Briefing to the Portfolio Committee: Water and Sanitation Audit outcomes of the portfolio for the 2015-16 financial year 18 October 2016

The AGSA’s promise and focus 2015-16 PFMA 1 1 The AGSA’s promise and focus

Role of the AGSA in the BRRR process Reputation promise 2015-16 PFMA The Auditor-General of South Africa (AGSA) has a constitutional mandate and, as the Supreme Audit Institution (Sai) of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. Role of the AGSA in the BRRR process Our role as the AGSA is to reflect on the audit work performed to assist the portfolio committee in its oversight role of assessing the performance of the entities, taking into consideration the objective of the committee to produce a BRRR.

1 2 3 Our annual audits examine three areas 2015-16 PFMA FAIR PRESENTATION AND RELIABILITY OF FINANCIAL STATEMENTS 2 RELIABLE AND CREDIBLE PERFORMANCE INFORMATION FOR PREDETERMINED OBJECTIVES 3 COMPLIANCE WITH KEY LEGISLATION ON FINANCIAL AND PERFORMANCE MANAGEMENT

Unqualified opinion with no findings (clean audit) Financially unqualified opinion with findings 2015-16 PFMA Auditee produced financial statements without material misstatements or could correct the material misstatements but struggled to: align its performance reports to the predetermined objectives it committed to in its APPs set clear performance indicators and targets to measure its performance against its predetermined objectives report reliably on whether they achieved its performance targets determine which legislation it should comply with and implement the required policies, procedures and controls to ensure compliance. Auditee: produced credible and reliable financial statements that are free of material misstatements reported in a useful and reliable manner on performance as measured against predetermined objectives in the annual performance plan (APP) observed / complied with key legislation in conducting their day-to-day to operations to achieve on its mandate.

Qualified opinion Adverse opinion Disclaimed opinion 2015-16 PFMA Auditee: had same challenges as those that were unqualified with findings but, in addition, it could not produce credible and reliable financial statements had material misstatements on specific areas in its financial statements, which could not be corrected before the financial statements were published. Adverse opinion Auditee: had same challenges as those that were qualified but, in addition, they had so many material misstatements in its financial statements that we disagreed with almost all the amounts and disclosures in the financial statements. Disclaimed opinion Auditee: had same challenges as those that were qualified but, in addition, they could not provide us with evidence for most of the amounts and disclosures reported in the financial statements, and we were unable to conclude or express an opinion on the credibility of their financial statements.

2015-16 PFMA 2 2 The 2015-16 audit outcomes

Audit outcomes over three years – Water and Sanitation portfolio 2015-16 PFMA Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings Audits outstanding 3 auditees 3 auditees 3 auditees

Improvement over two years in the most common qualification areas 2015-16 PFMA 2015-16 2014-15

3 Performance management linked to programmes/ objectives tested 3 2015-16 PFMA 3 Performance management linked to programmes/ objectives tested 3

Quality of performance information 2015-16 PFMA Usefulness of annual performance information Reliability of performance information With no material findings With material findings --------------------------------------------------- WTE’s 2015-16 reporting is incorporated with DWS

Material findings on usefulness and reliability 2015-16 PFMA Improved Usefulness The finding on the usefulness of information was the following: Programme 5 - The indicators are not well-defined to ensure that they have clear, unambiguous definitions so that data will be collected consistently A total of 30% targets were not specific at DWS Reliability The findings on reliability of information were the following at DWS: Programme 3 – one indicator - number of households provided with (interim or basic) water supply in the 27 priority districts - could not be verified as not all the lists of households could be obtained. Programme 5 – three indicators – sufficient appropriate evidence not obtained and indicators not complete Regressed

No material findings reported Material findings reported Key projects selected for audit Budget vs Spending Financial Management (AFS) Contract management Pre-determined Objectives Hazelmere Dam Budget R498 million Actual to date R209 million Clan William Dam Budget R3.0 billion Actual to date R353 million All the expenditure incurred on these infrastructure projects was correctly disclosed in the Work In Progress in the Financial Statements Contract management was adhered to on these projects, however delays were noted on the Clan William Dam, which will impact timely delivery of the project and escalation of costs Performance information was reported reliable – as these are multi year projects the following was reported in the APR: Hazelmere Dam - achieved Clan William Dam – not achieved Programme 3 – Indicator 38 – two dams where betterment is implemented Raising of Hazelmere Dam Raising of Clan William Dam Hazelmere Dam The raising of the dam is on track for completion within budget and on time Clan William Dam Target of placing 79 166m3 concrete on the wall was not achieved Delays emanated from the decision to procure a commercial contractor for the main works Construction South (division of WTE) has in the meantime commenced with site preparation and, with assistance of the service provider initially meant to provide supervision and contract management of the main works, commenced with the preparation of the tender proposal document The R353 million was spent on site establishment and construction of the N7 road by SANRAL The tender process for appointment of the main contractor is expected to be finalised during October 2016 No material findings reported Material findings reported 2015-16 PFMA

2015-16 PFMA 4 4 Compliance

Stagnation in compliance with legislation 2015-16 PFMA With no material compliance findings With material compliance findings Outstanding audits 3 auditees 3 auditees

Slight improvement in compliance with legislation and quality of financial statements Figure 1: Findings on compliance with key legislation – all auditees Figure 2: Findings on compliance with key SCM legislation – all auditees Figure 3: Quality of submitted financial statements Two auditees (67%) [2014-15: 1 (33%)] avoided qualifications due to the correction of material misstatements during the audit process Material misstatements in submitted annual financial statements 100% (3) 67% (2) 2015-16 Prevention of unauthorised, irregular and/or fruitless and wasteful expenditure Outcome if NOT corrected Outcome after corrections 100% (3) 100% (3) Management of procurement and/ or contracts 100% (3) 2014-15 Figure1: 2014-15 Material misstatement in submitted annual financial statements. 67%(2) DWS and WRC Consequence management 33%(1) WRC 100% (3) Outcome if NOT corrected Outcome after corrections Consequence management 0% 33% (1) With no material misstatements With material misstatements 2015-16 2014-15

Fruitless and wasteful expenditure and Irregular expenditure 2015-16 PFMA Definition UIF amounts incurred by entities in portfolio Investigations of U.I.F expenditure Three auditees (100%) lodged investigations to determine root cause and consequences of U.I.F incurred Expenditure incurred in vain and could have been avoided if reasonable steps had been taken. No value for money! 2015-16 3 entities 100% 2014-15 Expenditure incurred in contravention of key legislation; goods delivered but prescribed processes not followed 3 entities 100% Investigated Not investigated 2015-16 2014-15

2015-16 PFMA 6 Key controls, assurance providers, commitments made, top four root causes and proposed recommendations 6

Financial and performance management Some improvements in key controls 2015-16 PFMA Leadership Good Concerning Intervention required Financial and performance management Improved Stagnant or little progress Regressed Governance

Improvement in assurance provided by key role players 2015-16 PFMA Provides assurance Provides some assurance Provides limited / no assurance Third level of assurance External independent assurance and oversight First level of assurance Management / leadership Second level of assurance Internal independent assurance and oversight Accounting officers/ authorities Executive authorities Audit committees Senior management Portfolio committee Internal audit units Basis for PC evaluation: Oversight role ito robust budget vote process, review of the annual report including the audit report, quarterly reporting; Follow up on progress made by the auditees to address poor audit outcomes and key matters in the BRRR report. Recommendations made in relation to key audit matters; Improved Stagnant or little progress Regressed

Follow up on commitments by the minister 2015-16 PFMA To establish a structure in the department to incorporate the sanitation function The focus risk assessment will be discussed by top management and monitored by the audit committee. Implemented To provide a business process re-engineering committee (BPRC) implementation plan with milestones to the portfolio committee. In progress Not Implemented To take ownership / control over all processes within the department. To strengthen the internal controls within the department. New To strengthen the internal controls with reference to implementing agents

Top root causes 2015-16 PFMA 1 Lack of proper communication in the sector and regional offices about delivering of projects, planning, compliance. 2 Slow response in addressing audit findings, improving key controls and addressing risk areas Insufficient internal controls over implementing agents – specific to SCM procedures at implementing agents, documentation and control 3 4 Instability in management (after year-end)

Actions required to improve audit outcomes 2015-16 PFMA 2013-14 PFMA Appointment of the DG and to ensure that there is stability in the CFO position at the DWS Management should act on recommendations made by the AGSA in a timely manner and implement action plans for internal controls that are sustainable Accounting officer / authority must successfully implement basic internal controls and accounting disciplines by preparing regular and accurate financial statements and performance reports (interim reports) Controls over implementing agents should be implemented / strengthened to ensure that SCM rules are adhere to and that the funds are used for intended purposes Senior management, leadership and oversight structures should continue to pay close attention to the occurrence of supply chain management transgressions. Investigate the incidents of non-compliance, take appropriate corrective steps, and implement consequence management Ensure there is integrated planning, proper communication and coordination in the water sector to ensure that the vision and mission of the DWS are achieved Operation and maintenance strategy should be enhanced Appoint / retain technical staff at finance / project planning 2013-14 PFMA 23

Actions required by the Oversight structures Oversee the appointment of the DG and to ensure that there is stability in the CFO position at the DWS Senior management, political leadership and oversight structures should continue to pay close attention to the occurrence of supply chain management transgressions. Investigate the incidents of non-compliance, take appropriate corrective steps, and implement consequence management When Water boards (IA’s) are called before the committee, that the committee stresses the importance of controls over projects as the implementing agents to ensure that SCM rules are adhere to and that the funds are used for the intended purposes Oversee that there is integrated planning, proper communication and coordination in the water sector to ensure that the vision and mission of the DWS are achieved 2015-16 PFMA 2013-14 PFMA 2013-14 PFMA 24

2015-16 PFMA PFMA cycle: Section 4(3)

Entities included in the portfolio not audited by AGSA: PAA (section 4(3) audit entities) 2015-16 PFMA Three year audit outcome of auditees within the Water & Sanitation portfolio which are not audited by the AGSA in terms of PAA section 4(3): Auditee: Three year Trend Audit Outcomes 2015-16 Audit Outcomes 2014-15 2013-14 AFS AoPO Compliance Trans-Caledon Tunnel Authority (TCTA) a r Breede-Gouritz Catchment Management Agency (BGCMA) Inkomati-Usuthu Catchment Management Agency (IUCMA) Improved Stagnant Regressed Outcome legend Unqualified with no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with finding Audits outstanding a No Material Findings r Material findings

2015-16 PFMA Questions