DEPARTMENT:  WATER AFFAIRS AND FORESTRY

 

 

                                                                                                            ENQUIRIES:                  Onesmus Ayaya

                                                                                                           

                                                                                                            REFERENCE:  

 

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

 

         Main account Vote 34

         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 Main and Trading Account not having been fully implemented at this stage as mentioned above.  This matter is being addressed in the Financial Management Improvement Projects currently in progress.

           

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

·               Forest Recreation and Access Trust : Matter of Emphasis.

 

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 (Africa).  The finalisation of the restructuring programme and the progress on the parallel runs may still impact on the ability to achieve a clean financial audit opinion.

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

Department of Water Affairs and Forestry

04 September 2007