Presentation by Ms Z Mathe

Chief Director: Water Trading Entity26-27 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 2007

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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

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FINANCIAL PERFORMANCE (WTE as a whole)  

ECONOMIC CLASSIFICATION ACTUAL YTD BUDGET YTD BUDGET 2010/11 FORECAST 2010/11

% UTILIZATION ACTUAL vs.

BUDGET

% UTILIZATION

FORECAST vs. BUDGET

R'000 R'000 R'000 R'000 R'000 R'000

REVENUE 2 937 787 3 071 836 4 129 810 4 188 531 96% 101%

National Water Resource Infrastructure 1 102 317 1 263 940 1 706 407 1 719 756 87% 101%

Catchment Management Agencies(CMAs) 164 266 170 720 240 503 240 503 96% 100%

TCTA Revenue 1 671 204 1 637 175 2 182 900 2 228 272 102% 102%

OTHER INCOME 252 584 480 995 625 587 625 587 53% 100%

Augmentation (Government Grants) 259 609 340 846 438 722 438 722 76% 100%

Interest received from customers (32 752) - - - 0% 0%

Other Income 25 727 140 149 186 865 186 865 18% 100%

TOTAL INCOME 3 190 371 3 552 831 4 755 397 4 814 118 90% 101%

EXPENDITURE 3 069 661 3 222 870 4 293 218 4 267 691 95% 99%

Compensation of Employees 373 086 548 126 748 335 729 123 68% 97%

Goods and Services 452 709 743 107 969 366 963 050 61% 99%

TCTA Payments 2 243 867 1 931 638 2 575 517 2 575 517 116% 100%

Bad debts - - - - 0% 0%

Surplus/Deficit before depreciation 120 710 329 960 462 179 546 427 37% 118%

Depreciation 744

782 1 050

000 1 405

353 1 405

353 71% 100%

Operating surplus/deficit (624 072) (720 040) (943 174) (858 926) -34% 18%

FINANCIAL PERFORMANCE ANALYSISFINANCIAL 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 ANALYSISFINANCIAL 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 ANALYSISFINANCIAL PERFORMANCE ANALYSIS (cont..)

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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 ANALYSISFINANCIAL PERFORMANCE ANALYSIS (cont..)

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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

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CHALLENGESCHALLENGES

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.

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ACTION PLAN TO ADDRESS THE CHALLENGESACTION PLAN TO ADDRESS THE CHALLENGES

Financial Improvement Initiatives - SCMFINDINGS• Poor Inventory Management• Poor Contract ManagementACTION 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 3rd

year

CONCLUSION