DWS on its Budget; Construction Unit; Water Trading Entity & Bucket Eradication Programme, with Deputy Minister

Water and Sanitation

23 May 2017
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

The Department of Water and Sanitation owed its contractors a whopping R1.5 billion. The Department of Water and Sanitation (DWS) revealed this when it was briefing the Portfolio Committee on Water and Sanitation on issues related to its budget, the Bucket Eradication Programme (BEP), and the Water Trading Entity (WTE). The Department reported this amount would be settled in the 2017/18 financial year. The debt would have a negative impact on the current allocated budget since it would reduce the current budget and that would result in the Department reprioritising some projects. The Department already reprioritised Accelerated Community Infrastructure Programme (ACIP) and Water Services Infrastructure Grant (WSIG) for projects not yet started to cater for accruals.

The Department also stated that the Troika (the agreement between DWS, Human Settlement, and COGTA) suggested the use of Public Entities to commence implementation of the programme in 2013 with a view of replacing all buckets by March 2014. The original scope of dry sanitation was revised and it became the water borne sanitation scope. The change in scope inevitably had both time and cost implications. These implementing agencies were being phased out as soon as they completed their projects. Sedibeng Water was the only one remaining and would be phased out end of June.

In terms of the flow of projects, by March 2016, 98% of toilet structures were completed, with reticulation in progress. Installation of services was still work in progress and plans were to conclude this by March 2015. However, only 5 projects (quick win) were concluded. Toilets would only be flushing once reticulation was completed. The BEP did not meet the proposed target date and this resulted in the overflow into the next financial year because work was still in progress and toilets were being connected. Aged infrastructure was being replaced. In 2015/16, a sum of R206.1 million was paid to implementing agencies that should have completed projects in 2014/15. This reduced the R975.3 million allocation to R769.2 million. The Department said it engaged with National Treasury which advised it to revise its budget allocation on WSIG to cover the budget shortfall. The Department was only able to allocate R328 million towards the programme.

The Department further informed the Committee that the WTE should collect debts owed to it and use revenue generated through increase in tariffs as a source of funding. The assumptions used, as a basis of budget reduction, did not take into account that the accumulated surplus indicated by National Treasury consisted of non-cash items and, therefore, did not take into account that an accumulated surplus did not translate into cash as could be seen from the difference between the surplus of R3.5 billion and the cash and cash equivalents of R42 million in the audited financial statements for the year ended 31 March 2016.

With regard to debt owed to the WTE by municipalities and Water Boards, the Department indicated municipalities continued not to pay accounts. However, they were handed over to legal for summoning. A total of 45 summons were issued and three court judgments were granted. 138 were still in legal collection process. 74 municipalities was not handed-over as some of them were paying their accounts. Assessment was being done so that those that were not paying could be handed-over. Most Water Boards were paying with the exception of Sedibeng Water. As a result, a final demand letter would be sent to Sedibeng Water.

Members remarked that Treasury indicated the Department spent more money than it budgeted for in the 2016/17 financial year and asked how the R1.5 billion owed to contractors was going to be paid and if it would be taken from the remaining R2 billion. They wanted to find out how the accruals happened because the Department was implementing projects and money was committed. Members also wanted to know if the problem of accruals was brought before Treasury and commented the Department should try to validate information and check the correctness of figures on documents it sent to the Committee. With regard to the BEP, Members wanted to know when was the decision taken to change the scope of the bucket eradication programme to include the bulk infrastructure programme and asked what it cost to build one toilet. They wanted an explanation on why there were a high number of toilets not flushing being handed over and remarked that the implementation of the bulk infrastructure was not the mandate of DWS but that of COGTA.

The Deputy Minister of Water and Sanitation, Ms Pamela Thswete, said that on the unspent R3 billion, it was reported that the Department was new at that time and they were waiting for the Department of Human Settlement to give them the sanitation part. The Department had to put new systems in place and transfer staff. It feared to use the money without policies and systems in place because they felt Members would be hard on them for spending money without having policies in place.  The Department was now prioritising projects that should not be stopped and would forward the Committee a list of projects that would be cancelled. She asked the Committee to give the Department constructive criticism, and not to look at the negatives all the time because this was a new department.

Meeting report

Water Trading Entity Presentation

Mr Paul Nel, Acting Chief Financial Officer: Water Trading Entity (WTE), DWS, briefed Members about the detailed explanation on the WTE overdraft, debt owed to municipalities and Water Boards, and challenges in respect to debt collection. He reported the main reasons that National Treasury indicated to the WTE for the budget cuts were that the entity was under-spending on capital projects and could use its accumulated surpluses to fund its capital needs.

He said that it was expected that the entity should collect debts owed to it and use revenue generated through increase in tariffs as a source of funding. The assumptions used, as a basis of budget reduction, did not take into account that the accumulated surplus indicated by National Treasury consisted of non-cash items and, therefore, did not take into account that an accumulated surplus did not translate into cash as could be seen from the difference between the surplus of R3.5 billion and the cash and cash equivalents of R42 million in the audited financial statements for the year ended 31 March 2016.

He said that in compiling the budget, the WTE made the following assumptions:

  • Out of total amount of R9.8 billion of revenue billed, R7.8 billion would be collected from the water users
  • Augmentation of R1.5 billion would be received from National Treasury
  • The amount of R2.9 billion of long outstanding debt (over 150 days) was to be received from the Water Boards and Municipalities and the R200 million owed by companies would be collected through the debt collector. The R2.9 billion was not yet paid to the Department.
  • The Main Account receivables relating to water services projects were to be paid in the current financial year
  • The WTE assumed 100% collection with regards to the Capital Unit Charge – as such taking the bad debt risk of the Trans Caledon Tunnel Authority (TCTA)
  • The assumptions that were made took into consideration the budget pressures and the fact that the National Treasury budget cut was drastic

He stated that the 2017/18 budget reflected a surplus of R748 million which would go towards reducing the overdraft as at 31 March 2017. This was negatively affecting the 2017/18 financial year as this money could have been used to fund projects. No collection of debt was included in the 2017/18 budget.

With regard to debt owed to the WTE by municipalities and Water Boards, he said municipalities continued not to pay its accounts. However, they were handed over to legal for summoning. 45 summons were issued and three court judgments were granted. 138 were still in legal collection process. 74 municipalities was not handed-over as some of them were paying their accounts. Assessment was being done so that those that were not paying could be handed-over. Most Water Boards were paying with the exception of Sedibeng Water. As a result, a final demand letter would be sent to Sedibeng Water. He said that water restrictions would be considered if it continued not to pay the accounts. The Rand Water was not paying for old debt on Bushbuckridge. They promised to pay the current debt. The Lepelle Water Board was not paying because the DWS owed them.

He further indicated that although the National Water Act allowed the Department to restrict or suspend the flow of water to defaulting water users, this strategy would have a negative impact on communities and this may result in unrest as the municipalities would not have enough water to deliver to the communities. Restriction or suspension of water supply would affect economic activities that were happening at local level.

In his conclusion, he took the Committee through the following challenges faced by the entity:

  • Municipalities were not budgeting for raw water charges.
  • Refusal by municipalities to pay for raw water without valid reasons.
  • Changes in municipal boundaries (amalgamation). The receiving municipality refused to pay the debt transferred to them.
  • Municipalities claimed that most of the residents were indigent.
  • Municipalities were not billing their users due to poor revenue management.
  • Changes in leadership.
  • Customer disputes.
  • Inability to implement credit control mechanism (i.e. restricting the supply of water).
  • Water Boards were being owed by municipalities.
  • Intergovernmental processes take long to conclude.
  • Legal processes took long as the Department had to wait for the courts date.

Bucket Eradication Programme Presentation

Mr Steven Arumugam, Acting Deputy Director-General: National Water Resources Infrastructure (NWRI), DWS, informed the Committee of the appointment of implementing agents for the eradication of buckets, project flow, responses from National Treasury on budget allocations, and motivation for additional funding.

He stated the Troika suggested the use of Public Entities to commence implementation of the programme in 2013 with a view of replacing all buckets by March 2014. The original scope of dry sanitation was revised and it became the water borne sanitation scope. The change in scope inevitably had both time and cost implications. These implementing agencies were being phased out as soon as they completed their projects. Sedibeng Water was the only one remaining and would be phased out end of June.

In terms of the flow of projects, by March 2016, 98% of toilet structures were completed with reticulation in progress. Installation of services was still work in progress and plans were to conclude this by March 2015. However, only 5 projects (quick win) were concluded. Toilets would only be flushing once reticulation was completed. The BEP did not meet the proposed target date and this resulted in the overflow into the next financial year because work was still in progress and toilets were being connected. Aged infrastructure was being replaced. In 2015/16, a sum of R206.1 million was paid to implementing agencies that should have completed projects in 2014/15. This would reduce the R975.3 million allocation to R769.2 million.

He also noted that numerous engagements with National Treasury were done. The National Treasury directed the Department to revise its budget allocation on WSIG to cover the budget shortfall. The Department was only able to allocate R328 million towards the programme.

In motivating for additional funding, the following were considered:

 

  • With  97% Top Structures (Toilets) built approximately 43% of such were currently connected and flushing
  • Infrastructure was already installed in all the projects 
  • Un-connected toilets would be subject to use like a pit latrine / bucket toilet and risk spillages and pollution
  • High risk of vandalism on constructed toilets and reticulation
  • Increase in cost of completing the project
  • Litigations from contractors / claims for standing time

Mr Sifiso Mkhize, Chief Financial Officer: Main Account, DWS, reported that the money owed to contractors as at 31 March 2017 amounted to R1.5 billion and would be settled in the 2017/18 financial year. The debt would have a negative impact on the current allocated budget since it would reduce the current budget and that would result in the Department reprioritising some projects. The Department already reprioritized ACIP and WSIG for projects not yet started to cater for accruals.

Discussion

Mr L Basson (DA) remarked that Treasury indicated the Department spent more money than it budgeted for in the 2016/17 financial year. There was no provision made to pay contractors owed R1.5 billion by the Department. The R12.2 billion meant for infrastructure development came down to R2 billion. He asked if the R1.5 billion owed to the contractors was going to be taken from the remaining R2 billion. He stated if the R1.5 billion was not spent on contractors, it would have been reflected as a roll-over. He enquired about projects that were going to be scrapped because municipalities promised people that projects would be implemented and if these projects were not implemented, the country would be on fire. He said it was a big worry that a lot of money was not going to be spent and municipalities had to wait for two years. He indicated the main account of the Department appeared to have an overdraft.

Mr Mkhize stated the R1.5 billion was reprioritised to take care of things like drought instead of taking it back to Treasury. He also said the Department would provide details on projects that would be continued and discontinued. Regarding the R2 billion projects, he said some of these projects were catered for under the Water Trading Entity. He told the Committee the figures the Department presented were preliminary.

Mr T Makondo (ANC) wanted to find out how the accruals happened because the Department was implementing projects and money was committed.

Mr Mkhize indicated they would provide the Committee with a detailed written response. He said they had a shortfall last year for the BEP, but work was done on the ground and they had to settle the debt.

Mr P Chauke (ANC) asked if the problem of accruals was brought before Treasury.

Mr Mkhize said there were grants on the work they did with municipalities. Those allocations were going to take care of the accruals.

Ms Ulrike Britton, Chief Director, National Treasury, stated that accruals were not normal. That was a result of spending money that was not budgeted for. She further indicated the Department, according to contracts, had to pay the contractors within 30 days. If the Department chose to spend the money, then that would have been reflected in the statement as overspending.

An offical from the Office of the Auditor-General pointed out that accruals were used to delay unauthorised expenditure or it could be a genuine thing to do to validate at the end of the year and which might take some time to make payments. It’s not a situation that was unique to the Department, but it was something they needed to unpack and find out how many invoices were due for payment. It was a principle of accounting that existed and which was open to abuse if it was not properly managed.

Mr Makondo stated the Department should not have come to the Committee if it was unable to provide answers because its answers were not satisfactory.

Mr M Galo (AIC) said the Department was wasting its time and it appeared Members were not going to get appropriate answers. He suggested that the Committee should call for an investigation into the matter of why contractors were not paid money owed to them.

The Chairperson asked Treasury what informed the budget cuts.

Ms Britton indicated that if the projects or programmes were not sustainable, they had to reduce expenditure. There were processes on non-performing projects that were followed. Then they moderated strong expenditure areas.

Mr Basson commented that for the current financial year there would be no new infrastructure projects that were going to happen. He said the Department was not giving them answers on what it was going to cancel in order to pay the R1.5 billion owed to contractors. It was not even clear how the R2 billion that was going to be used for certain projects was going to be replaced. He said he did not understand why the Department engaged with contractors when it knew it did not have the money. He also pointed out that in the last three years, the Department returned R3 billion to Treasury. Then there was R800 million the Minister handed back to Treasury thinking her Department would not be able to use the money.

Mr Chauke indicated the Department had to give the Committee answers. It was strange that Treasury was keeping quiet and saying nothing on abnormalities. If the Department did not give the Committee satisfactory answers, then there was no need to adopt the budget vote.

The Deputy Minister, on the unspent R3 billion, reported that the Department was new at that time and they were waiting for the Department of Human Settlement to give them the sanitation part. The Department had to put new systems in place and transfer staff. It feared to use the money without policies and systems in place because they felt Members would be hard on them for spending money without having policies in place.  The Department was now prioritising projects that should not be stopped and would forward the Committee a list of projects that would be cancelled. She asked the Committee to give the Department constructive criticism, and not to look at the negatives all the time because this was a new department.

Mr Chauke remarked that if Parliament could not do robust oversight, the use of public funds would be inappropriately accounted for. The political leadership must not take responsibility for the tasks of accounting officers. The PFMA was clear on this matter. The exercise the Committee was doing was to help the Department. If the risk unit and internal audit committee of the Department were functioning well, the Committee would not be discussing accruals and the unpaid R1.5 billion. This was abnormal and questions should be responded to.

Mr Dan Matshitisho, Director-General, DWS, concerning the internal audit committee and risk unit, explained that the risk unit and internal audit were mixed together but the two were now separated. There were plans to have an external person check the risk unit, which now operated very well and had structures in place. Recommendations from the risk unit and internal audit committee were made, but they just needed to be implemented.

Ms T Baker (DA) commented the Department should try to validate information and check the correctness of figures on documents they sent to the Committee. The drought expenditure was a mess. All the reports they were getting from the Department were never correlated. Everything kept changing. The Committee would continue to use the red pen if things were not functioning well.

Mr Basson stated the Department was failing black contractors. These were emerging contractors. He asked how it was going to be possible to achieve economic transformation if black contractors or consultants were not paid in time because they had to pay their employees. Already, there were court cases happening and some of these companies could not take the Department to court because they did not have the financial muscle. He doubted if National Treasury would bail out the Department so that it could continue with its projects and pay the contractors.

Mr Chauke asked for details on the appointment of debt collectors, date of their appointments, payments and type of contracts entered into with them.

Mr Nel reported that debt collection was done by a company and its contract ended March 2018. He said the Department planned to get four more debt collectors. Other details on debt collectors would be sent to the Committee.

Mr Basson remarked that in the previous meetings there was a question on the R2.9 billion the WTE owed the Reserve Bank. The Director-General and Minister confirmed they paid R780 million towards that debt. He wanted to know from which funds that money come from. He said the Committee was been ill-informed about this and it was stated the money would be paid by March 2018, but now the Minister and Director-General said it was already paid. He further stated the DWS, COGTA and National Treasury should get together and sort out the problem of municipalities not paying for water. Municipalities did not worry to collect money from the people who owed them money for they were getting an equitable share. The equitable share money from the municipalities should be given to the water entities.

Ms Britton, regarding the equitable share, stated it was important to understand the powers and functions around this issue. She said that Treasury did not have the power to take money from the municipalities to the water entities. SALGA raised objections to this.

The Chairperson wanted to know who owned the assets of the Department because some assets were owned by Public Works, and asked what the role of the TCTA was in the assets.

An official from the AG office reported the assets were in the books of WTE. The TCTA did not account for assets. The TCTA went out to seek funds. Then the National Treasury prepared a consolidation account. The WTE had the assets. The guarantees came from the National Treasury.

The Director-General, pertaining to the R780 million overdraft, explained there was an agreement with Treasury to put it as a surplus. The debt would be reduced by R470 million. Remedial action on flouting of Treasury regulations was implemented.

Mr Chauke proposed that both the internal audit committee and the risk unit be invited to brief the Committee and that would help the Department not to be on the radar.

Mr Basson wanted to establish if the R482 million the Departments owed to Water Boards was paid by the end of March 2017 as promised.

The Director-General admitted the whole amount was paid to the Water Boards.

Ms Baker wanted to find out why when the budget for a project was presented, the scope of the project changed and what changed the processes.

The Director-General elaborated that in some projects what was estimated changed. The costs escalated. It all depended on the scope of work and changes that went with that. Then the accounting officers would make approvals with Treasury.

Ms Baker wanted to know when the decision was taken to change the scope of the bucket eradication programme to include the bulk infrastructure programme because the role of the BEP changed completely.

Mr Arumugam explained they had to implement the bulk infrastructure programme because there was no planning done when they took over the BEP. When they did the work, they implemented the top structure and looked at the reticulation. Then everything was determined by the topography of the area. They even looked at the depth of the excavation as some areas were rocky. That was also provided on the escalation of costs. He further elaborated that when they started this work with municipalities, they discovered that most pumping stations were not strong enough to handle the added workload. That was why they had to redesign the whole project and cater for the bulk infrastructure. Implementation plans for the municipalities was developed already when the Department started working on the programme. So, the whole thing had to change. And some of these projects had to be reprioritised to suit the BEP.

Mr Chauke asked what the involvement of the Water Research Commission was in this programme and what it cost to build one toilet.

Mr Arumugam stated Members needed to understand that the costs of building one toilet were not the same. It all depended on the topography of the area and the reticulation system in place. Topography played an important role in terms of costs. Roughly, it cost R15 000 to build one toilet, but it differed from province to province, based on the topography of the area. He also said the Water Research Commission helped them in solving water related problems.

Ms Baker asked the Department to explain why a high number of toilets not flushing were being handed over.

The Deputy Minister added that the Department should explain what it meant by handing over toilets not flushing. She said that the Minister was looking at reasonable toilets in terms of price, especially which were going to last forever. Not an R80 000 toilet that equaled to an RDP house.

Mr Arumugam elaborated that “not flushing toilets” referred to toilets that had built top structures but were not connected to the bulk reticulation process. Those toilets were in the vicinity or yards of the owners. The official hand-over of toilets not flushing was not done, but only that of flushing toilets.

The Director-General enlightened the Committee that on bulk infrastructure they appointed a task team to see what was happening on the ground. He said that if you put a structure not flushing, the community might think you were disrespecting them. The communities did not understand you could have a dry toilet which did not need to flush. Hence they rejected some of these toilets. It must be noted that when this started, some geotech studies were not done on this project. This was a back-to-basics kind of a project. That was why it was referred to as Troika because it involved Human Settlements, COGTA and DWS. The bulk of this project was done by DWS. To complete this project the DWS would need R1.4 billion.

Ms Baker remarked that the BEP was meant to eradicate buckets before 1994. If the bulk infrastructure programme was not there when the BEP was started, the programme should have not been started. Now it has become the bulk infrastructure programme.

The Director-General replied that you could not have a flushing toilet without reticulation. The project was the responsibility of COGTA and Human Settlement and DWS. The bucket eradication programme was work in progress.

Mr Chauke remarked that the implementation of the bulk infrastructure was not the mandate of DWS but that of COGTA. Now the project was with the DWS. There was a lot of confusion.

The meeting was adjourned.

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