommends as follows:

 

5.1   The Minister of Finance should ensure the following:

 

5.1.1 That the National Treasury assists the Department of Water Affairs to ensure compliance with the Public Finance Management Act and the National Treasury Regulations by ensuring that all committees required to comply with supply chain management procedures are in place;

5.1.2 That the National Treasury reports to Parliament on progress in this regard within three months from the adoption of this report by the House.The National Treasury submit an extensive report to Parliament outlining what it perceives to be constraints in respect of the Nandoni project. This report report must include capacity constraints; and

5.1.3 That the National Treasury submits a progress report on the finalisation of service level agreement, in particular the shared costs, with the mines that would benefit from the De Hoop Dam; and

 

5.2   The Minister of Water and Environmental Affairs ensures that the Department of Water Affairs submits a progress report on the court case between it and the service provider regarding the glass reinforced steel pipes.

 

 

 

 

 

6.         Conclusion

 

All the requested reports as set out in section 5 above need to be submitted to the National Assembly within 90 days of this report being adopted in the House. 

 

 

Report to be considered.