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Finance performance

Presented by Mr O. Ayaya

Chief Financial Officer Department: Water Affairs (DWA)

14 October 2009

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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

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Overview of the spending trends per programme

MEADescription 2008/09

BudgetR’mil

2008/09ExpendR’mil

% Spent

Programme 1: Administration682 088 681 758 99.95

Programme 2: Water Resource Management 3 499 812 3 001 348 85.80Programme 3: Water Services

2 348 031 2 341 817 99.70Programme 4: Forestry

506 685 506 648 100

TOTAL 7 036 616 6 531 571 92.80

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Overview of the spending trends per economic classification

MEA

Description

2008/09 BudgetR’mil

2008/09ExpendR’mil

% Spent

Current payments

3 101 100 3 124 421 100.75

Transfers and subsidies 3 883 168 3 355 561 86.41Payments for capital assets

52 348 51 589 98.55

TOTAL 7 036 616 6 531 571 92.82

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Overview of the spending trends per programmeMEA (2007/08 vs 2008/09)

Description 2007/08 BudgetR’mil

2007/08ExpendR’mil

% Spent 2008/09 BudgetR’mil

2008/09ExpendR’mil

% Spent

Programme 1: Administration 606 547 604 879 99,73 682 088 681 758 99.95

Programme 2: Water Resource Management

2 912 352 2 462 514 84.55 3 499 812 3 001 348 85.80Programme 3: Water Services 1 874 007 1 866 926 99.62 2 348 031 2 341 817 99.70Programme 4: Forestry

469 607 451 077 96.05 506 685 506 648 100

TOTAL 5 862 513 5 385 396 91.86 7 036 616 6 531 571 92.80

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Overview of the spending trends per economic classification

MEA

Description

2007/08 BudgetR’mil

2007/08ExpendR’mil % Spent

2008/09 BudgetR’mil

2008/09ExpendR’mil

% Spent

Current payments 2 900 935 2 854 189 98.39 3 101 100 3 124 421 100.75

Transfers and subsidies2 479 911 2 052 568 82.77 3 883 168 3 355 561 86.41

Payments for capital assets 481 667 478 639 99.37 52 348 51 589 98.55

TOTAL 5 862 513 5 385 396 91.86 7 036 616 6 531 571 92.82

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Consultants, contractors and agency/outsourced services

2007/08 2008/09 % increase

Business and advisory services 227 310 302 783 33.20

Infrastructure and planning 355 012 267 828 -24.56

Laboratory services 290 1 966 577.93

Legal costs 3 502 3 586 2.34

Contractors 2 568 102 180 3 878.97

Agency and support/outsourced services

243 966 385 368 57.96

Total 832 648 1 063 711 27.75

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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.

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Measures to reduce reliance on Professional Service Providers

• Filling of vacancies• Linking of PSPs to new appointments • Limitation of variation orders• Targeted internship programmes

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Explanations – economic classification items

• Current payments consists of :

compensation of employeesGoods and servicesInterest and rent on landFinancial transactions in assets and

liabilities10

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Explanations – economic classification items (Cont)

• Transfers and Subsidies consists of:Provinces and municipalitiesDepartmental agencies and accountsPublic corporations and private enterprisesForeign governments and international

organisationsNon profit institutionsHouseholds

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Explanations – economic classification items (Cont)

• Payments for capital assets

Buildings and other fixed structuresMachinery and equipmentSoftware and intangible assets

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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.

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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

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Donor funds

Opening balance

R’000

Revenue

R’000

Expenditure

R’000

Closing balance

R’000

Received in cash (278 398) 445 124 408 736 (242 010)

Received in kind 1 811 1 811

TOTAL (278 398) 446 935 408 736 (240 199)

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Transfers – operating subsidies

• AchievementsThe allocated budget was transferredThere was no under expenditure on

schedule 7 All municipalities had approved RPPs and

AddendumsManaged to transfer staff to municipalities

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Transfers – Operating subsidy

• ChallengesStaff transfers not yet finalised Still to finalise two transfer agreementsAllocated budget not adequateSome municipalities not reporting on funds

transferred to them

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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.

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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

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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.

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Audit Outcomes – 2008/09

• MEA – Unqualified opinion

• WTE – Unqualified opinion

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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

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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.

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Statement of Financial PerformanceMEA

Description 2007/08R’mil

2008/09R’mil

% Change

Revenue 5 953 679 7 553 386 26.87Expenditure 5 716 706 6 940 307 21.40

Surplus/(Deficit) 236 991 613 079 158.69

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Financial Performance NarrativeRevenue 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

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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

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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

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Statement of Financial PositionMEA

Description 2007/08R’mil

2008/09R’mil

% Change

Current assets673 270 774 788 15,08

Non current assets122 167 118 719 -2,82

Total Assets795 437 893 507 12,33

Current liabilities 645 408 740 732 14.77Non current liabilities

- -Total Liabilities

645 408 740 732 14.77

Net Assets150 029 152 775 1.83

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Financial Position Departmental AssetsAn 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)

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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

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Statement of changes in net assetsMEA

Description 2007/08R’mil

2008/09R’mil

% Change

Capitalisation Reserves

opening balance155 117 146 476 -5,57

Transfers(8 641) (3 075) -64.41

Closing balance146 476 143 401 -2.10

Recoverable revenue

opening balance2 919 3 553 21.72

Transfers634 5 821 818.14

Closing balance3 553 9 374 163.83

Total150 029 152 775 1.83

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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

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Cash Flow Position MEA(cont.)

Description 2008 2009 % Change

R’mil R’mil

Net cash flows available from operating activities 391 177 191 011 -51.17

Cash flows from investing activities (476 958) (49 923) -89.53

Net cash flow from financing activities (8 007) 2 746 -134.29

Net increase/ decrease in cash and cash equivalents (93 788) 143 834 -253.36

Cash and cash equivalents at the beginning of the period 356 616 262 828 -26,30

Cash and cash equivalents at the end of the period 262 828 406 662 54.73

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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

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Financial PerformanceWTE

Description 2007/08R’mil

2008/09R’mil

% Change

Revenue 1 477 841 1 537 083 4.01%

Other income 645 155 601 249 -6.81%

Income before expenses 2 122 996 2 138 332 0.72%

Expenses -3 578 150 -3 641 863 1.78%

Deficit for the year -1 455 154 -1 503 531 3.32%

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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.

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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

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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

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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

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Financial PositionWTE

Description 2007/08R’mil

2008/09R’mil

% Change

Non current assets87 297 583 87 174 294 -0.14%

Trade and other receivables 1 535 398 2 166 553 41.11%Other non-current assets 139 402 14 269 -89.76%Total assets

88 972 383 89 355 116 0.43%Capital and reserves

87 767 719 86 264 188 -1.71%Non-current liabilities

30 394 29 779 -2.02%Trade and other payables 572 666 1 388 681 142.49%Other current liabilities

601 604 1 672 468 178.00%Total equity and liabilities 177 944 766 178 710 232 0.43%

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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.

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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

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Cash Flow Position

Description 2008 2009 % Change

R’mil R’mil

Cash inflows from operations 283 777 1 189 896 319.31%Cash flow from investing activities -559 300 -1 369 370 144.84%Cash flow from financing activities 25 731 709 -97.24%Net cash flow at end of year -249 792 -178 765 -28.43%

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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

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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.

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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.

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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

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Thank you

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