DRAFT REPORT

REPORT OF THE PORTFOLIO COMMITTEE ON WATER AFFAIRS AND FORESTRY ON OVERSIGHT OF 2004/05 ANNUAL REPORTS AND ORAL PRESENTATIONS OF WATER BOARDS DATED 17 MAY 2006:

The Portfolio Committee on Water Affairs and Forestry having considered and oversight of 2004/05 Annual Reports and oral presentations of Water Board from 22 – 24 March 2006, reports as follows:

1. Background

The Constitution of South Africa (Act 108 0f 1996) recognises that Legislatures have an important role to play in overseeing the performance of Departments and its Public Entities. Section 65 of the Public Finance Management Act requires that Ministers table the annual reports for the Department and Public Entities for which they are responsible by 30 September each year. The Public Finance Management Act (PFMA) states the action to be taken if reports are tabled late and the Joint Rules of Parliament also states the course of action to be taken when a Public Entity fails to appear before the Committees in Parliament.

The Minister may by notice in the Government Gazette, in terms of the Water Services Act, 108 of 1997, establish a Water Board. The primary activity of a Water Board is to provide water services, mainly potable water to water-services institutions within its service area.

On the 12 January 2006, the Minister of Water Affairs & Forestry tabled Bushbuckridge, Rand, Umgeni, Magalies, Botshelo, Overberg, Ikangala, Mhlathuze, Namaqua, Lepelle Northern, Albany Coast, Sedibeng, Pelladrift, 2004/05 Annual Reports and Financial Statements to Parliament in terms of Section 65 (1) (a) of the Public Finance Management Act 1999 (Act No. 1 of 1999).

Upon referral by the National Assembly on 19 February 2006 for consideration and reporting, the Portfolio Committee on Water Affairs & Forestry scheduled hearings on the 22 and 24 March 2006 with Water Boards, to present their Annual Reports and Financial Statements including the Reports of the Independent Auditors on the Financial Statements for 2004-2005. Officials from the Department of Water Affairs and Forestry (DWAF), charged with the work of Water Boards responded to the input from Water Boards.

2. Introduction

The Portfolio Committee used the following documents as an oversight tool to guide and analyse the input made by Water Boards to the water sector in South Africa:

2.1 2004/05 Annual Reports and Oral Presentations of the Water Boards.

2.2 Analysis by DWAF of the Water Boards’ 2005 Annual Reports, including its

audited Financial Statements. The analysis by DWAF, which is reflected as a

‘superficial analysis for the purposes of initiating discussion on the financial

status of the Board’, was used by the Portfolio Committee to engage the Water

Boards.

The following Water Boards provided oral presentations to the Portfolio Committee:

Bushbuckridge, Lepelle Northern, Botshelo, Albany Coast, Namaqua, Umgeni, Sedibeng, Magalies, Overberg, Ikangala, Mhlathuze and Bloem.

Due to certain constraints, the following Rand Water Board provided written submissions to set questions, to the Portfolio Committee:

The following two Water Boards (Namaqua and Albany Coast) submitted written apologies and explanations for their non-appearance:

Namaqua apologised for being unable to appear before the Committee as they only received the letter informing them of the event on the morning of the 22 March 2006

Albany Coast reported that they are a small entity of six personnel. For any one of them to go on leave, that has to be planned well in advance. Due to the fact that their accounting is done by Independent Auditors, they (auditors) need to be told in advance when the Water Board has to come before the Committee in Parliament to present its Annual Report.

3. Overview of 2004/05 Annual Reports and Financial Statements of Water

Boards

3.1 Bushbuckridge Water Board

In focusing on providing water to communities, Bushbuckridge noted that the lack of guaranteed operational subsidies proved to be a serious hindrance to the Board’s mission. However, the Board was exploring strategic means of attaining financial sustainability. A severe drought had affected the Board’s areas of supply with two dams drying up completely. This had forced the Board to use alternate water systems. The development of the Inyaka Scheme was fast tracked, abstraction points were cleaned and consumption was rationed in certain areas. 67% of the Board’s operational costs were funded by the DWAF. The change in accounting policy whereby the inventory had been included at market value increased profits by R1.9 million.

These were some of the findings for Bushbuckridge from DWAF’s report:

3.2 Conclusions on Annual Financial Statements

Bushbuckridge is totally dependent on DWAF subsidies, and hence not fulfilling the function of a Water Board, that is, the self-sufficient supply of water.

In 2005, it was stated that either Bushbuckridge should conclude a payment agreement with the customer municipalities or serious consideration should be given to transferring its assets to the municipality and phasing out the Board. The Water Board’s current DWAF subsidised position is not in alignment with the Equitable Share philosophy.

Although Bushbuckridge subsequently entered into a Memorandum of Understanding (MoU) with the Municipality, this is not being implemented.

3.3 Recommendations

DWAF should question whether there is any sense in maintaining a Water Board for water provision essentially to a single municipality.

The Board should be disbanded, and the function be transferred to the municipality or to another Board.

Checklist for comment:

Board, Management	The Board has not addressed the continued non-payment by Bohlabela. The board’s internal audit committee was not performing satisfactorily. The audit committee should have raised the need for a forensic audit before the critical external auditors’ report of 2003/04. It appears that VAT may have been paid unnecessarily on DWAF subsidy receipts – although the note needs to be clarified. The board is not viable.
Audit report	An External Auditor made the users to the financial statements aware that the forensic investigation is still in process of being completed and that no adjustments have been made to the figures in the financial statements. The going concern basis has been adopted in preparing the financial statements. The auditor has not commented on this.
Other	The sole/main customer is hardly paying for it’s water and the board is totally dependent on financial susbsidies from DWAF as well as some hidden subsidies related to the cost of raw water. Cash resources have decreased by an amount of R2 million and if that trend continues, the Board will find itself in huge financial difficulties.
Reserves	Merely a reflection of subsidy levels. Accumulated loss of R27 million. (The actual cost to tax payers is far higher given the level of disclosed subsidies, the R1, 9 m profit from restating inventories, the hidden water resource subsidy etc.)
Liabilities
CAPEX	R762 180 addition to plant and equipment.
Financial Investments	Investments in money market and current account OK. The retirement funding is in the Orion Money Provident Fund. This fund is not actuarially valued and it is a condition that the staff must become members. Given the apparent lack of financial capacity displayed at board level external assurance should be sought that the employees funds invested in this Provident fund are safe.
Receivables	The non-payment by Bohlabela has been allowed to drag on for much too long and is contrary to the equitable share philosophy. The problem should now be addressed at National Treasury level as neither the board nor DWAF has successfully been able to resolve the problem.
Current ratio	Just a reflection of subsidy levels.
Profitability	Board is not nearly viable.
Fixed Assets	It is recommended that the level of maintenance of fixed assets should be independently confirmed.

4. Lepelle Northern Water Board

Lepelle Northern had received two awards for the year under review. It was also in the top five of the 500 South African companies. The Board had managed to keep its tariff increase to 2.94%, which was well below the inflation rate. The Board had also concluded a long-term supply contract with Polokwane Municipality for 25 years. In addition, the Board had repaid the Olifants/Sand loan of R218 million during the first quarter of 2005/06.

4.1 Conclusion drawn from Annual Financial Statements

The high level of debtors was identified during the two previous years as a concern. The situation appears to have deteriorated.

Receivables are currently equal to 242 days of revenue. The Board must explain whether any of these debtors should be written off, as this would considerably alter the liquidity position.

A substantial writing off of these debtors could change the Balance Sheet substantially and also affect future income projections. There is possible requirement to recast the financial statements after discussion with debtors and redo the analysis. The financial statements can therefore not be treated as a reliable reflection of the position of the board.

4.2 Recommendations

An urgent meeting should be arranged between DWAF, DPLG, National Treasury, Lepelle and Phalaborwa.

Checklist for comment:

Board, Management	MH Mokgobi has not attended any of the 6 board meetings but has received a basic remuneration of R51 755. 14-person board appears to be large.
Audit report	Auditor should be requested in writing to indicate the steps that they took to give them confidence that the financial statements properly reflect current assets when accounts receivables are at 242 days.
Other	Board should obtain and forward a copy of the actuarial report for Lepelle Northern Water pension fund once completed during July 2006. What is represented by the amount allowed for the contingent liability described in note 21, more details on that are required? Financial statements might not be an accurate reflection of the financial situation given the high level of accounts receivables.
Reserves	Accumulated deficit now only R7 million, Reserves of R388 million OK.
Liabilities	Bosveld Services Council interest 5% OK DWAF loan Duiwelskloof interest 10,4% OK DBSA 10% OK. Potgietersrus Platinum 9,5% OK.
CAPEX
Financial Investments	Not shown with whom and how funds are invested.
Receivables	Receivables of R110 million, 242 days. R17 million provisions for bad debts. Phalaborwa owes R95, 8 million. Serious problem needs urgent DWAF, DPLG, National Treasury attention and if they don’t show sufficient energy in resolving issue then court action must be taken otherwise financial loss to Organ of State and contrary to spirit of PFMA.
Current ratio
Profitability	R45 million surplus OK

5. Botshelo Water Board

Whilst a new Board was constituted, the Board faced major challenges in the form of:

(a) R110 million had to be recovered from Municipalities;

(b) Unauthorised water connections posed major problems for both the Municipalities and the Water Board;

5.1 Comments based on financial statements

Botshelo is not nearly financially viable and is dependent on DWAF subsidies for over half of its operating and administration costs.DWAF’s subsidies are in arrears to a value of R41 million. Total accounts receivables total R95 million. If this situation is not resolved the Board cannot be seen as a going concern.

Checklist for comments

Board, Management	No internal audit committee in place during financial year. All the relevant Board Committees should be put in place.
Audit report	The auditor notes that an amount of R41 331 477 and R52 802 908 is owed by DWAF and other Government Debtors. The recoverability of these balances is uncertain. No provision for these balances has been made in the Annual Financial Statements.
Other
Reserves	Reserves are smaller than debtors. If accounts receivable are not recoverable, the board would be in financial difficulties. Certain reserves do not have investments to cover them.
Liabilities	The board has no long-term liabilities and is not in a financial position to raise loans.
CAPEX	Purchase of assets of R592 221. Loss on disposal of assets of R96 459. Additions to computer equipment of R183 465 plus office equipment of R99 310 could purchase many PC’s for that amount. Erf 1766, Erf 2449, Erf 2779 were disposed of. What was the reason and to whom and how where they disposed?
Financial Investments
Receivables	Receivables total R95 million. This includes an amount owed by DWAF of R41 million, which is offset by R27 million accounts payable to DWAF. Provision for doubtful debts of +-R58 million of which R31 million is for Trade Receivables. The receivables situation is unacceptable. The reason that the accounts receivables had to be written off must be discussed. Could the equitable share of the municipality involved not be tapped directly from National Treasury to repay the funds over time?
Current ratio	The current ratio is meaningless given the uncertain over debtors and the tendency not to recover the trade debtors.
Profitability	Board showed a loss of approximately R37 million before subsidies (assuming subsidies of R41 million) and is not nearly financially viable.

6. Umgeni Water Board

Some of the 2004/05 Key Financial highlights were:

(a) A surplus of R55 million was generated;

(b) The Board experienced an 11% increase in revenues, amounting to R1 billion;

(d) They experienced a positive cash flow from operating activities, amounting to R221 million.

Umgeni, Mhlathuze and uThukela Water, had developed a regional strategy to supply bulk water for the KwaZulu Natal province.

Some of the challenges faced by the Water Board were:

(a) R14.4 million is still owed to the Board by the Msundusi Municipality for the Waste Water Treatment project that was undertaken at Darvill; and

(b) The delay in the transfer of Rural Schemes to the Msundusi municipality.

6.1 Conclusions to be drawn from Annual Financial Statements

Umgeni Water still faces a liquidity and solvency challenge. The ability to meet debt payments may have been disguised by a large water sales increase.

Umgeni Water’s operating and administrative costs have increased dramatically over the last year but this is mainly due to asset impairments (possibly once off write downs).

It is recommended that the financial situation be monitored semi-annually.

6.2 Questions and observations

(a) What assets were written off that had such a marked effect on the costs (R70 million)?

(b) Why did raw water purchases from DWAF fall from R71, 9 million in 2004 to R65, 5 million in 2005 when volume of water sales increased by 3,7%?

(d) What percentage long-term water sales growth is assumed in the tariff cash flow model?

(e) The Africa/South Africa Division made a loss of R9 million. What was the loss in Africa (taking out rural sanitation etc)? What are the future plans for overseas activities?

Checklist for comments

Board, Management	OK
Audit report	OK
Other
Reserves	Accumulated loss
Liabilities	Bond issues, interest rates not visible. Build up to year 2010 liabilities maturing +-R1.4 billion and probable need to roll over must be properly managed.
CAPEX	R228 million authorised but not contracted for. R41 million contracted for but not provided for in financial statements.
Financial Investments	Zero coupon bonds OK. Current assets in money market investments.
Receivables	Average age receivable 41,5 days is an improvement and OK. R14, 4 m unpaid by Msunduzi for management fee to be dealt with (DPLG, National Treasury, DWAF).
Current ratio	0,7 looks tight with non-payment of management fee not yet resolved.
Profitability	Profit after taxation R53 m good turnaround from loss of R37 million but interest cover still tight.

6. Magalies Water Board

Some of the major achievements in 2004/05 were:

(a) Implementation of future corporate strategy that focused on the appointment of a new BEE Suppliers and professional service providers.

(b) Implemented a new organisational structure.

(d) Implemented an Asset Management Improvement Plan.

(e) Received a PMR Diamond Award in 2005 for Public Sector Entity Service Delivery.

(f) Entered into a Twinning Agreement with Nkana Water in Zambia.

(g) Successfully implemented the attainment of gender equity.

(h) Successfully implemented the water loss program in City of Tshwane Metro.

(i) Successfully disbursed a donation of R18 million to 4 key municipalities identified for water services projects.

Some strategic challenges faced by the Board were:

(a) A need for the improvement of the fast deteriorating raw water quality in catchment areas such as Hartebeespoort and Roodeplaat dams.

(b) A need to accelerate assistance offered to Municipalities to deal with Project Consolidate.

(d) A need to continuously ensure that the quality of portable water that is produced and delivered remains quality consistent.

(e) A need to accelerate access to sanitation to all consumers in areas of operation.

Checklist for comments

Board, Management	It is noted that Ms Molotlegi earned significantly less than other board members. It should be enquired how many board meetings she attended.
Audit report	The Auditor of Magalies Water: Bonjala states that the Financial Statements were prepared as a going concern, taking into account the subsidy from DWAF and the financial support from Magalies will continue. The Auditor thus treats Magalies Water: Bojanala as a separate entity and implies that it would not be a going concern if there was either no subsidy from DWAF or no financial support from Magalies Water. The auditor states that the accounts reflect generally accepted accounting practice. However, it is argued later in this table that Magalies is using an unusual approach to accrual accounting (eg. the treatment of depreciation, the calculation of interest on reserve funds).
Other	Treatment of depreciation is unusual and not in accordance with GAAP. In accrual accounting interest should be shown as an expense not as an appropriation from net surpluses. The need for subsidies is linked to the separate treatment of the different components of the water board. The water board should be consolidated and subsidies should be removed.
Reserves	Sufficient. Showing interest earned against general reserves (note 4), other reserves (note 5) and depreciation fund (note 6) is unusual. Interest is money earned on funds invested and is an income in the income statement to be allocated as part of net surplus, and is not normally shown as an earning on reserves. Showing the General reserve fund, depreciation fund etc as investments (Note 9) is also unusual.
Liabilities	Interest at 15% on DWAF loan is far higher than current interest rates and should be reviewed.
CAPEX	Additions total R23, 196 million in 2005 and R41, 293 million in 2004.
Investments	There is an investment in New Republic bank, which is in receivership, of R698 426. Fortunately this is not a large amount. DWAF should have a policy that ratio of investments held with different banks should bear some relationship to market capitalisation of banks. Larger amounts should be invested with large banks. In note 9 reserves are shown as investments. I.e. it could be argued that the balance sheet partially reflects accrual accounting and cash flow accounting. This approach could possibly explain why Magalies shows interest against particular reserves and why depreciation is appropriated to a depreciation fund after determining net surplus and not deducted as an expense.
Receivables	The increase in accounts receivables to almost 2 months is not acceptable and needs to be monitored.
Current ratio	0,86 insufficient.
Profitability	Just breaking even before subsidies, insufficient.

6.1 Recommendation

&nbs