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Portfolio Committee: Water & Environmental Affairs

Department: Water AffairsDepartment: Water AffairsWater Trading EntityWater Trading Entity

10-11 October 201210-11 October 2012

Briefing on the Audited Financial Statement, 2011/12

CONTENTS

1. Purpose

2. WTE Operations overview

3. Basis used to prepare WTE Financial statements

4. Statement of Financial Performance

5. Statement of Financial Position

6. Analyzing the Audit Outcome

7. Looking Forward 2012/13 and beyond

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PURPOSE

To provide a brief overview of the -

• Annual Financial Statements for the year ended 31 March 2012.

• Audit outcome for 2011/12 and highlight action plans and corrective measures going forward

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WTE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2012

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WTE OPERATIONS OVERVIEW

Basis used to Prepare WTE Financial Statements

1. Change in WTE Accounting framework from IFRS (GAAP) to early adoption of ASB (GRAP)

WTE adopted GRAP for the first time in 2011/12 in accordance with Directive 9, issued November 2011 by the ASB. Mandatory by 1 April 2013 for all Public Entities…Rationale for early adoption GRAP focus on public sector issues, more transparency not profit driven standards

The adoption of GRAP resulted in the re-classification and re-measurement of certain AFS items

2. A number of changes in WTE accounting policies required to better present the financial affairs of the entity including adopting cost model for PPE, recognising augmentation grant when received, pumping cost as a reserve (earmarked).

3. Some 26 adjustments in respect of prior year errors to ensure reliable financials are presented including TCTA accounting arrangements, PPE not recognised in the past, change in depreciation method and review of useful lives, incorrect capitalisation to AUC of depreciation, dams safety rehabilitation provision, recognition of Construction material inventory, Bank and cash control to mention a few.

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STATEMENT OF FINANCIAL PERFORMANCE for the year ended 31 March 2012

2012R'000

2011 Restated

R'000

Increase (Decrease)

% Revenue 8 112 062 6 545 593 24%Revenue from exchange transactions 6 177 613 4 739 965 30%Revenue from non-exchange transactions 1 934 449 1 805 628 7%

Expenditure 6 088 877 6 841 534 (11%)Employee benefit costs 619 538 579 282 7%Operating expenditure 1 875 049 1 991 240 (6%)Impairment on financial assets 173 181 786 530 (78%)Finance cost 1 247 738 1 577 089 (21%)Depreciation, amortisation and impairment 2 167 035 1 898 318 14%Loss on disposal of fixed assets 6 336 9 075 (30%)

Surplus/(deficit) for the year 2 023 185 ( 295 941) 584%

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Statement of financial performance analysis

1. Increase in revenue (24% compared to 2010/11) resulted primarily from increase in water consumption volumes from some of our major customers and also the annual tariff increase.

2. Decrease in expenditure (11% compared to 2010/11) due to the following:• Operating expenditure decreased by 6% due to the following:

Construction cost decreased by R20 million emanating from less spending on Nandoni replacement of GRP pipes due to delays in appointing PSP’s.

Pumping cost decreased by R23 million due to less pumping demand on the Vaal river system.

Travelling cost decreased by R33 million.• Increase in employee costs (7% increase compared to 2010/11) due to

annual salary adjustments.• Decrease in Impairment on financial assets 78% due to management

view based on their analysis that the historic plus current impairment provision on debtors is sufficient….revenue turnaround plan

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STATEMENT OF FINANCIAL POSITION as at 31 March 2012

2012

R'0002011

RestatedR'000

Increase (Decrease)%

ASSETS Current assets 5 238 115 3 943 873 33%Cash and cash equivalents 1 488 681 1 021 986 46%Receivables from exchange transactions 3 581 057 2 758 524 30%Inventory 168 377 163 363 3% Non-current assets 90 026 125 89 061 096 1%Property, plant and equipment 74 117 540 73 192 788 1%Intangible assets 15 908 585 15 868 308 0% Total assets 95 264 240 93 004 969 2% LIABILITIES Current liabilities 4 808 203 4 483 920 7%Payables from exchange transaction 578 636 661 585 (13%)Financial liabilities: TCTA 3 414 693 3 339 663 2%Employee benefits 156 321 147 212 6%Provisions 649 212 328 446 98%Finance lease liability 9 341 7 014 33% Non-current liabilities 27 328 067 27 416 263 0%Financial liabilities: TCTA 26 512 977 26 441 224 0%Provisions 810 420 972 735 (17%)Finance lease liability 4 670 2 304 103% Total liabilities 32 136 270 31 900 183 1% Total net assets 63 127 970 61 104 786 3%NET ASSETS Reserves Accumulated surplus 62 855 451 60 818 229 3%Pumping cost reserve 272 519 286 557 (5%) Net assets 63 127 970 61 104 786 3%

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Statement of financial position analysis

1. Increase in Total assets (2% compared to 2010/11) resulted from the following: Increase in cash and cash equivalents by 46% due to improvement in

cash collections note also that current liabilities at year end increased (timing)

Receivables from exchange transactions has increased by 30%, note that revenue from “water sales” has also increased by some 30% however much work is still required to ensure debt collection is improved (revenue turnaround plan) – Working capital management is crucial...

Property, plant and equipment increased by 1% (R925 million) primarily due to increase in Asset under Construction of some R1.1 billion reduced by an increase in depreciation of R269 million compared to 2010/11.

2. Increase in Total liabilities (1% compared to 2010/11 – R236 million) resulted mainly from an increase of R160 million in the provision required for dam safety rehabilitation. There is still some work required to enhance the processes involved in the formulation of the dam safety rehabilitation. Furthermore there was a marginal increase in TCTA financial liability compared to prior year.

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Water Trading EntityAnalysing

the Audit Outcomes

2010/11 and 2011/12

Water Trading EntityAnalysing

the Audit Outcomes

2010/11 and 2011/12

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Matters Relating the Audit Report 2010/11 - disclaimerNon Financial Intervention Financial Intervention1. IT governance

and control environment

2. Predetermined Objectives

3. SCM (irregular expenditure)

4. Non compliance with laws and regulations

5. Lack of policies and procedure manuals

6. Internal audit not effective

1. SAP Disaster Recovery Plan Documented ECC6 procured

2. SMART principles to be applied

3. Financial Misconduct Committee Stricter Controls

4. Compliance Dashboard and escalation process

5. Ring-fence critical Policy gaps and draft policies & procedures

6. Build internal team to meet requirements for Main & WTE needs

1. Revenue (accuracy, completeness, occurrence, cut-off) & Receivables

2. Expenditure (completeness, accuracy, cut-off, classification)

3. PPE (impairment, revaluation, useful lives, residual values, existence, completeness)

4. Liabilities (unrecorded)& provisions

5. Suspense accounts6. Inventory7. Deferred income8. Disclosures (Irregular

expenditure, related parties, capital commitments, errors, etc)

1. Revenue Turnaround Strategy in place

2. Improve internal controls and revised policies where applicable – within all areas PPE, Liabilities, suspense accounts clearing, inventory and disclosure issues

3. Define Procedure for month end

4. Inventory Management Task team to address inventory issues – Construction inventory

5. Assisted by BPRC with AFS – GRAP compliance matters this provided us with capacity as an interim measure whilst structure being finalised

The AG declared a material limitation of scope on most areas of the business as in most instances the internal controls were not in place and supporting documentation could not be provided..in 2010/11 AUDIT

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Audit Opinion of 2010/11 – DisclaimerThe following contributing factors that lead to the Disclaimer:

Leadership Financial and Performance Management

Governance Interventions to address contributing factors

1. No effective HR management to ensure that sufficiently skilled resources are in place in the right structures;

2. Inadequate establishment and communication of policies and procedures;

3. Inadequate oversight relating to the achievement of complete and accurate financial and performance reporting – internal controls

4. Inadequate monitoring of implementation of action plans; and

5. Formal IT Governance framework not established

1. Inadequate review and monitoring of compliance with applicable laws and regulations;

2. Poor review and monitoring to ensure accurate and complete daily and monthly financial and performance reporting; and

3. Reliable evidence to support regular, complete and accurate financial and performance reports

4. IT systems to ensure availability, reliability and protection of information

1. WTE has a shared internal audit division with the Main Exchequer Account, the division did not have adequate personnel to carry out its mandate and as a result the internal audit function is not effective .

2. Two audit committee members resigned recently and they have not been replaced.

Post for CFO for WTE created and Acting CFO appointed Filling of post in progressRevised Structure in approval processWTE Finance Turn Around Plan in progressBusiness Intelligence module for SAP upgrade will improve IT governance SAP Disaster Recovery Plan document in placeECC6 SAP upgrade will improve the generation of regular complete and accurate financial & reporting informationEstablishment of SAP centre of Expertise in process

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Interventions addressing Audit Opinion of 2010/11 and the goal of a Clean Audit by 2014

Based on the audit report 19 audit recommendations that were accepted by management in the prior year were implemented or alternative actions were taken which resolved the prior year audit findings.

15 recommendations are still in the process of being implemented.

A major turnaround strategy with clearly defined timelines and deliverables which impacts on all areas of the operational side of business is in place and steady progress is being achieved

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The 2011/12 Results – Qualified Audit

Non Financial Financial

1.SCM (irregular expenditure)

2.Non compliance with laws and regulations

3.Lack of policies and procedure manuals

Revenue from exchange transactionsSales of water servicesInterest on outstanding debtor balancesImpairment of financial assetsTrade receivables from exchange transactionsProperty, plant and equipmentAssets under construction (AUC) / Work in progress (WIP)DisclosuresIrregular expenditureFinancial instrument disclosure

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Looking Forward 2012/13

and Beyond

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People, Process & Technology

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Improved Collaboration (Bt Finance & Line) Clearly Defined role and responsibility matrix Revised Delegations of Authority System Workflows linked to Delegations Clearly defined Business Process across WTE value chain Skills Acquisition and Retention Skills Development & Training Development of a Values Charter that encourages a High Performance culture Improved Communication (Develop effective Communications Strategy) Diversified Revenue Streams to improve financial sustainability

INTERNAL KEY DRIVERS TO ENSURE THE IMPLEMENTATION OF A EFFECTIVE TURNAROUND STRATEGY (PROJECT CLEAN AUDIT 2014 AND BEYOND)Complete integration of People, Process and Technology

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PEOPLE INTERVENTIONSDELIVERABLE 6MTHS 2013/14

Structure

Filling key Vacancies

Skills Audit

Training & Development

Leadership Development

Develop Service Delivery focused Team

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PROCESS

PROCESS

DELIVERABLE 6MTHS 2013/14

Standardised Business Processes/Policies/Procedures in line with GRAP

RevenueWIPIrregular ExpenditureCash & BankCreditorsPPE(Focus on matters that pertain to the possible material misstatements in the Annual Financial Statements)

All other Business functions(Construction, Engineering, Operations & Maintenance, Project Management, Infrastructure Development)

Governance & Reporting Framework

Compliance dashboard developed &Enforcement procedures implemented 20

TECHNOLOGY

GOOD GOVERNANCEAbsolute attention will be given to ensuring that internal control is effective by establishing a compliance unit which will drive month end procedures and deal with exceptions, ensuring that reporting is reliable and laws and regulations are complied with.

THE BUSINESS INTELLEGENCE COMPONENT OF SAP WILL PROVIDE THE NECESSARY TOOLS TO ANALYSE THE FINANCIAL AND BUSINESS OPERATIONS (CONSTRUCTION, O&M, ENGINEERING, INFRASTRUCTURE DEVELOPMENT) ASPECTS OF PERFORMANCE OF THE BUSINESS PROVIDING INFORMATION THAT WILL BE USED TO IMPLEMENT GOOD GOVERNANCE STRATEGIES

6mthsProcure P-Systems software (Sakhile) for infrastructure asset management (GIS Tool)

18mthsFull implementation of ECC6 SAP Upgrade 21

THANK YOU

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