DEPARTMENT:  WATER AFFAIRS AND FORESTRY

PORTFOLIO COMMITTEE ON WATER AFFAIRS AND FORESTRY

QUARTERLY FINANCE REPORT :  13 SEPTEMBER 2006

 

 

1.             INTRODUCTION

 

Following the 2004/05 Audit of the Department a number steps were taken by EXCO and Top Management taken to ensure that the Financial Management of the Department is improved and placed on a much firmer footing. While these actions, which were taken in the later half of the 2005/06 financial year, did not have a significant impact on the results of the 2005/06 Audit it is expected that with the interventions put in place that an improvement will be seen over the next two financial years with an expectation that the Department will have an unqualified audit in the 2008/09 financial year.

 

For historical reasons the Department is involved in a number of trading activities, which include the sale of water.  There is a medium term plan to migrate these activities out of the Department.  On the financial side we are improving the general financial management through a Financial Management Improvement Plan which includes the following key interventions:

 

·         A total restructuring of the Finance Branch and the Regional Finance Structures through the separation of the Trading Account and Main Account (Exchequer) activities;

·         A national accounting firm has been contracted to provide temporary resources at the   Department’s National and Regional offices to improve our financial management while we recruit suitable staff for the Department;

·         The implementation of SAP as the preferred Enterprise Resource Planning (ERP) system to support our trading activities. This system is expected to “go live” from end September 2006. This will mean that we will be able to fully implement accrual accounting for the trading activities and comply with the provisions of section 40(1) of the Public Finance             Management Act,1999 (Act 1 of 1999) (PFMA);

·         Coupled with the implementation of SAP is an extensive training programme for the Departmental staff which includes computer literacy, accrual accounting and the application of SAP in the Departmental environment;


 

·         Implementing an asset management strategy to ensure that we are able to comply with all of the National Treasury’s requirements, including Generally Accepted Accounting Practice (GAAP). This will also include a re-valuation of all of the Department’s fixed assets; and

·         Build on the successes achieved in the management of the audit process through the Audit Steering Committee which was establised in 2005/06. This committee, with members from the Department and the Office of the Auditor-General, will continue to to oversee and monitor progress on the 2006/07 annual audit which will commence in November 2006.

 

The Department also has an ongoing engagement with the Accountant-General to implement a comprehensive programme of support to the Department with regard to financial management and to ensure that the Department can in the future look forward to not only improved, but in fact unqualified audit reports.

 

2.             AUDIT 2005/06

 

            The Auditor-General has reported on the Financial Statements for the 2005/06 Financial Year of the Department:

·         Vote 34 (Main Account): Qualified.

·         Water Trading Account: Disclaimed.

·         Equipment Trading Account: Disclaimed.

·         Forest Recreation and Access Trust : Matter of Emphasis.

 

In three of the accounts (Vote 34, Water Trading Account and the Equipment Trading Account) the principle contributor to the qualification and the disclaimers is as a result of the way in which the Department has accounted for its assets, while in the trading operations the Department has not been able to comply with the reporting requirements of GAAP. The GAAP reporting requirements relate to the fact that the Department operates in a “cash accounting environment” using BAS and is then required to represent the trading account financials on an “accrual accounting” basis where cash based transactions have to be converted/modified to an accrual base. These are legacy issues and steps have been taken to address the fundamental requirements to ensure that an improved Audit is posted for the 2006/07 Financial year. The non compliance with regard to assets and GAAP has been further exacerbated by the lack of adequate financial capacity and skills in the Department.

 

It should also be noted that as a result of the actions taken by the Department in improving the “quality” of the information provided to the Auditor-General, a much more comprehensive audit was conducted which has now hopefully identified the full extent of the issues to be dealt with in improving the financial management of the Department.

 

2.1        Asset Management

 

      Problem statement:

·         Vote 34 (Main Account), combination of electronic (LOGIS) and manual registers used and        inadequate reconciliations to verify physical existence of assets purchased during the year.


 

·         Trading Accounts, while records of all assets are available, the recording of the assets fundamentally departs from the representation of these assets in terms of the reporting            requirements of GAAP.

 

      Actions Taken to Resolve the Problem:

·         An Asset Management Strategy has been developed (March 2006) and is being implemented to ensure that we are able to comply with all of the National Treasury’s requirements, including GAAP. This will also include a re-valuation of all of the Department’s fixed assets.

·         A Project Charter has also been approved and is being implemented for “Enterprise wide asset management”. The goal of this project is to implement formal asset management        throughout the Department to enable the Department to operate and maintain its assets           responsibly by 2008. The high level objectives of the project are to:

ü       Compile a comprehensive and accurate asset management system;

ü       Enable the department to use the system as a decision support mechanism;

ü       Provide a basis from which the assets will be managed optimally over its entire lifespan;

ü       Provide a basis from which the cost of ownership can be determined;

ü       Support the sustainability of current and new schemes; and

ü       Form an accurate basis from which raw water price determination can be done.

 

2.2        GAAP Compliance

 

      Problem Statement:

·         The Department is not able to comply with the requirements of the South African Statements of GAAP.

 

      Actions taken to resolve the problem:

·         The implementation of SAP as the preferred Enterprise Resource Planning (ERP) system to support our trading activities. This system is expected to progressivly “go live” during September and should be fully operational by the beginning of October 2006. This will mean that we will be able to fully implement accrual accounting and comply with the provisions of section 40(1) of the PFMA.

·         A comprehensive training programme has commenced and Trainers have been appointed and deployed at National and Regional Offices. Ten training rooms, each with 15 work stations have been established and commissioned. The initial focus of the training is on:

ü        Computer literacy which has been completed;

ü       Accrual accounting; and

ü       Focused SAP Training which commenced during May and will continue during and after the implementation phases.

·         Super Users (internal : State Accountants and Chief Provisioning Officers) are being identified and will also be supplemented if necessary by Power Users (external resources).

·         Core group of users (50%) are being trained prior to activating the functionality components.


 

2.3        Financial Management Capacity (Restructuring)

 

            Problem Statement:

·         The Department currently operates both cash and accrual accounting activities. The main          challenge/difficulty is that the Trading Account operates in a cash environment and all    transactions have to be converted to an accrual basis for reporting purposes, which makes it difficult/impossible to comply with the GAAP disclosure requirements.

 

            Actions taken to resolve the problem:

·         The Finance Branch is being restructured at both the National and Regional levels, the outcome will be:

ü       A Branch with a Cash accounting unit with dedicated resources and independent             rocesses; and an Accrual accounting unit with dedicated resources and independent   processes;

ü       A new finance structure that has been populated with resources and is operationalised. This will involve the development of a physical relocation strategy (relocation of people, equipment and technology) and a staged resource implementation plan;

·         The key reasons for restructuring are therefore:

ü       To comply with the PFMA, Regulations and the National Treasury directives  it is    necessary to split the main account and trading activities into independent functions;

ü       In order to eliminate fragmentation of the overall finance activities (consolidation of supply chain management, revenue management and budget activities performed by Regional Co-ordination and support);

ü       To prepare a working environment which is conducive to the implementation of SAP.

·         The high level structure has been approved and recruitment of key resources has commenced, an invitation for applications closes on 22 September 2006. A fast track approach is being adoted to finalise the structures for the Regional Finance components with recruitment targetted to commence in October 2006. As an interim measure while the recruitment process is being followed, temporary resources will be brought in from selected Professional Service Providers already contracted to the Department.

 

 

3.                   BUDGET 2006 TO 2009

 

Main Account Vote 34

The approved Budget for 2006 to 2009 is summarized below (R’000):

Programme

2006/07

2007/08

2008/09

Administration

436 708

428 408

451 776

Water Resources

2 179 186

2 416 291

2 961 631

Water Services

1 462 251

1 544 103

1 772 319

Forestry

398 400

420 545

440 258

Total

4 476 545

4 809 347

5 625 984

 


 

4.         EXPENDITURE REPORT 2005/06 (END JULY 2006)

 

In terms of section 40(4) of the PFMA, information on Departmental spending must be reported to the National Treasury and also to the Minister. Summarised below is the Departmental actual expenditure from 01 April 2006 to 31 July 2006.

 

As reported in the June 2006 Early Warning System Report (EWS Report), the Department is in the process of transferring officials from Water Trading Account to the Exchequer Account. This process has not gone according to plan and will now only be completed by the end of September 2006.

 

Based on an expenditure analysis on the Water Trading Account it was established that an amount of R62 million was incorrectly spent in the Water Trading Account instead of Exchequer Account. Taking this expenditure into account will increase expenditure to 24% up to the end of July 2006.

 

The expected under-expenditure of the R300 million allocated for De Hoop Dam in Programme 2: Water Resource Management was reported in the June report.

 

The Department submitted a request to the National Treasury to roll-over an amount of R140,506 million from the 2005/06 Financial year (this represented 3,6% of the Budget for that year). The National Treasury has advised that the Minister of Finance has approved the roll-over in an amount of R123,208 million (representing 3,1% of the budget for that year). This amount will be included in the Adjusted Estimates for 2006/07. This represents a 2,75% increase in the 2006/06 budget and will now be reflected in all our future reports.

 

The Department has spent 22,6% (R1 039 756 million) of the revised budget of R4 599 753 000 (including roll-overs). In comparison with expenditure for 2005/06 for the same period, the Department had spent 29,12% of the revised budget of R3 603 560 000.

 

 

2005/06 Financial Year

2006/07 Financial Year

Programme

Budget Allocation R’000

Actual Expenditure R’000

Percentage Spent %

Budget Allocation R’000

Actual Expenditure R’000

Percentage Spent %

Administration

    296 739

  91 268

30,76%

   509 670

 145 317

28,51%

Water Resource Management

1 536 557

611 807

39,82%

2 229 432

 458 702

20,57%

Water Services

1 397 075

223 184

15,98%

1 462 251

 313 004

21,41%

Forestry

   373 189

122 910

32,94%

  398 400

 122 126

30,65%

Theft and Losses

 

       104

 

 

        607

 

Suspense Account

 

 

 

 

     4 009

 

Total

3 603 560

1 049 273

29,12%

4 599 753

1 039 756

22,60%

 


5.         SAP IMPLEMENTATION

 

·         It was previously reported that the implementation of SAP as the preferred Enterprise Resource Planning (ERP) system to support our trading activities. Was scheduled to progressivly “go live” from 1 July subject to a quality assurance process conducted by SAP (Africa). Following this review a decision was taken by the Department to delay the “go live” to end September.

·         The finalisation of the restructuring programme and the progress on the parallel runs may still impact on the ability to achieve this revised target date.

·         A comprehensive training programme has commenced and Trainers have been appointed and deployed at National and Regional Offices. Ten training rooms, each with 15 work stations have been established and commissioned. The initial focus of the training is on:

ü        computer literacy which has been completed;

ü       Accrual accounting; and

ü       Focused SAP Training is still being conducted.

·         Super Users (internal : State Accountants and Chief Provisioning Officers) are being identified and are being supplemented by Power Users (external resources).

 

6.         ASSET MANAGEMENT STRATEGY

 

·         The asset registers are the key areas which led to the qualification (property, plany and equipment) of the Financial Statements for the Water Trading Account and an emphasis of matter (Asset and inventory management) on the Financial Statements of the Main Account Vote 34 in 2005.

·         An Asset Management Strategy has been developed (March 2006) and is being implemented to ensure that we are able to comply with all of the National Treasury’s requirements, including GAAP. This will also include a re-valuation of all of the Department’s fixed assets.

·         A Project Charter has also been approved for the “Enterprise wide asset management”. The goal of this project is to implement formal asset management throughout the Department of Water Affairs and Forestry to enable the department to operate and maintain its assets responsibly by 2008. The high level objectives of the project are to:

ü       Compile a comprehensive and accurate asset management system;

ü       Enable the department to use the system as a decision support mechanism;

ü       Provide a basis from which the assets will be managed optimally over its entire lifespan;

ü       Provide a basis from which the cost of ownership can be determined;

ü       Support the sustainability of current and new schemes; and

ü       Form an accurate basis from which raw water price determination can be done.

 

7.         ANNUAL AUDIT 2006/07

 

·         The Audit Steering Committee with members from the Department and the Office of the Auditor-General which was established to oversee and monitor progress on the 2005/06 annual audit will be reconstituted to oversee and monitor the 2006/07 annual audit.

·         Engagements have already commenced between the Department and the Office of the Auditor-General to agree on the plan for the 2006/07 annual audit.

 

 

 

Prepared by:

Trevor Balzer

Acting CHIEF FINANCIAL OFFICER

Department of Water Affairs and Forestry

8 September 2006