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Presentation to the Portfolio Committee: Water & Environment
Presentation by
Mr Onesmus AyayaChief Financial Officer
13 April 2010
Pricing strategy and funding model
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Contents1. Journey to success
2. Background
3. Status Quo
4. DWA Trading Entity Context
5. Budgeting for cost recovery
6. Review of pricing strategy
7. Financial management Improvement- Revenue Management- Financial Accounting- Asset Management- Supply Chain Management- Resource Implications- Recommendations
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Opening remarks• What happens when one looks at large undertakings
from a process perspective? • The question seems impractical given large undertakings
are executed through both traditional bureaucracies and increasingly complicated networks of public, private, and non-profit providers.
• In giving highlights of pricing/funding model review , we may take cognisance of other major undertaking by government- both great successes and monumental failures- process issue comes to the fore.
• Nearly all major undertakings by government seem to follow a predictable path, a series of steps that I am inclined to call, somewhat optimistically, the journey success in project design and execution.
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JOURNEY TO SUCCESS MAP
• IDEA DESIGN IMPLEMENTATIONDESIREDRESULTS
DEMOCRATIC
COMMITMENT
Re-evaluation
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Journey to success The journey to success in the case of the project initiatives in South
Africa do occur according to the following map: – The projects must be based on a good idea: raise funds for
water security– The idea must be given specifics that become an implementable – The project design must win the approval of legislators/Minister
-signaling a moment of democratic commitment.– There must be competent implementation mainly by the
bureaucrats– The project initiative embarked on must generate desired
results: Water to Gauteng.– Overtime, both what is being done to implement the project
and how it is being done should be subjected to re-evaluation
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Mandate of DWA and WTE
DWA has three main types of responsibilities. Custodian of water resources - responsible for the
allocation and health of the nation's water resources; Trusteeship role - owns and cares for water resource
infrastructure; and Regulatory and oversight role - responsible for the
performance of the public entities and municipalities in the water sector.
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Context On WTE The Water Trading Entity (WTE) was established in compliance with the
Public Finance Management Act (PFMA) and is structured into two functional components: water resource management (residing with the CMAs) and infrastructure management [residing with the National Water Resource Infrastructure (NWRI) Branch] and operational clusters.
The regulatory role on water resource management and planning is centralised at head office-main account, with the clusters and regions involved in the daily oversight of the schemes through the CMAs and the proto-CMAs.
The CMAs represent a decentralised structure, as a requirement of the National Water Act, also responsible for enhancing access, flow and quality of water.
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Context On WTE…cont
This necessitates for the CMAs to interact with the various sectors i.e. Agriculture etc. It further renders them as capable to confirm the registered volumes of consumption by water users on WARMS, the information of which is critical for the WTE to bill accurately to its customers.
Infrastructure management constitutes of construction (i.e development of new infrastructure) and operations and maintenance.
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Context On WTE…cont
WARMS is the water user register constituting a database on the state of water in the country, in terms of quality and quantity, as entrenched in the National Water Act.
Expectation for the WTE to service the TCTA debt and yet the former is not consulted during the planning as well as expenditure thereof.
There is an urgency to revisit the TCTA payment of R300m monthly with or without collection.
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BACKGROUND AND PURPOSE OF THE WATER TRADING ENTITY…Cont
Massive scale (custodian of infrastructure with a replacement value of some R123 billion, and construction unit implementing projects to the
tune of some R2 billion per year)
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Mandate Synopsis
National Water Act, Water Services Act, PFMA, Other Legislation and Policies
DWA Current Role DWA Future Role
Operator
Developer
Regulator
Sector Leader
Policy Maker
Regulator and Monitor
Water Institutions
Head Office
Regional Offices
CMA
WRC
WUA
WSA
WSP
NWRIA
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Policy Development
Regulation
Regional Offices
TCTA and NWRIB
Head Office
Sector Leadership
Oversight and Monitoring
CMA
WRC
WUA
WSA
WSP
Municipal Entity
Water Infrastructure Development and Management
Water Resource Management
Research
Association of Water Users-Local Level
Ensures Delivery of Water Services
Provision of Water Services
Entity under a Municipality
Reg
ulato
ry Man
date
and
Ro
leIm
plem
entatio
n M
and
ate an
d R
ole
Institutions Mandate
Mandate Synopsis
DW
AF
WA
TE
R I
NS
TIT
UT
ION
S
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DWA’s Trading Accounts
DWA TRADING ENTITY
Trading Account
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Trading Account 2 and 3
Trading Account
4
Integrated Water Resource
Management
Integrated Systems, Bulk Water Supply, Equipment Trading
Account
Water Services Scheme
To be Migrated to CMAs ? To be Migrated to SANWRIA? Transferred to municipalities?
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Trading Entity s brief: To ensure that the water supply
is conducted in an efficient, cost effective and sustainable waythat ensures proper accounting and reporting
DWA’s Mission: Ensuring that water services are provided to all
South Africans in an efficient, cost effective and sustainable way
Financial Management: Trading Entity’s brief: To manage, account and report on
revenue generated from water users
Funding Model and Pricing: Alignment with Strategy
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DWA’s Trading Entity: Strategy and NWRI Structure
DDG: NWRI
CD: Construction CD: OperationsCD: Engineering
ServicesCD: Business Management
Construction Central
Construction South
Construction North
Construction Equipment
Central Operations
SouthernOperations
Northern Operations
Eastern Operations
Centralised Functions
Decentralised Functions
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WTE SPECIFIC CHALLENGESEXTENT OF INFRASTRUCTURE
• 240 schemes• 334 dams (34 billion cum storage) • 6929 km canals• 171 km tunnels• 990 km pipelines• 56 pump stations – 211 MW• Other infrastructure
– 28 wastewater treatment works– 34 water treatment works– 2581 buildings– 3006 measuring facilities (1070 hydro, 1724 geohydro,212
meteorological stations)• Land – 795,563 Ha plus 137,264 Ha servitudes
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Budgeting for cost recovery Pricing based on cost recovery requires sound budgeting
practices Budgets required at the Scheme level as users are
registered at the scheme level Challenges
The regional structures are not aligned to the strategic objectives of DWA.
No clear segregation of functions at regions i.e overlap between WTE and main account functions.
Understatement of expenditure within the regions.
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Budgeting: O&M Challenges
The pricing strategy is based on the cost within the respective schemes whilst overheads within head office are currently not catered for.
The current budgeting framework does not reflect the need to expend on O&M in terms of a coherent life-cycle strategy for the infrastructure, not simply recover actual costs.
The current budgeting framework is therefore not aligned with international practices within infrastructure operations.
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Budgeting ...cont
Solutions Establishment of structures where services are shared such as
corporate services should be apportioned between main and WTE and other structures should be funded under main account.
Revision of pricing strategy and the funding model will assist WTE in operations and maintenance of infrastructure assets.
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Budgeting: O&M...cont Solutions
There must be a provision from the fiscus to cater for support functions until such a time that the pricing structure is revised accordingly.
Budgets need to align with the asset management plans (prepared ito GIAMA), that have a minimum planning horizon of 10 years as informed by demand assessment, risk and service performance needs.
The pricing strategy needs to differentiate between the various sectors and socio-economic imperatives.
A prioritisation model is being established as a guide to decision making on budget allocations, to be aligned with the Departmental strategic objectives.
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Water Trading Entity Statement of financial performance
2009/10
R’ 000
2010/11
R’ 000
2011/12
R’ 000
2012/13
R’ 000
Revenue 1,748,524 1,949,123 2,240,922 2,420,196
Other Revenue 137,143 147,211 157,644 167,983
Transfer Received 219,835 258,741 292,577 307,653
Total revenue 2,105,502 2,355,075 2,691,143 2,895,832
Expenses
Compensation of employees 717,457 774,854 836, 428 903,789
Goods and services 938 095 1 013 984 1 077 443 1 141 855
Depreciation 1 635 127 1 790 239 1, 958 363 2 146 049
Interest, dividends and rent on land
70 000 60 000 60 000 64 800
Total expenses 3,360,679 3,639,077 3,932,648 4,256,494
Surplus / (Deficit) (1,255,177 ) (1,284,001) (1,241,505) (1,360,662)
Capital payments 1,886,639 1,685,436 1,906,175 2,091,637
Refurbishment and betterment programme
525,101 556,607 590,004 625,404
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Raw Water Pricing Strategy Review
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Brief BackgroundThe National Water Act (NWA), 1998 defines the mandate of the DWA as responsible for:
Effective,
Sustainable and
Equitable management of water resources in the country.
Furthermore, the NWA grants the Minister of Water Affairs the regulatory authority over water services institutions.
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Brief Background…contThe pricing strategy was seen as a process that evolves over time and aimed at achieving, in a coherent manner the:
Efficient and cost effective allocation of water,
Equity,
Fairness in the allocation mechanism, and
Long term sustainability of the natural environment.
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Brief Background…cont
• The NWA allows for full cost recovery from registered users.
• The Public Finance Management Act (PFMA), 1999 provides for the development of mechanisms to conduct operations:
• Effectively • Efficiently and • To make economic use of resources.
• The department has embarked on a number of interlinking projects geared at enhancing its ability to achieve these goals.
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Brief Background…cont
• The Department conducted a project (“Sakhile”) in 2008 to:• verify and • value its infrastructure in terms of prevailing
accounting standards and prepare asset management plans in terms GIAMA
• The objective of these plans is to formally document and communicate to stakeholders the strategy and plan for the life-cycle management of the infrastructure in order to meet performance and service delivery objectives.
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Brief Background…cont
• Amongst other things, the exercise highlighted the following:
• A substantial portion of the infrastructure is in poor or very poor condition ( replacement value estimated to be some R10bn);
• Current levels of funding are not nearly sufficient to enable adequate maintenance, renewal and upgrading; and
• This scenario of exposure to risk of infrastructure failure will continue to escalate.
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Drivers WTE conducted a project (“Sakhile”) in 2008 to verify and value its
infrastructure assets. A substantial portion of the infrastructure is in poor or very poor condition
(R10 billion backlog). Current levels of funding are not nearly sufficient to enable adequate
maintenance, renewal and upgrading of infrastructure. Exposure to the risk of infrastructure failure will continue to escalate. The current pricing strategy gazetted in Government Gazette No. 29696 on
16 march 2007 in terms of s 56(1) of National Water Act, 1998.Recovery of operations and maintenance costsA return on assets to provide for future betterments; andA depreciation charge to provide for ongoing capital refurbishment
and rehabilitation costs. Exemption of ROA ( example. irrigators) Various stakeholders have from time to time also challenged the relationship
between components of the pricing strategy and departmental expenditure.
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Drivers…cont• The R2.6 billion shortfall is as a result of capping (10% plus PPI)
Cost Item Pricing Strategy Estimated Actual NeedCharge for operations and maintenance 0.9 1.4
Depreciation charges 0.7 1.3
Charge for return on assets 2.5 1.8
Sub-total 4.1 4.5Less: Cap on annual increases 0.8Less: Exemption of irrigators from ROA 0.8Less: Reduced billable volumes 1.0
Net Potential Income 1.5
2.6SHORTFALL
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Problem Statement • Water pricing for socio-economic growth
– Vehicle to subsidise in a more coordinated manner
• Effective management of the extreme sensitivity of some customers to price adjustments
• Disparities in tariffs due to an unstructured infrastructure funding model• The need to review the pricing strategy in a stakeholder-driven process,
understood and supported by the key water use sectors and stakeholders• Address resource pollution remains a problem• Support the development of clean energy• Inequitable and unsustainable difference in the financial burden
state/private funded infrastructure
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Problem Statement
• Various challenges which impact on the achievement of the abovementioned objectives and the Department’s ability to function optimally have been encountered since the introduction of the new pricing strategy.
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• These include:– A need to compare the current pricing strategy with
National government mandate and strategies (i.e. the charges in tariff to be linked inflation target and CPIX etc)
– The challenges that exist on the current pricing strategy and the implication thereof on the Full economic cost recovery, Price increasing capping and Tariff exemptions.
– The current pricing strategy not doing what it supposes to do with regard to the raising of adequate funding and Influencing water use behaviours in a manner that supports water conservation and demand management.
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Problem Statement…cont
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– Alignment of legislation to value chain arrangements– NWA/WSA/MFMA.– Water sector pricing not yet fully supporting the
development of clean energy– Effective management of the extreme sensitivity of
some customers to price adjustments– The need to review the pricing strategy in a
stakeholder-driven process with the objective to satisfying the life-cycle funding requirements of the national water resources infrastructure in a way that is understood and supported by the key water use sectors and stakeholders
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Problem Statement…cont
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– Disparities in tariffs that are due to an unstructured infrastructure funding model,
– The infrastructure funding model being a sub-set of the pricing strategy as oppose to the pricing strategy being the sub-set of the infrastructure funding model.
– The current pricing strategy only being applicable to the raw water and not for the entire value chain of the water sector on an integrated basis
– The current public finance principles utilised
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Problem Statement…cont
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– The current structure, mechanism and process used to fund the infrastructure
– Cross subsidies– Pricing strategy need to align its with the current
institutional realignment and other projects (i.e Sakhile for Infrastructure asset data).
– A need for a training strategy analysis and development, both short and long term to cover those currently working on the project and those involved in the entre value chain and the funding model to allow for a cost for training fund to be created to assure a project sustainability
– The Gaps and inconsistency that exist in the value chain concerning the application of regulation, guiding principles, business plans, agreements and DWA not imposing a tariff methodology on (loose arrangements) water boards
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Problem Statement…cont
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– Lack of customer analysis (i.e customer grouping and customer tariff analysis) to determine associated charges
– Need for a domestic & Industry tariff vs. Irrigation tariff analysis and comparison
– Lack of rigorous monitoring and reporting of illegal and unregistered water users and over utilization of water by farmers, due to Independent water regulator non-existence
– Existence of different data sources, with a need for verification and validation
– A need for an analytical, structured and methodological process to be put in place when it comes to commissioning and decommissioning decisions.
– Need for NWRI and WRM review– Need for an in depended regulator
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Problem Statement…cont
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– Lack of municipal oversight and partnership COGTA (DPLG) with respect to water services.
– Water pricing for socio-economic growth - the need for the pricing strategy to also be used as a vehicle to subsidise in a more coordinated manner, certain sectors i.e. currently no coordination between the Departments of Agriculture and Water Affairs.
– Water resource pollution remains a problem due to the lack of implementation of Waste Discharge Charge System
– The need to make full use of provisions in Section 56 of the NWA – i.e. differentiate between municipalities.
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Problem Statement…cont
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– An inequitable and unsustainable difference in the financial burden carried by those who are supplied out of state funded infrastructure as opposed to those who are supplied out of privately funded infrastructure (off budget schemes).
– Charges need to reflect the relative socio economic value of water.
– The need to reflect the intergenerational share of debt (cost) burden.
Look at ownership along the value chain where for example different institutions are getting direction from various legislation, resulting in reporting silos.
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Problem Statement…cont
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• The water sector infrastructure funding model and pricing strategy review project is to be designed to meet the challenges presented by the current and growing imbalances which exist between the supply of and demand for water in South Africa.
• To this end, a project is under design to review the infrastructure funding model and pricing strategy for the entire water sector value chain, and
• In executing this revision, we are guided amongst other by the achievement of Social equity; Ecological sustainability; Financial sustainability; and Economic efficiency principles.
Project Goals and Objectives
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• The goal of this project is therefore, to assist the department in achieving the above-mentioned objectives through efficient application of a pricing strategy, that is anchored on a funding model benchmarked against best practice.
• At an operational level, the project will thus facilitate achievement of the following objectives:
• Efficient revenue management;• Key customer focus;• Effective infrastructure lifecycle management;• Improved accountability;• More effective use of available sector funding;
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Project Goals and Objectives…cont
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– Improved environmental management measures;– Better manage the supply and demand of water;– Better coordination with other government
departments;– Better coordination with the private sector; – Provide for the ability to meet growth in demand; – Stakeholder cooperation; and– Ring fencing of water business to address
related challenges.
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Project Goals and Objectives…cont
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Underlying Principles• The project will be a people-led process managed according to the
following underlying principles:– Sectoral and affected stakeholders fully included in deciding on
appropriate solutions to the pricing of raw water in the country;– Fair and equitable treatment of all sectoral interests;– Alignment with the Water Sector Institutional Realignment Project;– Alignment and linkages with departmental initiatives, and avoid
“reinventing the wheel”;– Best practices driven;– Transparency– Solutions will be based on the achievement of government and
department’s objectives;– Strict adherence to legal norms; and– Evidence based solutions through rational quantification.
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Project Scope• Project Includes :
– The Review of the entire water sector as-is situation including (refer to project plan implementation plan for details) :
• Catchment management;• Funding Model;• Institutional Realignment;• Technical; • Regulatory, Legal and Governance; and• Stakeholders Communication and consulting
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• Key attributes of the current raw water Pricing Strategy such as:• Legal efficacy;• Financial viability;• Constitutional mandate of the department;• Affordability and socio-economic sustainability;• Water quality improvement;• Private sector debt funding;• Other issues, i.e. clean energy promotion, etc; • Ecological sustainability; and• Fiscal analysis.
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Project Scope…cont
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• Assessment of options and the development of a position paper Through:
• Considering the As-Is recommendations;• Funding position paper;• Water sector value chain pricing position paper;• international project funding arrangements;• Fiscal impact analysis; and• Costs benefit analysis of proposed solutions.
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Project Scope…Cont
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• Evaluate effectiveness of block tariff system and multi year systems;
• Assess economic value of water;
• Development of a coherent water infrastructure funding model;
• Gazetted and reviewed National Water Pricing Strategy; and
• Tariff calculation principles, methodologies and guidelines.
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Project Scope…Cont
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Project Deliverables
• The main deliverables are:• The Project Charter;• Project Plan;• An as-is report (situational assessment);• Assessment of options and the development of a
position paper;• Development of a coherent water resources
infrastructure funding model; • Gazetted and reviewed National Raw Water Use
Pricing Strategy; and• Tariff calculation methodologies and guidelines.
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Critical Success Factors• Participation, consultation of all relevant
stakeholders;• Support by DWA senior management;• Adequate / appropriate resourcing of the project;• Designation of the project as a priority in the
current financial year;• Integration with other relevant departmental
initiatives;• Communication and change management;• Transparency within the sector; and• Alignment with the IR project.
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Assumptions• There will be no need to invest in or change existing
technological infrastructure• There are resources (human and financial) committed into
the project• The project has support at the right levels of management• The project is necessary and a priority to be undertaken this
financial year• Solutions will be based on benchmarked best practice• Information on asset values, operations costs and economic
life is available• Sector stakeholders will commit the necessary resources to
the project
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Areas of Dependencies
• While broad institutional arrangements have been agreed, institutional realignment has not been completed, whereas the funding model and pricing strategy depend on the water sector institutional framework.
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Project Authority and Milestones
• Funding Authority– The WTE will be responsible for funding of the
initial phase of conceptualisation of the initiative.
• Project Oversight Authority– Champions, Project Team, EXCO / TOP
Management, Government Forum, Stakeholder Forum.
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Major Project Milestones
MilestoneTentative Completion
Date
1. Adoption of Project - DWA Family October 2009
2. Adoption of Project - Government Forum March 2010
3. Adoption of Project - Broader Sector Stakeholders March 2010
4. Development of the As Is Report and Launch of the Project December 2010
5. Options Analysis and Government Position Paper February 2011
6. Benchmarking Activities August 2011
7. Water Infrastructure Funding Model and Revised Pricing Strategy implementation March 2013
• All milestones will be achieved through a transparent consultative process and benchmarking against best practice. Dates are also subject to other interlinking initiatives being finalised e.g. the Institutional Realignment project and Green Paper on Planning.
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Project Organisation
Work stream 1
Project SponsorCFO
Work stream 2 Work stream 3 Work stream 4 Work stream 5 Work stream 6
Project Manager
?
ChampionDWA Minister
Top ManagementEXCO
Internal Reference
Group
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Project Governance
• Champions– The project is championed by the DWA
Minister supported by key strategic Ministries (NT, Cooperative Governance and Traditional Affairs, Energy).
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Project Sponsor• The project sponsor is the DWA CFO; his/her role
is to:
– Chair the steer committee; – Report to the Minister through EXCO and Top
management;– Review and approve the project work stream
documents submitted by Project manager, before submission to Top management ; and
– Approve the resourcing work stream terms of reference
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The Project Management Unit • Project Manager • Project Management Office (PMU) role include:
– Chairing of the Project Team;– Chairing of the of Internal Stakeholder Reference Group
(consisting of All technical representatives in the DWAE)– Project manager must review all the documents from the
work streams;– Ensure that the work stream project milestones are
executed;– Review and recommend the resourcing of work streams
terms of reference; and– Approval and management of the project budget
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Government forum– Consists of all affected government
departments – Co Chaired by Project sponsor & Project Manager
Stakeholder Forum– Consist of all stakeholders from public and
private sector – Co Chaired by Project sponsor & Project Manager
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Resourcing of work streams• Expert and Advisors may be supplied to the work streams by
DWA and by external institution through agreed terms of reference and memorandum of understanding (MOU) by DWA and involved institutions.
Work stream leaders• Work stream leader may consist of government officials from the
entire water sector value chain
• Work stream leader roles include:– Should monitor, report on the project milestones, activities and
out put;– Manage the resource involved on the project; and– Monitor the budget.
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Roles and ResponsibilitiesRole Player Responsibility / Role
3.2.1 ChampionsChampioning the project , eliminating blockages, ensuring cooperative governance,
and taking strategic decisions on policy and legal matters
3.2.2 Project SponsorProject conceptualization, provision of project directives, project funding and
providing project approvals
3.2.3 DWA Project ManagerProject plan / road map development and implementation, quality of documents,
logistics, secretariat ,consultations, project charter
3.2.4 work stream resources: Financial accountant Economist Water expert Legal Knowledge management and
research
Expert technical review
3.2.5 EXCO / Top management Strategic directives
3.2.6 Government Forum Technical input, government position and ownership of deliverables
3.2.7 Stakeholder Forum Input on all project deliverables
3.2.8 Internal Stakeholder Reference Group
Input on all project deliverables
3.2.9 Project TeamPreparation of draft documentation for review and comment, project teaming
meetings
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THANK YOU
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FINANCIAL MANAGEMENT IMPROVEMENT
SUSTAINING UNQUALIFIED AUDIT:
WATER TRADING ENTITY
Presentation by
Mr Onesmus AyayaChief Financial Officer
13 April 2010
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Revenue Management Challenges
Water use charges is one of the sources of funding within the WTE through TCTA. TCTA currently relies completely on the guarantor provided by the National Treasury to meet its rights and obligations relating to operating expenses and service long-term borrowings.
Data cleaning – the WTE is responsible for all registered water users. The registration and licensing of water users operates independently of revenue management. The information on these users is taken as is, including mistakes, from WARMS and is used for billing purposes. This led to a need for data cleaning which eventually led to WTE losing huge amounts of revenue.
Old debt – the WTE was not successful in collecting debt from all its clients.
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Revenue Management…cont
Solutions In accordance with best practices , TCTA should utilize the strength
of its balance sheet to leverage funding from the capital market instead of the current scenario of total reliance on the guarantor.
There are opportunities for the WTE to broaden the current revenue base through the registration of the waste discharges by industry on WARMS.
The water use audit is based on currently available data, and may need to be enhanced with the physical visits to verify users (to accelerate current initiative in regions).
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Revenue Management…cont
Solutions Coordination of the licensing, registration and billing of users. Tightening legislation to ensure that all changes on ownership are
cleared with DWA before sales of properties can take place. The WTE is currently exploring the feasibility for granting of amnesty
on old debt particularly due to reasons of affordability by especially municipalities.
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Financial Accounting Challenges
Vendor reconciliations. WTE is currently operating with bank overdraft. Lack of interface between the structure on PERSAL and that on
SAP.
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Financial Accounting...cont
Solutions Consistent billing and debt collection from especially key customers
should assist in alleviating the current overdraft.
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AR for 2007/2008 vs 2008/2009
2007/2008 2008/2009
Qualified audit opinion
Unqualified audit opinion with other matters
Qualification: Existence and Valuation of accounts receivables
No qualification
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AR for 2007/2008 vs 2008/2009 (Continued)
2007/2008 2008/2009
Emphasis of matters
Emphasis of matter
•Infrastructure assets; and•Restatement of prior year figures.
•Restatement of prior year figures only.
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AR for 2007/2008 vs 2008/2009 (Continued)
2007/2008 2008/2009
Other Matters Other Matters
•Bank account in overdraft only.
• Internal controls for inventory;•Bank account in overdraft;•Interest not charged on debtors;
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AR for 2007/2008 vs 2008/2009 (Continued)
2007/2008 2008/2009
Other Matters Other Matters
• Vehicles lost at various construction sites;•Recoverability of staff & trade debtors; and•Vendor reconciliations not performed for the complete period.
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Review of Performance Information by AG
2007/2008 2008/2009
•No Separate Strategic plan for WTE only.
•No Separate Strategic plan for WTE; and•No Framework for collecting, recording and reporting of performance information.
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Other significant findings identified in the Management Report for 2008/2009
Revenue and Receivables Long outstanding items in receivables
Purchases and Payables Long outstanding reconciling items for VAT payables
Inventory and Assets Management Long outstanding cases in losses register
Employee cost No separate HR plan for WTE
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Process going forward Post preparation report for 2008/2009 financial year compiled based on
operational challenges identified
Areas of concern for 2008/2009 were highlighted which were used as one of the basis for the action plan for 2009/2010 financial year.
Action plan formulated for 2009/2010, based on Audit report, Management report and Post preparation report.
Designated Audit Process Champion per region to address challenges at regional level; and
Action plans per region in consultation with Head Office to address the findings at regional level.
Preparation and submission of IFS to AG for Interim Audit.
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Asset Management Challenges
The WTE is responsible for the delivery of raw (untreated) water in terms of the National Water Act (No 36 of 1998). The infrastructure within the WTE’s control comprises dams, tunnels, pipelines, canals, pump stations and associated infrastructure that spans the length and breadth of the country.
The ability of this infrastructure to perform effectively, in the context of the vagaries of rainfall patterns, is a matter of national consequence, with potential impact on the economy, environment and the quality of life.
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Asset Management …cont Challenges
Serious backlogs (estimated at R10billion) in maintenance have built up over the years due to budgetary constraints. Revenue has not been sufficient to support adequate maintenance nor capital renewal, institutional capacity has eroded and the condition backlog continues to mount.
In terms of the funding structure, new and replacement construction, rehabilitation and maintenance of critical infrastructure have been postponed resulting in infrastructure deterioration. Demand for new infrastructure in developing areas has outstripped existing capacity. The problem is compounded by increasing costs to meet new demands, as well as inadequate planning.
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Asset Management …cont
Solutions The WTE has committed to a policy of continuous improvement of
the management of the infrastructure, guided by good international practice. To give effect to this, the WTE embarked on the Sakhile project. The project achieved robust information on the state of infrastructure, long-term financial needs, and the challenges in terms of financial viability amongst others.
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Asset Management …cont Solutions
DWA needs to ramp up capital investment in renewal expenditure to a sustained level of R1,3bn annually to satisfactorily manage the the backlog (estimated at R10bn), and substantially increase its O&M expenditure (to double the current annual expenditure).
National Treasury’s acknowledgement of the R1,3bn required as annual re-investment to sustain current service levels, and not grow the existing backlog – to eliminate the current funding gap.
Financial management of public infrastructure facilities should be in a manner that is consistent with international best practice which requires that service providers operate on a full commercial basis and that the user fees/charges cover all costs including capital replacement.
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Supply Chain Management Challenges
A lack of highly skilled and capacitated officials within supply chain. Inefficient systems. Current procurement processes have been rule-driven rather than
looking at efficiency and cost savings. The lack of procurement planning and adequate sourcing strategies
to meet strategic needs. The lack of commitment to support the promotion of BEE and
preferential procurement. A general lack of compliance to SCM policy and delegations by end-
users.
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Supply Chain Management...cont
Solutions Roll-out of Procure-to-pay business processes at cluster offices and
at head office. Developing a sourcing strategy which will address a more
consolidated and planned approach to procurement which is linked to the budgeting process.
Provide training on supply chain management to end-users and management.
Verification of BEE credentials of suppliers who bid for work through the open market.
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Supply Chain Management...cont
Solutions Review of the current supplier database to comply with National
Treasury prescripts and also increase the participation of SMMEs and HDI entities.
Capacitate head office with supply chain personnel to assist in the implementation of business processes and supply chain framework.
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Resource Implications Although the WTE is not yet an agency, the current resource
requirements necessitate for it to operate at optimal capacity levels – all vacant posts have to be filled.
The regions are not adequately capacitated, as a result there is no dedicated attention to some of the key functions affecting the WTE operations such as revenue management and budgeting.
The organisational structure of the regions (including CMAs) would have to be revisited to reflect the strategic direction and priorities of the Department as provided for by the Act.
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Recommendations Full-blown forensic audit that focuses on:-
SCM policies and operations in line with the socio-economic objectives of government.
Review of existing business model on construction to review the procurement procedures adopted, the budgeting processes followed in line with the overall objectives of the Department.
The review of the pricing strategy in consultation with sector partners and internal stakeholders (i.e. WARMS) is critical, to deviate from the one-size fits all approach and differentiate between various sectors.
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Recommendations ...cont The review of the pricing strategy should be preceded by a thorough
articulation of issues and shortcomings posed by the current strategy. This should also reflect the concerns raised by the various sector partners to build a substantive business case that reflects the sector in its totality.
A funding model would then be developed, supported by an appropriate institutional framework, as a thrust for shift in the current operational model to sustain the strategic objectives of the water sector.
The organisational structure of the department needs to expediently assume the regulatory role as mandated by the Act and facilitate for the regions to be adequately capacitated and the CMAs fully established to channel efforts to achieve outcomes from decentralised structures.
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Recommendations ...cont Linkages between WARMS, Licensing and Revenue Management is
crucial to improve the current achievements on debt collection The funding and financing models on infrastructure development and
maintenance should involve partnerships with the commercial sectors, for not only risk sharing but also as a demonstration of commitment to nation building and economic development necessary for the water sector to contribute meaningfully to the employment targets of the country.
Quality comes at a premium, keeping WTE within DWAF will result in inability to attract skills and inability to optimise efficiency and effectiveness of the unit.
SAP upgrade a key to assets management.
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Thank You
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