ATC171129: Report of Portfolio Committee on Water and Sanitation on the Fourth Quarterly Progress Report for the Department of Water and Sanitation for the 2016/17 Financial Year, dated 29 November 2017

Water and Sanitation

REPORT OF PORTFOLIO COMMITTEE ON WATER AND SANITATION ON THE FOURTH QUARTERLY PROGRESS REPORT FOR THE DEPARTMENT OF WATER AND SANITATION FOR THE 2016/17 FINANCIAL YEAR, DATED 29 NOVEMBER 2017   
 

1. Introduction

 

Section 40 of the Public Finance Management Act, 1999 sets out the accounting officer’s reporting responsibilities, which are to:

 

  • S40(1)(c): Submit financial statements within 2 months after the end of the financial year to National Treasury and Auditor-General.
  • S40(1)(d): Submit annual report and audited financial statements within 5 months of the end of the financial year to National Treasury.
  • S40(4)(c): Submit revenue and expenditure information to National Treasury within 15 days of the end of each month.

 

The Portfolio Committee on Water and Sanitation (hereinafter the Portfolio Committee), on 28 June 2017, considered the fourth (4th) quarterly progress report of expenditure trends of the Department of Water and Sanitation (hereinafter the Department) for the  R15.5 billion budget for the 2016/17 financial year, and reports as follows:

 

2. Overview of the 2016/17 Fourth Quarter Expenditure

 

                2.1 Department of Water and Sanitation (Vote 36)

 

The fourth (4th) quarter expenditure is based on the preliminary expenditure results as the Department has not finalised its annual financial statement for 2016/17. Thus, the final shifts approved by the accounting officer are not included.

 

To effectively optimise its work, the Department has two accounts, under which it operates.  The Main Account is the appropriated funds from the fiscus, and the Water Trading Entity.  Funding for the Water Trading Entity, that of operations and maintenance, as well as development of new infrastructure, comes from revenue that is generated from raw water charges in terms of the pricing strategy.  It also receives augmentation from the fiscus, via the Department through the National Water Resource Infrastructure Programme.  The water resource management charges cover the operational costs of all water management areas.  The Department undertook its work for the 2016/17 financial work by delineating budget and priorities under five (5) programmes, that is, Administration, Water Planning and Information Management, Water Infrastructure Development, Water and Sanitation Services and Water Sector Regulation.

 

The Department’s largest expenditure is on Programme 3: Water and Infrastructure Development, which received an allocation of R12.1 billion with the Department having spent 100 per cent of the allocated budget. The Department further reported that within Programme 4: Water and Sanitation Services Programme, it spent 138 per cent of its allocated budget reflecting an overspending of R292 million. This is mainly due to the extension of scope of the Bucket Eradication Programme beyond the top structure to include the provision of bulk sanitation infrastructure. Table 1 below reflects departmental expenditure per programme and economic classification.   

 

Table 1: Department of Water and Sanitation Expenditure per programme – 31 March 2016

Programme

Final Appropriation

Expenditure 31 March 2017

% Spent

R0’00

R0’00

Administration

1 547 743

1 504 930

97%

Water Planning and Information Management

749 656

695 603

93%

Water Infrastructure Development

12 130 318

12 082 463

100%

Water and Sanitation Services

778 488

1 070 757

138%

Water Sector Regulation

318 392

281 685

88%

Total

15 524 597

15 635 438

101%

Economic Classification

 

 

 

Current payments

 3 186 536

3 139 947

99%

Compensation of employees

1 540 217

1 439 945

93%

Goods and Services

1 646 244

1 699 928

103%

Interest on rent and land

75

74

99%

Transfers and subsidies

7 503 548

7 482 875

100%

Payments on capital assets

4 834 510

5 012 613

104%

Payments on financial assets

3

3

 

Total

15 542 597

15 635 438

101%

Source: Department of Water and Sanitation

 

Table 1 above reflects the economic classification, which gives a breakdown of actual expenditure of current payments such as compensation of employees, goods and services and interest on rent and land.  It further provides details of transfers and subsidies, payment of capital assets and payments for financial assets. 

 

The notes to the figures reflected above show the following:

 

  • Compensation of Employees: The underspending of R100.272 is mainly due to the vacant posts across all programmes.  The Department is in the process of reviewing the organisational structure.  The Compensation of Employees budget is specifically and exclusively appropriated. Parliament’s approval is required to utilise the budget for any other purposes.  All the unspent funds on Compensation of Employees will be surrendered to National Treasury.
  • Goods and Services: The overspending is due mainly to:
    • Expenditure incurred for water tankering in respect of drought relief activities; and
    • Expenditure incurred in respect of operations and maintenance related interventions.
  • Transfers and Subsidies:  The underspending is mainly due to:
    • An amount of R14 million allocated to Thabazimbi Municipality, in relation to the Water Services Infrastructure Grant could not be transferred due to the risk of misappropriation of funding and the unsatisfactory environment, which Thabasimbi finds itself (facing legal and administrative challenges).
  • Payment for Capital Assets: The overspending is due mainly to unfunded projects within the Bucket Eradication Programme, which were processed against an insufficient budget.

 

2.2 Expenditure and Performance Trends per Programme

 

2.2.1 Programme 1: Administration

 

This programme received an allocation of R1.54 billion. The under spending is due mainly to:

 

  • Reduced activities such as travelling, air transport, travel agency fees and accommodation as part of departmental cost containment measures.
  • The late finalisation of contracts relating to the development of the National Water and Sanitation Resources and Services Strategies.
  • Payments relating to the wellness contract, training interventions, information technology contracts were delayed due to challenges within the service level agreements and the activities related to restructuring of the Department.
  • Transfers could not be made to the Universities of Stellenbosch and Western Cape.

In respect of Departmental performance of the Administration Programme, 75 per cent of targets were achieved and 25 per cent of targets were partially achieved or not achieved.  The underperformance on performance targets in this programme relate to the Departmental management sub-programme. The Department over-achieved in terms of the vacancy rate for engineers. It had achieved 111 per cent on the intended targets with 702 of the intended posts for engineers and scientists filled.

 

2.2.2 Programme 2: Water Planning and Information Management

 

In this programme, 93 per cent (R695 million) of an allocation of R749 million was spent in the 2016/17 financial year. The under spending, is due mainly to:

 

  • Unfilled vacancies during the greater part of the financial year across the sub-programmes, as well as the concomitant goods and services and the related payments for capital assets.
  • Delays in implementation of the master plan projects for Water Services and Local Water Management.
  • Feasibility studies and reconciliation strategies projects related to integrated planning could not commence due to unexpected delays in the procurement stage.
  • Re-advertisement of a bid relating to Water Ecosystems where the only bidder could not meet set criteria specified in the Terms of Reference.

The Department reported 80 per cent achievement of targets in this Programme, of which 20 per cent were un-achieved.  Under-achievement in this programme was mainly within the Sanitation Planning and Management sub-programme. The reasons for variance include the non-completion of the feasibility studies; the partial achievement of implementation readiness studies and the non-achievement of the consolidated assessment for socio-economic impact for water user associations.

 

2.2.3 Programme 3: Water Infrastructure Development

 

The programme was allocated an amount of R12.1 billion.  At the end of the 2016/17 financial year, the Department had spent an amount of R12 billion. The under spending is due mainly to;

  • The unspent funds of R14 million allocated to Thabazimbi Municipality in respect of Water Services Infrastructure Grant, which could not be transferred due to misappropriation of funding and the unsatisfactory environment, which the municipality found itself around challenges of legal and administrative issues. 

 

There was over spending in Goods and Services, mainly due to expenditure incurred for water tankering in respect of drought relief activities, and operations and maintenance related interventions.

 

In terms of Departmental performance of pre-determined targets, 67 per cent was achieved and 33 per cent not achieved. Unachieved targets were reported on all sub-programmes, such as the Water Services Infrastructure; Infrastructure and Rehabilitation and Operation of Water Resources. The Infrastructure Development and Rehabilitation programme reported the highest percentage of targets not achieved. These relate to the mega and wastewater treatment works under construction, as well as bulk raw water projects under construction. Impacted projects include the Umzimvubu and Hazelmere Dams as well as the Jozini (Pongolapoort) Bulk Water Supply Scheme.

 

2.2.4 Programme 4: Water and Sanitation Services

 

The Department reported an overspending of R292 million which totalled 138 per cent of its allocated budget. The commitments for this programme, specifically in terms of the Bucket Eradication Programme exceeded the allocated budget. The R292 million overspend will be reflected as an unauthorised expenditure.

 

In respect of Departmental performance on the Water and Sanitation Services Programme,  100 per cent of targets were achieved. An over-achievement was reported in the Water Sector Support sub-programme in terms of providing additional resources for poor farmers.

 

2.2.5 Programme 5: Water Sector Regulation

 

An allocation of R318 million was provided for in 2016/17 financial year. The Department spent R281 million  in this programme, which amounted to an expenditure spend of 88 per cent. The under spending is due mainly to:

 

  • Unfilled vacancies during the greater part of the financial year across the sub-programmes of this programme, as well as the concomitant goods and services and Payments for Capital Assets.
  • The terms of reference for planned projects in Institutional Oversight, which relate to the re-grading of water entities, water board boundary study and the appointment of professional staff to provide strategic advice and support was delayed.
  • The planned projects in Sub-programme: Economic and Social Regulation such as the consumer survey on raw water pricing, regulatory model for the review of all tariffs and policies which were deferred to the 2017/18 financial year.

 

In terms of this programme, 26 per cent of targets were achieved and over-achieved, whilst 84 per cent of targets were partially achieved or not achieved. The Department reported non- achievement on predetermined targets on the Economic and Social regulation, Water Services and Sanitation regulation and Water Sector Regulation and Management Support sub-programmes.

 

  1. Water Trading Entity

 

  1. Financial and Non-Financial Performance

 

The Water Trading Entity receives its funding from the fiscus, revenue earned from provision of water services as well as revenue from construction work done, which is only charged once the work is certified. Of the allocation to the Water Trading Entity, 45 per cent is transferred to the Trans Caledon Tunnel Authority. The projected revenue for the 2016/17 financial year was revised to R10.6 billion which is an increase of R528 million from the previous financial year. The improvement in revenue projection can mainly be attributed to the increase on construction revenue and efforts made by the Entity to improve the billing efficiency for water sales. The operating expenditure was revised to R1.8 billion in order to cover the increase on the construction costs and electricity consumption for operation of the pumping station while project expenditure was increased from R5.4 billion to R5.7 billion in order to cover projects such as the Vaal Water Treatment that required funding during the 2016/17 financial year.

 

The favourable variance on revenue performance can be attributed to the increase on the construction order book, efforts made by the Entity to improve billing efficiency for water sales and interest charged on overdue customer accounts. The total revenue against the revised budget for the financial year reflects a favourable variance of R1.1 billion.

 

The overspending on total expenses can mainly be attributed to the increase on the finance costs, Goods and Services and employee costs. The increase on finance cost is due the cash flow timing difference on off-budget projects (undertaken by the Trans Caledon Tunnel Authority (TCTA)), whilst overspending on Goods and Services can be attributed to the increase on the TCTA management fees. The TCTA management fees increased from R653 million in the 2015/16 financial year to R1.4 billion in the 2016/17 financial year. The overspending on employee costs is mainly due to the non-capitalisation of employee costs incurred by the construction units during the 2016/17 financial year. The unfavourable variance on impairment of assets is due to the fact that the Entity does not budget for impairment on financial assets.

 

In terms of attainment of targets, the Water Trading Entity (WTE) reported 75 per cent achievement on predetermined targets and 25 per cent partial achievement on targets. The 25 per cent partial achievement on targets is related to the Financial Management sub-programme.

 

4. Portfolio Committee Deliberations with the Department

 

The following were the key issues raised by Members during deliberations on the Department’s  Fourth Quarterly Progress report for the 2016/17 financial year:

 

4.1 Reasons for overspending given that the Department had only achieved on 48% of predetermined targets

 

The Department responded that there was a misalignment between the reporting on budget and performance targets, with the reporting on performance targets being more stringent. If there are no supporting documentation, even if the target had been achieved, the achievement is not recognised to satisfy monitoring and evaluation criteria resulting in  the target  being listed as  not achieved.  Furthermore, during the 2016/17 financial year, the Department had to reprioritise the budget to address the drought which had a national impact. Most of the budget allocated towards drought interventions had not been recovered from the National Disaster Management Fund from the Department of Cooperative Governance and Traditional Affairs.

 

4.2 Vacancy rate within the Department

 

The Department responded that it was undergoing a review of the organisational structure. This process will be concluded in the 2017/18 financial year.

 

4.3 What is being done to manage the R2.7 billion overdraft by the Water Trading Entity?

 

The Water Trading Entity has R2.9 billion in outstanding debt. There is a process underway to recover this debt in the 2017/18 financial year, which will alleviate the R2.7 billion overdraft.

 

4.4 Reasons for overspending in the Bucket Eradication Programme and the reasons for the variance in the cost of sanitation units

 

The Department responded that when it inherited the Bucket Eradication Programme from the Department of Human Settlements in 2014, the focus of the programme was on the top structure. Over the course of the financial years,  the scope of the programme has been extended to include the provision of bulk sanitation infrastructure. This includes the refurbishment and construction of waste water treatment plants. The Department cannot provide sanitation solutions to communities without the infrastructure to support it. It should further be noted that when the Department inherited the programme, the unit costs for sanitation were based on estimates. The Minister for Water and Sanitation indicated that she was awaiting a directive from the Minister of Finance as well as the directive from the inter-ministerial task team on service delivery regarding the budgeting solutions for the Bucket Eradication Programme. Further reasons for escalating costs in terms of the programme includes the preference for water borne sanitation in formal areas by communities. The Department is however  exploring alternative sanitation technologies for rural areas.

 

4.5 Status of the Green Drop and Blue Drop Report

 

The Department reported that whilst the Green Drop and Blue Drop report was not available, it could report that 66 rivers had been assessed on a quarterly basis. This provided the Department with information of the status of rivers in the country.

 

4.6 The mechanisms the Department will devise to deal with the R1.5 billion overspend in the 2017/18 financial year

 

The Department responded that this information would be responded to in writing.

 

5. Recommendations

 

Having considered the fourth quarterly review and report of the financial and non-financial performance of the Department, the Portfolio Committee resolved that:

 

5.1 Monthly briefings by the Department on progress made on debt collection, eradication of the bucket system in informal settlements, and work undertaken by the construction unit.

5.2 Progress reports on engagements made by the Department of Water and Sanitation with National Treasury, Departments of Human Settlements and Cooperative Governance and Traditional Affairs on misalignment of budgets for the Bucket Eradication Programme, as well as improving intergovernmental relations on issues of concurrent functions and budgeting frameworks within the water sector.

5.3 Risk and consequence management mechanisms initiated by the Department to deal with non-compliance with supply chain management processes of work undertaken by implementing agents, such as water boards.

5.4 Progress report on the findings of the Motau Task Team on challenges related to procurement in the Department.

 

 

 

Report to be considered.

 

 

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