Presentation by Ms Z Mathe Chief Director: Water Trading Entity January 2011 Presentation to the Portfolio Committee: Water & Environment Financial matters: Water Trading Entity

Formally Established in 2006 Prompted by the AG report –Re Accrual Accounting SAP implemented in 2006 Structure in place in Background

Trading Account Turnaround Strategy Trading Account 1- Proto CMA’s- Water Resource Management Revenue- R200m (Revenue+ R100 Aug Fiscus) R200 million Functions – » Allocation Control » Pollution Control » Solid Waste Control » Water Use Control » Water Quality Control » Dam Safety » Planning and Implementation of Catchment Strategy COMPONENTS OF THE TRADING ENTITY

Management of Water Resource Infrastructure Operation of maintenance of water resource infrastructure Development of new infrastructure Revenue-R5 billion (R3.5 billion to TCTA to service Debt R1.5 billion – Water Resource Management R1. 3 billion- for O & M INFRASTRUCTURE BRANCH

5 FINANCIAL PERFORMANCE (WTE as a whole) ECONOMIC CLASSIFICATIONACTUAL YTDBUDGET YTDBUDGET 2010/11FORECAST 2010/11 % UTILIZATION ACTUAL vs. BUDGET % UTILIZATION FORECAST vs. BUDGET R'000 REVENUE % 101% National Water Resource Infrastructure % 101% Catchment Management Agencies(CMAs) % 100% TCTA Revenue % OTHER INCOME % 100% Augmentation (Government Grants) % 100% Interest received from customers(32 752) % Other Income % 100% TOTAL INCOME % 101% EXPENDITURE % 99% Compensation of Employees % 97% Goods and Services % 99% TCTA Payments % 100% Bad debts % Surplus/Deficit before depreciation % 118% Depreciation %100% Operating surplus/deficit( )( )( )( )-34%18%

FINANCIAL PERFORMANCE ANALYSIS FINANCIAL PERFORMANCE ANALYSIS Revenue year to date is unfavourable mainly due to the fact that SAP front end billing system has some challenges that are still unresolved. However the projected revenue shows that the target will be met. The compensation of employee is below budget. This is mainly due to the vacant posts that still need to be filled. The fact that WTE needed engineering and other related skills that are very scarce resulted in delay in filling some vacant position. The government salary scales doesn’t attract scarce skills such as engineers.

FINANCIAL PERFORMANCE ANALYSIS FINANCIAL PERFORMANCE ANALYSIS Goods and services has been affected by the delay in filling of vacant positions. The operating deficit of R624 million is due to the fact that the pricing strategy allows for the capping of tariffs and exemption of Return On Asset (ROA) to water users and has resulted in ROA not covering the depreciation of R744 million. The exemption of ROA is not covered by revenue generated.

Analysis Asset Management plans requires an estimated R1,3 billion per financial year for refurbishment and betterment and currently funding of R636 million is available for refurbishment and betterment after operating cost. WTE is not generating enough cash to funds projects due to the fact that pricing strategy allows for the exemption and capping of ROA and Depreciation. The refurbishment and betterment is under spent by R148 million due to the delay in approval of certain projects. The Revenue for TCTA is R1,6 billion and total payments made to TCTA is amounting to R2,2 billion which is inclusive of March 2010 invoice. This amount is paid to TCTA irrespective of whether it has been collected or not. FINANCIAL PERFORMANCE ANALYSIS FINANCIAL PERFORMANCE ANALYSIS (cont..) 8

Analysis The bad debts provided for the fiscal year 2009/10 R628 million is inclusive TCTA bad debts. The total non-current assets (infrastructure assets) for WTE amounted to R64 billion and current assets R1,8 billion. Net cash position is a positive balance of R325 million. FINANCIAL PERFORMANCE ANALYSIS FINANCIAL PERFORMANCE ANALYSIS (cont..) 9

Debts situation We have an obligation to service the TCTA debt whether we have collected or not from their customers and this is also affecting cash flow. WTE is not generating enough revenue to funds for new infrastructures developments and refurbishment due to exemption on ROA and capping of tariffs (increases are limited to PPI plus 10%). The improvement in the debtors books is due to provision of bad debts (write-off) and slightly improvement on collections. The conversion of debtors into cash is supposed to be 30 days, due to the non payment of some debtors the conversion is now sitting at 297 days 10 CHALLENGES

Action Plan to address the challenges Identify / Implement efficient debt collection methods. The review of funding model and pricing strategy to be prioritised. The assets that were misstated on the asset register have been fixed and monitored on monthly basis. 11 ACTION PLAN TO ADDRESS THE CHALLENGES

Financial Improvement Initiatives - SCM FINDINGS Poor Inventory Management Poor Contract Management ACTION PLAN IMPLEMENTED Policy on irregular expenditure drafted. Circular on irregular expenditure was implemented. Inventory management policy implemented. Procedures for inventory management and accounting have been drafted. Contract management unit was established and staff appointed during 2010.

Review the establishment of an Agency Merger of TCTA and Infrastructure branch Transfer a bankable entity = vigorous revenue plan Revenue improvement plan Co-sourcing the whole value chain at risk, include staff development plan Revenue improvement plan to be phased out on the 3 rd year CONCLUSION