FINANCIAL MANAGEMENT TURNAROUND PLAN (Draft for discussion at EXCO on 28 February 2005)

DEPARTMENT OF WATER AFFAIRS AND FORESTRY
FINANCIAL MANAGEMENT TURNAROUND PLAN

1. STRATEGIC OBJECTIVE

The development of a financial turnaround strategy for the improvement of financial management in the Department.

2. PURPOSE

To present an intervention strategy that is being applied to address identified problems

3. BACKGROUND

Concerns have been raised about the state of financial management in the Department of Water Affairs and Forestry due to the fact that its financial statements have been qualified in the past consecutive four years. While improvements have been made, the overall turnaround strategy has not been presented in a coherent manner. This presentation analyses the challenges and outlines the actions currently underway to address them.

Financial management in Government and in the Department of Water Affairs and Forestry is performed in accordance with the requirements of the Public Finance Management Act, No. 1 of 1999 as amended from time to time. The promulgation of the PFMA as an Act of Parliament gave effect to some sections of the Constitution that addressed financial reform processes initiated since 1994 with the introduction of the MTEF method of budgeting in 1996.

The MTEF approach emphasises multi-year budgeting (usually 3 year period) as against single year budgeting. The PFMA also requires the adoption of new accounting processes based on GAAP (accrual accounting).

The implementation of the relevant parts of the PFMA followed a phased approach over a number of years to allow Departments to plan for the gradual implementation of the Act itself. To assist Departments with the implementation process, National Treasury recommended seven immediate steps whose implementation would gradually lead to the successful application of the Act:

1. In-year management, monitoring and reporting

2. Clear up audit queries

3. Establish effective internal controls

4. Improve expenditure management and transfers

5. Banking arrangements

6. Complete financial statements on time

7. Delegation of responsibilities

In the Department of Water Affairs and Forestry, problems which have led to qualified audit opinions by the Auditor-General over a number of years included:

Inability to meet financial reporting requirements, e.g. accrual accounting

Inability to separate accounting transactions and budgets of the vote and trading accounts

Ineffective management of revenue and debt

Inability to recover state loans from water boards, irrigation boards, municipalities and the Land and Agricultural Development Bank.

Inability to submit supporting documentation on time

Inability to clear previous audit queries on time

Details of these problems are outlined in the attached Annexure A, grouped as systems related problems, capacity related problems and management related problems.

4. WAY FORWARD

National Treasury, in 2000, identified the following as the main requirements for successful implementation of the Act:

Political will to drive the implementation process

Buy-in and unconditional support for the implementation process from top management

Capacity building in Departments

Sufficient resources

The above are still crucial and key to effective financial management. According to National Treasury, "the successful implementation of the PFMA depends on strong, entrepreneurial managers". The reform of the financial management system requires empowered managers to take the initiative in revamping operations, reallocating resources and pointing their Departments in new directions. Without strong management, Departments may be in a similar position after the reform process, but may have incurred high transaction costs and pose greater risk to Government."

For the Department of Water Affairs and Forestry to address its challenges, an intervention strategy was designed which included, a number of intervention mechanisms. The table below outlines the key interventions, progress and constraints and major milestones.

1.

CAPACITY RELATED PROBLEMS

INTERVENTION STRATEGIES

DATE STARTED

BY WHOM

COMPLETION DATE/TARGET

COMMENTS

Lack of financial capacity in the Department (skills, people, understanding of financial implications of operations, etc.) to implement new requirements, aggravated by the need to undertake transitional activities

Conduct skills audit, gap analysis and develop intervention strategy

August 2004

CFO

2006/2007

The Institute of Public Finance and Auditing (IPFA) has been appointed to do a skills audit and then financial training based on the gap analysis that will emanate from the skills audit. This is a follow-up to the skills audit performed previously in the Department.

Conduct regular intensive financial training to address identified skills gaps with existing staff

2004

CFO

2006/2007

The 1^st phase of financial training was conducted in 2004 and over 450officials attended these training sessions.

Inadequate staff numbers

Financial positions not at correct level to support departmental structure and operations

Re-assessment/re-evaluation of the entire finance structure to determine appropriateness of levels and functions

August 2003

CFO

April 2004

A former DG of State Expenditure was appointed to evaluate the finance functionality and advice on the structure and its appropriateness.

Propose new structure for financial management

August 2003

CFO

April 2004

The process has now been completed and is being implemented. The same process has also been recommended for the Regional finance structure.

Inadequate staff numbers

Financial positions not at correct level to support departmental structure and operations

Creation of posts to address immediate known shortcomings

Including JE and budget determination

May 2004

CFO

28 February 2005

Posts have been created, interviews held and appointments are about to be made.

Recruitment

28 Feb 2005

CFO

1 June 2005

The newly appointed managers are expected to assume duty on 1 June 2005

Posts staying vacant for very long periods.

All the above lead to non-segregation of duties and over-dependence on consultants and non-financial managers to perform financial work

The Job Evaluation (JE) process needs to be streamlined

2004

DDG: CS

The overall JE process is under review and its capacity increased. Priority will be given to financial posts

Inability to submit supporting documents in time for audit purposes

Managers must be informed about the importance of keeping documents safe for future references

Every MANCO meeting (once a month)

Programme and line function managers

Every MANCO meeting

In every MANCO meeting, managers are reminded about the importance of proper financial management and record-keeping

Schedule the audit process in two phases

October 2004

Auditor General

The Auditor General has agreed and implemented this approach

The audit process is being conducted in two phases, i.e. interim audit and main audit.

Develop an audit plan that should be shared with all affected officials to ensure awareness of the start of the audit process

Feb 2004

D: IA

Annually

The audit plan has been presented at MANCO to brief managers about the audit process

2.

FINANCIAL POLICIES AND SYSTEMS RELATED PROBLEMS

INTERVENTION STRATEGIES

DATE STARTED

BY WHOM

COMPLETION DATE/TARGET

COMMENTS

Financial policies only available for some operations, not addressing new functions and new accounting regulations

Create a dedicated unit to ensure the development, amendment and implementation of financial policies

May 2004

CFO

28 February 2005

Appointment of a manager to lead this unit is scheduled for June 2005

Business processes for new functions not in place

Ensure that business processes are put in place for all the functions

June 2005

CFO

December 2005

Business in processes are currently place for some functions and the process is continuing for the remaining ones

Policies not applied or only selectively applied

Ensure that there is adequate training on the application of departmental financial rules and policies. Monitor implementation thereof closely

April 2004

CFO

Ongoing monitoring and intervention required

Training is currently taking place for existing functions and over 450 officials have already been trained. Continuous assessment is being conducted.

Problems with the implementation of new accounting requirements

Ensure that there is adequate training on new accounting requirements

April 2004

CFO

Currently the skills audit is being conducted and this will help determine new training needs

Accounting records for the vote and trading accounts not separated

Spend funds in accordance with budget

April 2004

All programme managers

Annual

The budget and records for the Exchequer and Trading Accounts have been successfully separated.

Capture budgets separately for the vote and trading accounts

Programme managers

Establish separate branch

August 2004

DDG:NWRI

April 2006

Establishment of the new Branch is progressing well

Current transversal financial management systems (BAS, PERSAL, LOGIS) not GAAP/GRAP compliant, leading to inability to perform accrual accounting and track financial transactions

Develop appropriate financial transversal systems (internal)

2003

CFO

April 2006

The financial management system, SAP has been introduced in the Department to address existing gaps within the current transversal systems

Engage with National Treasury to fix transversal systems

Train users on the appropriate utilization of financial systems

August 2003

CFO

CFO

May 2005

National Treasury has already rectified some of the identified problems on the transversal systems

3.

MANAGEMENT RELATED PROBLEMS

INTERVENTION STRATEGIES

DATE STARTED

BY WHOM

COMPLETION DATE/TARGET

COMMENTS

Lack of monitoring to ensure compliance with financial rules and policies

Programme managers should be appointed and should consistently monitor their budget and expenditure trends and ensure that financial policies are adhered to

April 2003

All programme managers

Ongoing

Prograrmme managers have been appointed and assigned responsibilities to monitor budget and expenditure

Managers should consistently monitor subordinates' work (oversight) and be assigned financial management responsibilities as part of performance management

All managers

Delegations not amended or aligned to new functions

Delegations should be amended and be aligned to new functions

1 Oct 2004

CFO

31 August 2006

As and when business processes are completed, delegations will be developed to assign functions to officials.

1.	CAPACITY RELATED PROBLEMS	INTERVENTION STRATEGIES	DATE STARTED	BY WHOM	COMPLETION DATE/TARGET	COMMENTS

	Lack of financial capacity in the Department (skills, people, understanding of financial implications of operations, etc.) to implement new requirements, aggravated by the need to undertake transitional activities	Conduct skills audit, gap analysis and develop intervention strategy	August 2004	CFO	2006/2007	The Institute of Public Finance and Auditing (IPFA) has been appointed to do a skills audit and then financial training based on the gap analysis that will emanate from the skills audit. This is a follow-up to the skills audit performed previously in the Department.
		Conduct regular intensive financial training to address identified skills gaps with existing staff	2004	CFO	2006/2007	The 1^st phase of financial training was conducted in 2004 and over 450officials attended these training sessions.
	Inadequate staff numbers Financial positions not at correct level to support departmental structure and operations	Re-assessment/re-evaluation of the entire finance structure to determine appropriateness of levels and functions	August 2003	CFO	April 2004	A former DG of State Expenditure was appointed to evaluate the finance functionality and advice on the structure and its appropriateness.
		Propose new structure for financial management	August 2003	CFO	April 2004	The process has now been completed and is being implemented. The same process has also been recommended for the Regional finance structure.

Inadequate staff numbers Financial positions not at correct level to support departmental structure and operations	Creation of posts to address immediate known shortcomings Including JE and budget determination	May 2004	CFO	28 February 2005	Posts have been created, interviews held and appointments are about to be made.
	Recruitment	28 Feb 2005	CFO	1 June 2005	The newly appointed managers are expected to assume duty on 1 June 2005
Posts staying vacant for very long periods. All the above lead to non-segregation of duties and over-dependence on consultants and non-financial managers to perform financial work	The Job Evaluation (JE) process needs to be streamlined	2004	DDG: CS		The overall JE process is under review and its capacity increased. Priority will be given to financial posts

Inability to submit supporting documents in time for audit purposes	Managers must be informed about the importance of keeping documents safe for future references	Every MANCO meeting (once a month)	Programme and line function managers	Every MANCO meeting	In every MANCO meeting, managers are reminded about the importance of proper financial management and record-keeping
	Schedule the audit process in two phases	October 2004	Auditor General	The Auditor General has agreed and implemented this approach	The audit process is being conducted in two phases, i.e. interim audit and main audit.

2.	FINANCIAL POLICIES AND SYSTEMS RELATED PROBLEMS	INTERVENTION STRATEGIES	DATE STARTED	BY WHOM	COMPLETION DATE/TARGET	COMMENTS

	Financial policies only available for some operations, not addressing new functions and new accounting regulations	Create a dedicated unit to ensure the development, amendment and implementation of financial policies	May 2004	CFO	28 February 2005	Appointment of a manager to lead this unit is scheduled for June 2005
	Business processes for new functions not in place	Ensure that business processes are put in place for all the functions	June 2005	CFO	December 2005	Business in processes are currently place for some functions and the process is continuing for the remaining ones
	Policies not applied or only selectively applied	Ensure that there is adequate training on the application of departmental financial rules and policies. Monitor implementation thereof closely	April 2004	CFO	Ongoing monitoring and intervention required	Training is currently taking place for existing functions and over 450 officials have already been trained. Continuous assessment is being conducted.
	Problems with the implementation of new accounting requirements	Ensure that there is adequate training on new accounting requirements	April 2004	CFO		Currently the skills audit is being conducted and this will help determine new training needs
	Accounting records for the vote and trading accounts not separated	Spend funds in accordance with budget	April 2004	All programme managers	Annual	The budget and records for the Exchequer and Trading Accounts have been successfully separated.
		Capture budgets separately for the vote and trading accounts		Programme managers

			Establish separate branch		August 2004		DDG:NWRI		April 2006	Establishment of the new Branch is progressing well
	Current transversal financial management systems (BAS, PERSAL, LOGIS) not GAAP/GRAP compliant, leading to inability to perform accrual accounting and track financial transactions		Develop appropriate financial transversal systems (internal)		2003		CFO		April 2006	The financial management system, SAP has been introduced in the Department to address existing gaps within the current transversal systems
Engage with National Treasury to fix transversal systems Train users on the appropriate utilization of financial systems		August 2003		CFO CFO		May 2005		National Treasury has already rectified some of the identified problems on the transversal systems

3.	MANAGEMENT RELATED PROBLEMS	INTERVENTION STRATEGIES	DATE STARTED	BY WHOM	COMPLETION DATE/TARGET	COMMENTS

	Lack of monitoring to ensure compliance with financial rules and policies	Programme managers should be appointed and should consistently monitor their budget and expenditure trends and ensure that financial policies are adhered to	April 2003	All programme managers	Ongoing	Prograrmme managers have been appointed and assigned responsibilities to monitor budget and expenditure
		Managers should consistently monitor subordinates' work (oversight) and be assigned financial management responsibilities as part of performance management		All managers
	Delegations not amended or aligned to new functions	Delegations should be amended and be aligned to new functions	1 Oct 2004	CFO	31 August 2006	As and when business processes are completed, delegations will be developed to assign functions to officials.