Department of Water and Sanitation & Water Boards: Auditor-General briefing

Meeting report

Department of Water and Sanitation (DWS) audit outcomes

Mr Andries Sekgetho, Business Executive: Auditor-General of South Africa (AGSA), said that on an annual basis the Auditor-General’s (AG’s) office examined three performance areas of all audited institutions:

• Fair presentation and absence of significant misstatements in financial statements;
• Reliable and credible performance information for predetermined objectives; and
• Compliance with all laws and regulations governing financial matters.

The AGSA expressed various opinions ranging from an unqualified audit opinion (clean audit) to a disclaimed opinion, based on an institution’s ability to account for the three aforementioned areas.

The AGSA had noted a significant trend of minimal improvement in its findings over the past ten years. It had identified several themes that had impacted on the government’s ability to improve its performance as far as audit outcomes went -- primarily a lack of accountability. It had developed an accountability model to guide government institutions in planning, implementing, regularly monitoring and evaluating performance to ensure they were staying on track. These evaluations also allowed the government to identify any shortcomings, implement consequence management and course correct early, if needed. The AGSA had noted a positive correlation between audit outcomes and the status of service delivery of government institutions. When officials implemented disciplined financial practices, these tended to be carried through to other areas of work concerned with public service delivery outcomes.

Highlights of the report were as follows:

Audit outcomes

• The Department of Water and Sanitation (DWS) audit outcomes had improved from a qualified to an unqualified audit opinion. Efforts needed to be made to sustain this progress.
• The Trans-Caledon Tunnel Authority (TCTA) audit outcomes had regressed from unqualified with findings on compliance, to a qualified audit opinion. This was related to structural arrangements with the Lesotho Highlands Water Project and shortcomings in the accounting for the Acid Mine Draining (AMD) project
• The Water Research Commission (WRC) audit outcomes had regressed from a clean audit to unqualified, with findings on compliance
• Water Trading Entity (WTE) audit outcomes remained stagnant at a financial qualification with findings on compliance with legislation

Key message on the DWS and entities

• The difference of opinion on the treaty requirements, directives and Memoranda of Understanding (MoUs) with the TCTA leadership had been the major contributor to the delay in finalising the audit processes at the TCTA. This delay had also had a consequential effect on the finalisation of the audit of the WTE due to the direct link that the financial statements of the two entities had.
• Certain treaty accounting controls were not adhered to by the TCTA or Lesotho Highlands Water Commission (LHWC), which could have alleviated the limitation and impact thereof.
• Internal controls implemented on the review of the financial models received from the TCTA had been inadequate.
• The DWS and WTE both had creditor payment periods of longer that 30 days (155 and 65 days respectively).
• The DWS and WTE currently operated overdrawn accounts against prescripts.
• No unauthorised expenditure had been incurred by the DWS in the 2018/2019 financial year. Unauthorised expenditure of R292 million) had been seen in the previous year, due to overspending on the Bucket Eradication Programme (BEP).  This had been investigated by the AGSA
• Fruitless and wasteful expenditure had increased from R546 million to R754 million in the FY2018/2019. This had resulted from overdue invoices, interest rates and excessive management fees.
• Irregular expenditure had increased from R4.227 billion (FY2017/20018) to R5.694 billion (FY2018/2019)

Mr Stephen Kheleli, Audit Manager, AGSA, said the AGSA undergoes a process whereby it ascertains the credibility of the financial and performance reports submitted by departments and government entities. This was done to ensure that statements submitted for audit were the same as those utilised to inform the daily decisions made by management.

In the 2018/2019 financial year, all the entities (DWS, WRC, WTE and TCTA) had recorded non-compliance with key legislation. Notable areas of non-compliance were the quality of financial statements, prevention of irregular expenditure, lack of consequence management, conditional grants not spent for their intended purpose, and payments not made within 30 days.

Various internal control deficiencies within the institutions had resulted in the basis for the noted qualified opinions and findings made by the AGSA. These included effective leadership, financial and performance management, and governance.

Leadership

The AGSA reported that the persistence of leadership instability at top management levels had a significant influence on audit outcomes. Leadership had not ensured that action plans were developed to address prior qualifications and deficiencies, and monitoring and oversight over projects had been limited, resulting in fruitless and wasteful expenditure. Another challenge was the high turnover rate of Directors-General (DGs) and the high incidence of Accounting Officer positions being occupied by acting officials. This was not to say those occupying acting positions had not carried out their duties as expected, but in their new roles they usually had to hold their peers accountable.

“War on Leaks” project

A summary of key projects implemented by the DWS and WTE was presented, and the “War on Leaks” project was highlighted. The project was conceived as an emergency response to an identified challenge, and thus did not have an initial budget. Spending on it began in the Water Trading Entity, and was thereafter transferred to the main account following recommendations from the AG. Supply chain management (SCM) processes had not been followed when implementing agents were appointed by the DWS, ultimately resulting in the entire project being declared irregular. Additionally, the project failed to achieve its annual performance plan (APP) target of training 2 640 learners, as only 1 689 were reportedly trained.  A similar analysis was performed on all other programmes, including the Bucket Eradication Programme, the Giyani Bulk Water Supply and Sedibeng Bulk Regional Sewerage programme.

Water Boards

Overall audit outcomes

The AGSA had noted a slight improvement in the overall audit outcomes of water boards over the last four years, which was largely due to Lepelle and Mhlathuze receiving unqualified audit outcomes. These water boards effectively implemented well developed audit action plans and used the interim audit to address prior year qualifications. The Sedibeng water board remained unqualified as a result of recurring irregular expenditure, and trade and other receivables. The AGSA’s audit showed leadership instability as one of the root causes for this audit outcome. The role of Chief Executive Officer (CEO) had been vacant for more than two financial years. This had impacted on other internal controls, such as financial and performance management.

Key highlights of the presentation included:

• 100% non-compliance was noted across all water boards in the 2017/2018 and 2018/2019 financial years as a result of SCM non-compliance, and a failure to apply effective measures to prevent irregular expenditure.
• The quality of annual performance plans had fluctuated over the years. There had been 67% with no material findings in the 2018/2019 financial year.
• 56% of annual performance reports submitted in FY2018/2019 had material findings. These were from Amatola, Lepelle, Mhlathuze, Sedibeng and Overberg.
• Irregular and fruitless and wasteful expenditure had increased over the years
• The AG had expanded its mandate to include work done regarding material irregularities, allowing it to refer material irregularities to relevant public bodies for further investigation, to take binding remedial action for failure to implement the AG’s recommendations, and to issue a certificate of debt for failure to implement remedial action if financial loss was involved.
• 28 material irregularities amounting to R2.81 billion had been identified in 12 completed audits

Irregular, fruitless and wasteful expenditure

R12 million in fruitless and wasteful expenditure had been incurred in the 2016/2017 financial year. It had been R7 million and R9 million in the subsequent years. The bulk of this was related to Umgeni and Sedibeng. Irregular expenditure increased from R294 million in 2016/2017 to R2.105 billion in the 2018/2019 financial year. The AGSA was still to receive information on whether or not cases of fruitless and wasteful expenditure had been investigated. The status of investigations would be collated and provided once an audit of the current financial year had been completed. The AGSA would further provide a written report with disaggregated information for irregular and fruitless and wasteful expenditure incurred at specific water boards.

Preventative controls

Mr Sekgetho said that in light of the current demands arising from the COVID-19 pandemic, it was crucial for all entities to apply sound financial management disciplines to ensure proper recording and accounting of transactions. This directive had been given to accounting officers. The AGSA had also offered additional support to institutions as they implemented preventative control activities.

He asked SCOPA to request substantive feedback from the entities to demonstrate the actions they had taken towards improving their financial health and turnaround plans. By doing so, it would improve SCOPA’s oversight and the ability to quickly determine the root causes of any challenges.

Discussion

Mr M Dirks (ANC) said that at the previous engagement with the DWS, SCOPA had indicated that it would want to meet with the water boards, as this was the area where the most corruption and irregular expenditure had occurred. He asked the AGSA to clarify if all audits on the water boards had been completed, as this would be crucial in further engagements. He raised a concern over the Lesotho Highlands Development Authority (LHDA), which fell outside the financial purview of the Committee, and asked if there was any way to bring it under the oversight of SCOPA. Experience had shown significant irregularities had occurred at the entity over the past decade, thus increasing the need for accountability. He commented on the institutional instability resulting from the high turnover of DGs, saying uncertainty at the management level created an environment conducive for maladministration. This was an issue the DWS needed to attend to urgently.

Mr Sekgetho replied that the financial outcomes presented at the meeting were for the 2018/2019 financial year. Understandably, a lot of changes had occurred in the water board environment, but these would be determined only once the 2019/20 audit findings had been finalised.

He said that whenever funds were paid, there had to be an existing mechanism or institution to ensure accountability as per Section 217 of the Constitution. The AGSA understood the implications of having a project implemented between two localities, and for this reason had developed the Lesotho Highlands Water Commission (LHWC). The one challenge the AGSA had was that the TCTA had not always used the available mechanisms to ensure compliance with Section 217 of the Constitution. There was merit in some of the noted challenges, but some of the institutional arrangements and mechanisms had been under-utilised.

Ms V Mente-Nqweniso (EFF) asked how the AGSA would advise SCOPA to address areas where there was a high need for intervention as far as the Department’s financial health was concerned. The financial health of the DWS indicated that there was a strong need for intervention. How had the AGSA helped the DWS, and what had been the Department’s response to the recommended interventions? In the breakdown of the programme areas it had audited, why had Programme 1 (Administration) not been audited if it recorded 100% budget expenditure, despite having an achievement rate of only 38%? She asked the AGSA to provide more information in order for the Committee to follow-up on this.

Mr Sekgetho replied that the AGSA was engaging with SCOPA for this particular reason -- to provide Members with the necessary information to lead further discussions with the various relevant entities. The work of the AGSA was a retrospective exercise, and for this reason it had implemented initiatives like the Status of Records Review to give management feedback before the end of the financial year. This allowed management the opportunity to address any notable challenges within the last quarter of the year.

He said the relationship between the AGSA and DWS had improved, and the current accounting officer had made notable efforts towards effecting consequence management. However, the AGSA could only attest to how much progress had been made when it had completed the audit for the 2019/2020 financial year.

He explained that when institutions came to Parliament, they presented their annual plans and projected budget allocations. However, there was a tendency to engage in projects that had not been budgeted, which led to funds being redirected for other purposes. As a result, the DWS was liable to pay all service providers for implementing projects that were within their budget, as well as those that were not, causing them to play a game of catch up in covering unbudgeted projects from previous financial years. This was what caused imbalances in the budget and the achievement rate.

A number of the assessments completed by the AGSA were based on areas of risk, ad particularly where service delivery occurred. Historically, the War on Leaks project was never on the plan of the DWS, and when it was conceived it was placed under Programme 1 (Administration), which was not service delivery oriented. From a risk perspective, the AGSA was fairly comfortable with the War on Leaks, as it had been audited in the previous financial year and had been followed up on.

Ms Gugu Shabalala, Senior Researcher: Finance and Public Accounts Committees, emphasised that the bulk of the budget for the War on Leaks project had come from Programme 1 (Administration) of the DWS. If the AGSA did not audit this programme, did this not increase the likelihood of significant challenges being missed?

Mr S Somyo (ANC) echoed Ms Mente’s concern about the incongruence between the reported budget expenditure and the programme achievement or deliverables. When the two areas failed to match, this was an indication of poor financial accountability, which called for the DWS to provide further explanations.

Ms R Mohlala (EFF) asked to what extent the AGSA engaged with the Special Investigating Unit (SIU) in sharing information. In 2006, the AGSA had undertaken a study on the expenditure on bulk infrastructure projects, which had produced bold findings. To date, what progress had the DWS made in this area, or had it regressed?

Mr Sekgetho said that in 2016, a water bulk infrastructure performance audit had been completed. This differed from a regulatory or statutory audit, which tended to require specialised expertise to look into the accounting and effectiveness of service delivery. This report had highlighted backlogs in the pipeline of bulk water infrastructure projects. There had been interactions and interventions shared between the AGSA and DWS, but the Department would be in a better position to report on this.

The AGSA had existing institutional arrangements with investigative entities, such as the SIU. For example, on the Giyani project, the AGSA had met with the SIU after performing its preliminary investigation to share its findings. The AGSA engaged with such institutions upon their request and if needed.

Closing remarks

The Chairperson said the briefing had been a preparatory engagement to form the basis that would inform any further oversight and discussions with the DWS and water boards. SCOPA needed to consider continuing with the inquiry into the Department. There was merit in Parliament probing what had happened in the DWS and to further investigate the War on Leaks project, which had not delivered on its intended outcome despite having spent R3 billion. In the previous engagement, the Minister of the DWS had suggested that learners trained under this project could be redirected to guard water tanks which were deployed to vulnerable communities at the onset of the COVID-19 pandemic. This was unacceptable in the view of the Committee, as their skills needed to be used appropriately. It was crucial for Parliament to continue its probe into the Department as far back as 2014, as this was when issues of corruption started to become entrenched.

The Chairperson thanked the AGSA for providing its information, which had illustrated the need for more discussions on the state of the financial health of the DWS and water boards. While the Fifth Parliament had done an inquiry on the matter, it was yet to reach a conclusion. Reports would be prepared in this regard. 

The meeting was adjourned.