DEPARTMENT:
WATER AFFAIRS AND FORESTRY
ENQUIRIES: Onesmus Ayaya
PORTFOLIO
COMMITTEE ON WATER AFFAIRS AND FORESTRY QUARTERLY FINANCE REPORT : 12 SEPTEMBER 2007
1. INTRODUCTION
Following
the 2004/05 Audit of the Department a number steps were taken by EXCO and Top
Management 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 has been witnessed in 2006/07. More of the
impact of financial management reforms in the department will be seen during the fiscal year 2007/08 and 2008/09 with
a plan to have unqualified audit opinion for the department at the end of 31
March 2009.
For
historical reasons, the Department is involved in trading activities, which
include the sale of water-related services.
The medium term plan to migrate these activities out of the Department
that started in 2006 is on course. The
medium-term plan is geared towards improving the general financial management through
specific financial amangement improvement interventions, which include:
·
A restructuring of the
Finance Branch at Head Office and at Regional level through the separation of
the Water Trading Account and Main Account (Exchequer) activities;
·
A national accounting firm
was 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 became operational during the last quarter of 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 No. 1 of 1999)
(PFMA);
·
Coupled with the
implementation of SAP is an extensive ongoing 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 the Department is 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. To this end, an enterprise-wide asset management
project is in progress to verify and value water resource management assets in
accordance of GAAP; and
·
Build on the successes
achieved in the management of the audit process through the Audit Steering
Committee (Chaired by the Deputy Chief Finance Officer). This committee was establised
in 2005/06. This committee, with members from the Department and the Office of
the Auditor-General, oversaw the 2006/07 fiscal year audit and continue to monitor
progress on the 2007/08 annual audit which will commence in November 2007.
The
projects implemented by the Department requires the Chief Financial Officer,
who assumed duty on 02 July 2007, to
have an ongoing engagement with the Office of 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 have improved financial management practices for the Department
of Water Affairs and Forestry in order to unqualified audit reports situation.
2.
BUDGET 2007 TO 2010
The approved budget for
2007 to 2010 is summarised below (R’000):
Table 2.1: MTEF Allocations
Programme |
2007/08 |
2008/09 |
2009/10 |
Administration
|
516 110 |
524 384 |
565 995 |
Water Resources |
2 730 032 |
3 221 192 |
4 313 760 |
Water Services |
1 913 660 |
2 419 150 |
2 527 591 |
Forestry |
460 545 |
440 258 |
463 962 |
Total |
5 620 347 |
6 604 984 |
7 871 308 |
The 2007 MTEF
allocations include amounts already in the baseline and new allocations of R505
million for 2007/08, R975 million for 2008/09 and R1 690 million for
2009/10, for spending on the following new policy priorities:
·
Upgrading and expansion of the National surface
water gauging network (R10 million for 2007/08, R20 million for 2008/09 and R30
million for 2009/10);
·
Working on Fire (R10 million for 2007/08, R20
million for 2008/09 and R30 million for 2009/10);
·
Refurbishment of infrastructure (water schemes)
(R20 million for 2007/08, R25 million for 2008/09 and R30 million for 2009/10);
·
Bulk infrastructure (conditional grant to Local
Government) (R300 million for 2007/08, R450 million for 2008/09 and R650
million for 2009/10); and
·
An increase in the allocation for the social
component of the De Hoop Dam downstream projects (phases 2B to 2G) (R50 million
for 2007/08, R250 million for 2008/09 and R600 million for 2009/10).
·
Schools and clinics water supply and sanitation
(R105 million 2007/08, R210 million 2008/09 and R350 million 2009/10).
Medium- Term Expenditure Framework (MTEF) 2008
Budget proposal
The Department
has submitted the budget proposal to National Treasury for consideration and
are excluded in the MTEF 2007 – Refer to Table 2.2. The budget proposal are as
follows
Table 2.2: Medium-
Term Expenditure Framework (MTEF) 2008 Budget proposal
Proposal |
2008/09 R’000 |
2009/10 R’000 |
2010/2011 R’000 |
Additional funding to
replace donor funds and support the 2010 sanitation targets |
100 000 |
120 000 |
800 000 |
Forestry Charter |
30 000 |
35 000 |
40 000 |
The need for additional
capacity |
30 000 |
30 000 |
80 000 |
National regional bulk
water services infrastructure programme |
160 000 |
200 000 |
800 000 |
Trees for food programmes |
20 000 |
25 000 |
30 000 |
Working for Water,
Working on Fire and Working for Wetlands |
110 000 |
160 000 |
400 000 |
TOTAL |
450
000 |
600
000 |
2
150 000 |
3. EXPENDITURE REPORT 2007/08 (END AUGUST
2007)
3.1 Main Account (Vote 34)
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 in Table 3.1 is
the Departmental actual expenditure from 01 April 2007 to 31 August 2007
(four-month period).
The Department
had spent 32% of the approved budget of R5 620, 347 million (including
roll-overs). This compares favourably with
the expenditure for 2006/07 for the same period, the Department had spent 29%
of the approved budget of R4 599, 753
million as shown in the Table 3.1.
Table 3.1: Main Account - Expenditure end of August 2007
2006/07
Financial Year |
2007/08
Financial Year |
|||||
Programme |
Budget Allocation R’000 |
Actual Expenditure R’000 |
% Spent |
Budget Allocation R’000 |
Actual Expenditure R’000 |
%
Spent |
Administration |
509 670 |
181 603 |
36 |
516 110 |
222 805 |
43 |
Water
Resource Management |
2 229 432 |
594 350 |
27 |
2 730 032 |
811 739 |
30 |
Water
Services |
1 462 251 |
404 881 |
28 |
1 913 660 |
585 678 |
31 |
Forestry |
398 400 |
160 959 |
40 |
460 545 |
167 777 |
36 |
Theft
and Losses |
- |
636 |
|
- |
513 |
|
Suspense
Account |
- |
2 373 |
|
|
|
|
Total |
4
599 753 |
1
344 802 |
29 |
5
620 347 |
1
788 512 |
32 |
The under-expenditure of 6,7% (on oversall budget) from 2006/07 financial was
mainly as a result of the delayed spending on the De Hoop Dam project,
Rehabilitation of dams(dam safety) and transfer of staff to municipalities to
cater for the ‘’once off” staff costs.
Consequently,
an amount of R314 million has been rolled over to 2007/08 financial year as
follows
·
R260 million to continue with the
implementation of the De Hoop Dam
·
R40 million to continue with the
rehabilation of dams to comply with safety standards
·
R14 million to finalise the transfer of
staff to municipalities and cater for the once off staff costs
An
amount of R314 million was rolled-over to 2007/08 financial year represents an
increase of 5,9% increase in the budget of the current financial year which
will be included in the adjustments estimated for 2007/08 financial year.
The
Departmental expenditure should have been 41% and the actual expenditure is 32%.
The following are the reasons for underspending
·
Programme 2: Water Resource Management: the
under expediture on this programme is due to vacancies that were not filled,
late processing of transfer payments, late delivery of goods and services and
amount R300 million rolled over for the De Hoop Dam Project and rehabilitation
of dam has an impact on the spending
·
Programme 3: Water Service: the variance is
mainly due delays in finalising transfer of staff to municipalities, regional
bulk infrastructure projects that could not start as planned because projects
must be approved and promulgated by National Treasury and, backlogs in water
and sanitation in schools and clinics the planning phase of this project was
only completed towards the end of the first quarter and the expenditure is
expected to increase in the second quarter
·
Programme 4: Forestry the variance is due to vacancies that were
not filled, late delivery of goods and services and invoices that could not be
processed before the end of this month
The Department is in the
process of linking officials correctly to Water Trading Account and the Main
Exchequer Account. This process has not gone according to plan and will now
only be completed by the end of November 2007 as part of PERSAL clean up
exercise undertaken by DWAF’s Corporate Services Branch.
3.2
Water Trading
Account:
Table 3.2 shows the Revenue
and Expenditure for the period ending 30 June 2007:
Table 3.2: Trading Account - Expenditure end of June 2007
|
TOTAL ACTUAL |
BUDGET |
% ACHIEVED |
|
R 000 |
R 000 |
% |
INCOME |
|
|
|
Sundry Revenue |
9,488 |
40,000 |
24% |
Catchment Management Agencies |
22,298 |
616,116 |
4% |
National Water Resource
Infrastructure |
393,177 |
2,014,068 |
20% |
TCTA - BILLED |
715,662 |
2,030,000 |
35% |
TCTA - REFUND |
(565,411) |
-2,030,000 |
28% |
Total Net
Revenue |
575,214 |
2,670,184 |
22% |
|
|
|
|
EXPENDITURE |
|
|
|
Unallocated Head Office |
22,850 |
0 |
0% |
Catchment Management Agencies |
59,310 |
319,512 |
19% |
National Water Resource
Infrastructure |
497,634 |
1,669,270 |
30% |
Transfers and Subsidies to
Public Cooperations |
38,337 |
254,424 |
15% |
Total
Expenditure |
618,131 |
2,243,206 |
28% |
EXCESS
INCOME/EXPENDITURE (DEFICIT) |
(42,917) |
426,978 |
-10% |
Less: Infrastructure Expenditure to be Capitalised |
155,992 |
1,038,000 |
15% |
Funded by Transfer from Main
Account |
173,008 |
1,038,000 |
17% |
Net Surplus (Deficit) |
(24,901) |
426,978 |
|
The Water
Trading Account was in the process of migrating from BAS (Cash Accounting) to
SAP (Accrual Accounting) during the 2006/2007 financial year and no interim
reports were prepared.
The expenditure
for the current year is below planned due to the clear separation of costs
between the
4.
AUDIT 2006/07
The Auditor-General has reported on the
Financial Statements for the 2006/07 Financial Year of the Department as follows:
·
Vote 34 (Main Account): Qualified.
·
Water Trading Account (including equipment tradingaccount):
Disclaimed due to limitation in scope
·
In two of the
accounts (Vote 34 and Water Trading Accounts) the principal contributor to the
qualification and the disclaimer is the way in which the Department has
accounted for its assets, which are a subject of asset verification and
evaluation process in compliance to reporting requirements of GRAP and GAAP.
The GAAP reporting requirements relate to the fact that the Department has operated
over years 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 the projects initiated by the Department of Water
Affairs and Forestry in 2006 have been taken to address the fundamental
requirements to ensure that an improved audit is posted for the 2000/09 financial
year and beyond. The non compliance with regard to assets verification 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. These issues raised in Audit report has formed the basis for
various action plans formulated by heads of regions and branches for
implementation.
4.1 Non-compliance
with policies and procedures
Audit report issue:
The Department
was not able to comply with the requirements of SA statements of GAAP and
applicable legilsation.
Suggested action steps to be taken to resolve the
problem:
In order to
ensure that the Water Trading Account, Annual Financial Statements are prepared
in accordance with Generally Accepted Accounting Practice, the following
actions have been taken to solve the problems:
·
The implementation of SAP, as the preferred
Enterprise Resource Planning (ERP) system to support our trading activities.
This system became operational during the last quarter of 2006 and is subject to post implementation
refinements. This will mean that the Department will be able to fully implement
accrual accounting and comply with the provisions of section 40(1) of the PFMA
by March 2009
·
A comprehensive training programme commenced and trainers
have been appointed and deployed at National and Regional Offices to offer
training to 42 user with an initial focus of training on:
o
Computer
literacy, which has been completed;
o
Accrual accounting in a computersised accounting
environment; and
o
Subsequently focus onSAP training during the
ongoing implementation phase.
·
SAP Super Users, comprising of State Accountants and Chief Provisioning
Officers, were identified and will also be supplemented if necessary by Power
Users (external resources).
·
Core group of users of about 50 per cent are receive
training trained on relevant financial modules of SAP.
4.2 Financial
Management practices and capacity
Audit report issue:
In the past, the
Department operated both accounts on a cash accounting basis. This has resulted
in a challenge whereby the SAP was
coinfigured to address Water Trading account activities in a cash accounting
environment and all transactions have to be converted to an accrual basis of
accounting for finacial reporting purposes. This made it challenging to comply
fully with the SA GAAP disclosure requirements in the shortest time possible.
Suggested
actions to be taken to resolve the problem
The restructuring of the finance function is in
progress in order for:
·
The Department to have a Chief Directorate with
staff dealing with Main Exchequer transactions and with dedicated support
resources and separate processes; and another Chief Directorate dealing with
the Water Trading account activities with dedicated resources and independent
processes that support accrual accounting.
·
The reconfigured finance structure to be populated
with qualified finance officials and related support from financial managers hired
to fast track the implementation of desired action steps arising from the
recent audit
The key reasons
for restructuring the finance function are therefore:
·
To achieve sound financial management practices by
embracing the requirements of comply with the PFMA, Regulations and the National
Treasury directives that call for the
separation of the main account transactions from those associated with trading
activities into independent functions;
·
In order to eliminate fragmentation of the overall
finance activities in a manner that does not facilitate mitigation of financial
risks associated with a possible break down in internal controls;
·
To prepare a working environment which is conducive
to the implementation of SAP and BAS systems.
The DG has approved the SMS level structure and recruitment
of key resources has commenced. As an interim measure, while recruitment
process is being followed, temporary
resources have been brought in from selected Professional Service Providers
already contracted to the Department.
4.3
Inadequate
documented business proceses and procedures
Audit report issue:
Business
processes and procedures affecting debtors, leave administation, state
guarantees were found to be inadeqiate. The inadequate business proceses and
procedures resulted in unallocated cash deposits, poor debtor management
practices and unaccounted for leave days.
Revenue
re-engineering and re-organisation of the revenue function project has been
undertaken to attend to matters relating to business processes and procedures
in so far as they impact on the water trading account. This project has the
following objectives:
·
Assist the Department in the re-engineering of the Water
Trading Account’s (WTA’s) business processes;
·
Assist in introducing policies and procedures that
will facilitate the implementation of a control environment that will ensure an
efficient and effective utilisation of the organisation’s assets;
·
Establish a process culture that will unlock
additional revenue potential for the WTA;
·
Assist in keeping the current operations going
through addressing the numerous day-to-day issues including responding to issues and
qualifications raised by the Auditor General; and
·
Assist in managing and coordinating the various
projects and initiatives being undertaking by WTA.
The Department
envisages that this initiative will result in:
·
Debtor policy regarding pre-1999 and post-1999 debtors
·
Recommendations on how to use debtor collection
agents to expedite collection of departmental debts that are older than 6
months
·
Employees of the Department of Water Affairs and
Forestry having to to provide proof of residence and postal address on a
regular basis in order to facilitate tracking of former employees of the
Department that are not servicing their past financial obligations to the
department.
·
Managers/supervisors to sign pay sheets 5 days
before pay day so as to minimise incidences of salary overpayment
·
Instituting a telephone certification system as
part of expenditure management
·
Using an item mapping guideline to allocate items
to appropriate ledger accounts
·
Having a dedicated person in SCM unit to assist
with expediting invoices for services rendered
·
Transferring conditional grants in accordance with DoRA schedule
·
Ensuring adequacy of supporting documentations on
tender files
·
Perform an evaluation of programmes before transfer
of grants
·
Indicating, through quarterly reports to the DG and
DDG: Regions, the extent to which the capacity of municipalities improved
5.
CURRENT PROJECTS
5.1
SAP
Implementation
The project involves the
execution of tasks by the SAP user community and SAP Consultants with the
support of other stakeholders including Trainers, Change Management Team, the
Office of the CIO and other stakeholders that may be required from time to
time. Typical tasks include, but not limited to the following:
·
System configuration
·
Documentation
·
Program development
·
Conducting Workshops
It was reported
last year that the implementation of SAP as the preferred Enterprise Resource
Planning (ERP) system to support our trading activities. This went life during
the last quarter of 2006 subject to ongoing quality assurance process conducted
by SAP (
A comprehensive
training programme was implemented and trainers.
This project was necessitated by
the perceived state of disarray of the SAP system implemented by DWAF. A number
of issues were raised by the SAP user community at a planning workshop held on
the 7 June 2007. A decision was subsequently taken to initiate additional
activities to resolve all the issues raised with the aim of “stabilising” the
SAP system environment and thereby promoting efficiency in the department.
It is envisaged
that through this initiative, the department will be in a better position to understand
the system and realise return on investment through practical benefits that
will be derived from properly configuring and utilising the system to meet
business requirements. With the implementation of SAP it is expected that the
records which are maintained and produced through the system will lead to progressively
improved reporting and disclosures from 2007/08 Annual Financial Statements
going forward. The reconciliation and conversion of all data from BAS into the
SAP for the Department’s trading activities was partially completed in March
2007.
This project
also presents an opportunity to resolve other issues raised in a number of
audit reports conducted on the SAP system. These include the Auditor General’s
reports and other Internal Audit reports conducted by different stakeholders
including Deloitte and Price Waterhouse Coopers (PWC).
5.2. ASSET MANAGEMENT STRATEGY
The asset
registers are key instrument of managing assets. The inadequacies found in the
existing assets registers 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 for
financial years ending 31 March 2005, 2006 and 2007.
An Asset
Management Strategy that was developed in March 2006 and was implemented, with
limited successes during 2006/07 to ensure that the department is able to
comply with all of the National Treasury’s requirements, including GAAP. So
far, the implementation of asset management strategy included a re-valuation of
all of the Department’s movable and immovable assets and creation of assets
registers.
Immovable assets
A Project
Charter was approved for the “enterprise-wide asset management”
(EWAM). The goal of this project is to implement formal asset management
throughout the Department of Water Affairs and Forestry to enable the
department to understand the scope and value of assets operated and maintained
to support service delivery. It is hoped that, in this way, assets be responsibly
soon after June 2008. The high level objectives of the project are to:
·
Compile a comprehensive and accurate asset
management system;
·
Enable the department to use the system as a
decision support mechanism;
·
Provide a basis from which the assets will be
managed optimally over its entire lifespan;
·
Provide a basis from which the cost of ownership
can be determined;
·
Support the sustainability of current and new
schemes; and
·
Form an accurate basis from which raw water price
determination can be done.
A rigorous
verification and valuation process was implemented during 2006/07 to ensure
full verification and valuation of the Department’s assets (both trading
account and main account). All movable ssets verified have been allocated a
unique bar code to enable tracking and identification..
Moveable Assets
The Department
embarked on another exercise to compile a fixed assed register. Due to the
extensive asset base and complexities facing the department, this exercise was
not completed adequately resulting in inadequate physical asset verification of
assets and incorrect asset values.
Suggested actions taken to resolve the audit query
in future
·
Form an asset management committee with members
from the regions.
·
Develop asset management policy (approved in April
2007).
·
Develop asset management strategies (approved in
April 2007)
·
Develop asset management procedures and processes
·
Train all asset officials including finance
officials on the basis of asset management learner guide developed by National
Treasury.
·
Develop action plans per region to deal with
challenges on asset management. Regional Directors to take ownership and
responsibility for asset management in their respective regions.
·
Conduct monthly reconcilitaions between assets
register and financial systems.
·
Conduct a physical verification of assets in all
officies and update the asset register.
·
Update the asset register as and when the assets
are procured.
5.3
REVENUE RE-ENGINEERING PROJECT
The SAP system
is a key enabler within the Trading Account without which it is not possible to
function effectively and efficiently.
This system (originally known as WSAP) was implemented in 2003 to
support revenue collection. It currently
administers the collection of approximately R2,6 billion per annum. As a follow-up, the FSAP Project was launched
to implement the SAP Financial and Logistic Modules. The consolidation of WSAP and FSAP
constitutes the Accrual SAP Project. This project is
currently focused on maintenance, support, improvement and refinement
activities.
The legislative
backdrop to the Water Trading Account is two-fold:
·
the establishment of Catchment Management Agencies
(CMAs) provided for in The National Water Act, and,
·
the cabinet approval for the establishment of a
National Water Resources Infrastructure Agency (NWRIA) to perform the
operations and development of the country’s national water resources
infrastructure.
A business
planning workshop was held on 06 June to 08 June 2007 and the forum highlighted
the following as key challenges for the Trading Account:
Organization
and governance |
·
A relatively new entity lacking an
appropriate business plan ·
Lacking a finalised organisation
structure ·
Dependency on other units and
external stakeholders ·
Ongoing restructuring of the
Department |
Business
processes |
·
Alignment between business
processes and SAP ·
Absence of essential policies and
procedures ·
Alignment between Head Office and
Regions ·
Auditor General qualification and
issues |
Systems
|
·
Data integrity and interfacing
issues (WARMS and PERSAL) ·
Compliance with accrual accounting
requirements ·
Incomplete customer data |
People
|
·
Lack of capacity and skilled
personnel ·
Lack of interim arrangements
(during restructuring) ·
Dependency of wider reorganisation
initiatives |
Legal
and commercial |
·
Adequacy of commercial terms,
conditions, tariffs and SLAs to enforce invoicing and payment compliance |
In
response to the challenges facing the Water Trading Account, the Department has
undertaken a number of key steps, including the following:
·
A department-wide human resource restructuring and
reorganisation
·
A project to verify and value all water
infrastructure assets,
·
A project to establish a complete movable asset
register,
·
The SAP Project to support key revenue management
and financial reporting activities,
·
The
IQ/Accenture project to assist with the reengineering of the Water Trading
Account activities and related business processes.
6.
ANNUAL AUDIT 2007/08 :
The Audit
Steering Committee with members from the Department and the Office of the
Auditor-General was established to oversee and monitor progress annual audit exercise.
The work of this steering committee will continue under the chairmanship of the
Deputy CFO to oversee and monitor the 2007/08 annual audit.
The
Auditor-general have already commenced with their planning for the 2007/08
annual audit. It is envisage that this plan will be completed by the end of
November 2007, after which it will be tabled at the Audit Committee.
The interim
audit will commence during December 2007.
Finance Branch
Team