1. Chief Financial Officer Department: Water Affairs (DWA)
Finance performance
Presented by
Mr O. Ayaya
Chief Financial Officer
Department: Water Affairs (DWA)
14 October 2009 1

2. Presentation Outline
Overview of expenditure trends as reflected in the AFS
Reasons for under spending
Donor funding
Transfers and subsidies
Previous audit outcomes
Key highlights from AG’s 2008/09 report
Overview of the audit committee 2

3. Overview of the spending trends per programme MEA
Description
2008/09 Budget
R’mil
2008/09
Expend
% Spent
Programme 1: Administration
99.95
Programme 2: Water Resource Management
85.80
Programme 3: Water Services
99.70
Programme 4: Forestry
100
TOTAL
92.80 3

4. Overview of the spending trends per economic classification MEA
Description
2008/09 Budget
R’mil
2008/09
Expend
% Spent
Current payments
100.75
Transfers and subsidies
86.41
Payments for capital assets
52 348
51 589
98.55
TOTAL
92.82 4

5. Overview of the spending trends per programme MEA (2007/08 vs 2008/09)
Description
2007/08 Budget
R’mil
2007/08
Expend
% Spent
2008/09 Budget
2008/09
Programme 1: Administration
99,73
99.95
Programme 2: Water Resource Management
84.55
85.80
Programme 3: Water Services
99.62
99.70
Programme 4: Forestry
96.05
100
TOTAL
91.86
92.80 5

6. Overview of the spending trends per economic classification MEA
Description
2007/08 Budget
R’mil
2007/08
Expend
% Spent
2008/09 Budget
2008/09
Current payments
98.39
100.75
Transfers and subsidies
82.77
86.41
Payments for capital assets
99.37
52 348
51 589
98.55
TOTAL
91.86
92.82 6

7. Consultants, contractors and agency/outsourced services
2007/08
2008/09
% increase
Business and advisory services
33.20
Infrastructure and planning
-24.56
Laboratory services
290
1 966
577.93
Legal costs
3 502
3 586
2.34
Contractors
2 568
Agency and support/outsourced services
57.96
Total
27.75 7

8. Consultants, contractors and agency/outsourced services (Cont)
Reasons for increase in expenditure was due to the additional funds granted for the backlog in sanitation at schools in clinics, regional bulk, Working for Water and Working on Fire. 8

9. Measures to reduce reliance on Professional Service Providers
Filling of vacancies
Linking of PSPs to new appointments
Limitation of variation orders
Targeted internship programmes 9

10. Explanations – economic classification items
Current payments consists of :
compensation of employees
Goods and services
Interest and rent on land
Financial transactions in assets and liabilities 10

11. Explanations – economic classification items (Cont)
Transfers and Subsidies consists of:
Provinces and municipalities
Departmental agencies and accounts
Public corporations and private enterprises
Foreign governments and international organisations
Non profit institutions
Households 11

12. Explanations – economic classification items (Cont)
Payments for capital assets
Buildings and other fixed structures
Machinery and equipment
Software and intangible assets 12

13. Reasons for under spending
The under spending is as a result of the De Hoop Dam project. Disbursements of the funds in respect of the project could not proceed as anticipated mainly as a result of the delays in the conclusion of the negotiations to finalise the memorandum of agreement with the 23 different mines. 13

14. Donor funds
During 2008/09 financial year, donor funds were received to implement the Community Water Supply and Sanitation Programme (CWSS) through the Masibambane III programme. The funds were used for the following activities:
The support to the implementation of water and sanitation infrastructure projects
Local government capacity building and knowledge sharing
Financial management improvement 14

15. Donor funds Opening balance R’000 Revenue Expenditure Closing balance
Received in cash
( )
( )
Received in kind
1 811
TOTAL
( ) 15

16. Transfers – operating subsidies
Achievements
The allocated budget was transferred
There was no under expenditure on schedule 7
All municipalities had approved RPPs and Addendums
Managed to transfer staff to municipalities 16

17. Transfers – Operating subsidy
Challenges
Staff transfers not yet finalised
Still to finalise two transfer agreements
Allocated budget not adequate
Some municipalities not reporting on funds transferred to them 17

18. Subsidies KOBWA – R180m was transferred in 2008/09 FY challenges
The Relocation Action Plan for compensating the communities affected by the construction of the Driekoppies Dam has not yet been finalized.
Due to the land claims the beneficiaries have been unable to fully exploit the potential of the properties and expand their operations by  taking  up the development opportunities that had been on offer at the time of receiving their compensation..
Three of the four senior managers in KOBWA are newly appointed and need to find their feet. 18

19. MEA: Previous audit outcome
2005/06 – Qualification. Asset management. The completeness; accuracy and validity of additions disclosed in the financials could not be verified
2006/07 – Qualified opinion – Assets. Disclosed amounts could not be substantiated with an adequate asset register
2007/08 report Qualified opinion –Tangible capital assets – no assurance could be obtained regarding the completeness, existence and valuation of the closing balance of assets disclosed in the annual financial statements 19

20. WTE: Previous audit outcomes
2005/06 – Disclaimer. Non adherence to accounting framework. Non-adherence to the requirements of the South African Statements of Generally Accepted Accounting Practice (GAAP) .
2006/07 – Qualified opinion – Assets. Disclosed amounts could not be substantiated with an adequate asset register
2007/08 report Qualified opinion –The trading entity did not investigate all debtor balances for recoverability as required by the South African Statement of Generally Accepted Accounting Practice, IAS 39 (AC 133) Financial Instruments: Recognition and Measurement. 20

21. Audit Outcomes – 2008/09 MEA – Unqualified opinion
WTE – Unqualified opinion 21

22. MEA- Key highlights from AG Report 2008/09
The financial statements were subjected to material amendments resulting from the audit
The internal audit function did not substantially fulfil its responsibilities for the year as set out in TR 3.2/27.2
There are significant deficiencies in the design and implementation of internal control in respect of compliance with applicable laws and regulations 22

23. Key highlights from AG Report 2008/09 (WTE)
There was no separate strategic plan document for WTE
Unallocated receipts from customers which have been deducted from the carrying amount of trade receivables.
WTE has not implemented adequate measures to clear the suspense account at year end.
Review of the debtor’s age analysis indicates that debtors are outstanding for periods longer than 366 days.
The corresponding figures for 31 March 2008 have been restated as a result of an error discovered during the current year in the financial statements of the Water Trading Entity at, and for the year ended, 31 March 2008. 23

24. Statement of Financial Performance MEA
Description
2007/08
R’mil
2008/09
% Change
Revenue
26.87
Expenditure
21.40
Surplus/(Deficit)
158.69 24

25. Financial Performance Narrative
Revenue Analysis
Increase in revenue is mainly as result of the following
Rollover of funds from 2007/08 FY in respect of De Hoop Dam – R269 million
Additional funding in respect of WoF (R35 m), WfW (R28m), Compensation of Employees (R26 m) and inflation adjustments (R45 m) – R134 million
Self financing surrendered into NRF following closure of the industrial trading account – R46 million
Financial aid assistance in respect of Masibambane project – R445 million 25

26. Financial Performance Narrative (Cont)
Expenditure Analysis
An increase of 18% in departmental expenditure is mainly driven by the following
CoE – increase of 2% is due to expansion of organizational structure
Transfer of funds in respect of Regional Bulk Infrastructure, Backlogs in sanitation at schools and clinics and transfer to municipalities with regard to operations of water services
G&S – increase in operational expenditure of 15% is due to payment to contractors in respect of WfW, WoF, maintenance and repairs and subsistence and travel as well as professional service providers
An increase of 21% is due to financial aid assistance in respect of Masibambane project 26

27. Financial Performance Narrative (Cont)
Surplus/(Deficit) for the year
Increase in surplus is mainly as result of the following:
Unspent funds in respect of De Hoop Dam – R505 million
Departmental Revenue Collected which was surrendered to NRF – R72 million
Unspent funds in respect of Financial Aid Assistance – R36 million 27

28. Statement of Financial Position MEA
Description
2007/08
R’mil
2008/09
% Change
Current assets
15,08
Non current assets
-2,82
Total Assets
12,33
Current liabilities
14.77
Non current liabilities -
Total Liabilities
Net Assets
1.83 28

29. Financial Position Departmental Assets
An increase in movement of tangible assets is mainly as result of the following
Acquisition of machinery and equipment as well as furniture and office equipment (Additions)
Incorrect classification from previous financial year - Prior year adjustments
Increase in cash and cash equivalents is as result of delays in payments of invoices, amounts to be surrendered to NRF, and amount that was to be transferred to WTE
Receivable has decrease by 32% as compared to previous financial year due to collection of department debts
Decrease in loans is as result of repayment of capital portion of loan (irrigation boards) 29

30. Financial Position (Cont)
Departmental Liabilities
An increase in departmental liabilities is mainly as result of the following
An increase of funds to be surrendered to NRF as result of unspent funds on De Hoop Dam Project. There were delays in the disbursement of these funds
An increase in payable in respect of advance received, forestry leases and salary deductions
An increase in unutilized financial aid assistance 30

31. Statement of changes in net assets MEA
Description
2007/08
R’mil
2008/09
% Change
Capitalisation Reserves
opening balance
-5,57
Transfers
(8 641)
(3 075)
-64.41
Closing balance
-2.10
Recoverable revenue
2 919
3 553
21.72
634
5 821
818.14
9 374
163.83
Total
1.83 31

32. Statement of changes in net assets narrative - MEA
Capitalisation Reserves are the decrease in the historical loans to the Municipalities and  Irrigation Boards
Recoverable revenue are amounts applicable to staff debts 32

33. Cash Flow Position MEA (cont.)
Description
2008
2009
% Change
R’mil
Net cash flows available from operating activities
-51.17
Cash flows from investing activities
( )
(49 923)
-89.53
Net cash flow from financing activities
(8 007)
2 746
Net increase/ decrease in cash and cash equivalents
(93 788)
Cash and cash equivalents at the beginning of the period
-26,30
Cash and cash equivalents at the end of the period
54.73 33

34. Cash Flow Position (cont.)
The net cash flow available from operating activities has decreased as result of the following:
An increase in outflow of current payments and transfers and subsidies
Decrease in cash flow from investing activities is due to acquisition of new capital assets 34

35. Financial Performance WTE
Description
2007/08
R’mil
2008/09
% Change
Revenue
4.01%
Other income
-6.81%
Income before expenses
0.72%
Expenses
1.78%
Deficit for the year
3.32% 35

36. Financial Performance WTE (cont.)
Increase in revenue (4.01% increase as compared to prior year) resulted from the increase in the tariff .
Approximately R 150 million was taken to a pumping costs provision account compared with only R 54 million in the prior year. 36

37. Financial Performance WTE (cont.)
Other income is down from the prior year by approximately R45 million (or 6.81 %).
The decrease is mainly due to a decrease in finance income as compared to prior year, which is as a result of the WTE not charging interest to overdue customers.
There was an increase in expenses of 1.78 % partly as a result of the following:
Approximately 25% (R133 million) increase in employee costs
Approximately 15% (R121 million) increase in administration expenses 37

38. Financial Performance WTE (cont.)
The increase in revenue and the increase in expenses resulted in an overall increase of 3.32 % (R 48 million) in the deficit recorded in the current financial year as compared to the prior financial year.
The deficit for the year as a percentage of revenue earned has remained constant at around 98% year on year.
One of the main contributors to this deficit is the fact that there are deficiencies in the pricing strategy that prevents the WTE from charging a tariff that will allow for full recovery of the costs it incurs in providing bulk water services to the water users. 38

39. Financial Performance WTE (cont.)
Taking out the effect of depreciation, the ratio of expenses as compared to total income is as follows:
2007/08 = 1.04 which means that 104% as a ratio of income earned was consumed by operating expenses if we exclude depreciation
2008/09 = 1.01which means that the WTE is not yet generating enough income to cover its operating expenses 39

40. Financial Position WTE
Description
2007/08
R’mil
2008/09
% Change
Non current assets
-0.14%
Trade and other receivables
41.11%
Other non-current assets
14 269
-89.76%
Total assets
0.43%
Capital and reserves
-1.71%
Non-current liabilities
30 394
29 779
-2.02%
Trade and other payables
142.49%
Other current liabilities
178.00%
Total equity and liabilities 40

41. Financial Position WTE (cont.)
Refinements to the infrastructure asset values amounting to R4.9 billion on the reported figures for the 2007/08 financial year were made
The increase in trade and other receivables of 41% means that cash was tied up in debtors.
This is one of the factors that contributed to a decrease in cash and the resultant overdraft. 41

42. Financial Position WTE (cont.)
Other current liabilities increased by 142 % as compared to the prior year mainly as a result of an increase of 194% (R 1 billion) increase in deferred income 42

43. Cash Flow Position Description 2008 2009 % Change R’mil
Cash inflows from operations
319.31%
Cash flow from investing activities
144.84%
Cash flow from financing activities
25 731
709
-97.24%
Net cash flow at end of year
-28.43% 43

44. Cash Flow Position (cont.)
The cash position of the WTE has decreased by 148% year on year as a result of the following:
Decrease in profitability as a result of deficiencies in the Pricing Strategy
Increase in trade receivables
Increase in trade payables 44

45. Overview of the audit committee
During the year under review, the Audit Committee had three normal meetings and one special meeting. Mr J.A. Boyd resigned as Chairperson of the Audit Committee on 12 November 2008, at which point Ms S Thomas was appointed as Chairperson. Mr Motha and Ms Kabini-Zondo were appointed to the audit committee in October 2008. 45

46. Overview of the audit committee (Cont)
Internal control
Whist the members of the Audit Committee believe that the system of internal controls largely covers organisational, financial and operating risks, control weakness are periodically identified during the Internal and External audit processes. The committee closely monitors management’s actions to remedy these weaknesses.
Risk management
The department has developed and approved a risk management strategy. This strategy is the foundation for a continuous risk assessment process and for management monitoring of risks on an ongoing basis. 46

47. Overview of the audit committee (Cont)
Internal auditing
Internal auditing provides a supportive role to management and the Audit Committee to achieve their objectives by assisting in the management of risks within the department
Evaluation of financial statements
The Audit Committee concurs and accepts the conclusions of the Auditor-General on the annual financial statements and is of the opinion that the audited annual financial statements be accepted and read together with the report of the Auditor-General 47

48. Thank you 48