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
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