1. 1 WATER TRADING ENTITY FINANCE PRESENTATION TO PORTFOLIO COMMITTEE 17/18 APRIL 2012 Mr. F Ismail aCFO: WTE

2. CONTENTS 1.WTE Operations overview 2.WTE Finance Branch Objective 3.WTE Proposed Finance Structure 4.WTE Finance Key Goals 5.WTE Turnaround plan progress update 6.Audit Action Plans Highlights 7.AFS preparation and Audit Plan2011/12

3. 3 WATER TRADING ENTITYNWRI CD: Infrastructure Development CD: OperationsCD: ConstructionCD: EngineeringFinanceRevenue ManagementSupply ChainFinancial AccountingManagement AccountingAssets Management WRM Water use allocationsWater QualityWater use Control Planning and Implementation WTE OPERATIONS OVERVIEW

4. 4 Asset ClassExtentReplacement Value (R bn) Buildings2 572Number2 301 Canals8 036km29 073 Dams and weirs359Number72 002 Measuring Facilities3011Number7 381 Pipelines1 063km8 044 Pump stations57Number1 673 Reservoirs51Number631 Treatment works62Number69 Tunnels171km18 354 Other77Number85 State owned land343 237Ha6 792 Servitudes51 849Ha769 TOTAL147 174 WTE OPERATIONS OVERVIEW

5. 5 WTE TOTAL INCOME 2012/13 WTE TOTAL INCOME R 8.6 billion TOTAL NWRI INCOME R8.1 billion Augmentation R1.7 billion Water related sales R 2.3 billion Other income R446 million TCTA revenue R 3.7 billion TOTAL WRM INCOME R484 million Augmentation R154 million Water relater sales R330 million WTE OPERATIONS OVERVIEW

6. WTE FINANCE BRANCH OBJECTIVE Public Finance Management Act The WTE Finance Branch is part of the Administration Programme of the Department and its purpose is to support NWRI Branch and WRM (Proto CMA’s) with regard to ensuring sound financial management practices based on the implementation of accountability and governance framework underpinning the Public Finance Management Act, (Act No. 1 of 1999) for Water Trading Entity. 6

7. OVERVIEW: PROPOSED WTE FINANCE BRANCH STRUCTURE 7 The WTE finance structure including job descriptions, job evaluations, associated skills requirements and recruitment plans are in the process of being finalised for implementation GREEN = ACTING, RED = UNFILLED “part of revised proposals”, BLUE = FILLED CFO CD : Revenue Management Director Billing Director Debt Management CD : Asset Management Director Infrastructure Assets Director Movable Assets CD : Financial Management Director Financial Accounting Director Management Accounting Dir : Supply Chain Management Director Strategic Support

8. WTE FINANCE KEY GOALS Defined Process to Prepare AFS that FAIRLY PRESENT the financial affairs of the WTE in accordance with the Accounting Standards Smooth audit process and improved audit outcome 2011/12 & 2012/13 Financial year 2013/14 Unqualified Audit Opinion WTE Turnaround Plan Audit Remedial Action Plans

9. WTE TURNAROUND PLAN PROGRESS UPDATE

10. WTE Turnaround plan progress Critical Elements of plan include- Strategy – financially viable & sustainable whilst focused on excellence in service delivery (pricing strategy, operating efficiencies, culture) – Focusing on business fundamentals, project management, analysing results & assigning accountability, Governance – Undefined Operating model WTE Finance and NWRI Branch (construction, engineering, O&M, Infrastructure development) – own finance and support components - started creating mechanisms and structures that ensure close working relationship between WTE Finance & NWRI branch – focus on core competencies

11. WTE Turnaround plan progress Critical Elements of plan include- People – Inadequate skills, competencies and experience in house – key focus to acquire in-house capacity supported by Minister and working closely with BPRC progress will start to show greater momentum during 2012/13 [skills in all areas engineering, financial management and project management] Processes - Policies, procedures and business processes across all areas of the WTE operations require attention – Being focused on in all areas finance and operations and it’s ongoing

12. WTE Turnaround plan progress Critical Elements of plan include- Systems – IT Systems and automation of processes across the value chain is an imperative. – SAP full ERP functionality ECC6 version has been acquired in process of formulating and sourcing implementation structure (Project Manager, SAP “max attention” & Integration Partner, ) aim is June / July 2012 implementation and governance structure fully in place. ASAP methodology will be followed underpinned by principle of minimum level of customisation thus using SAP standard as far as possible cost effective. Phased approach realise quick wins, building own SAP competency – [super-users, business analysts]

13. REMEDIAL AUDIT ACTION PLANS HIGHLIGHTS

14. Remedial Action Plans Plans developed for audit findings 2010/11: – Supply Chain Management – Revenue Management – Asset Management – Management Accounting – Financial Accounting Update for interim audit findings 2011/12

15. Supply Chain Management ID & disclose Fruitless and Wasteful and Irregular Expenditure ID & disclosure of related parties and related party transactions and balances – Processes to support the above Suppliers recons and age analysis Inventory – warehouse & construction

16. Revenue Management Reconciliations between sub-systems and SAP Accurate age analysis Discounting of debtors with >30day payment period Provision for impairment on different classes Clearing of Suspense accounts

17. Asset Management Completeness of Fixed Asset Register Review of useful lives, residual values – supporting schedules for those Fixed Asset Register reconciliations Rehabilitation provision CAPEX Commitments Capitalisation of expenses

18. Management Accounting Reconciliation between approved budget and final budget Analysis between final budget and actuals – reasons for deviations Performance information?

19. Financial Management AFS preparation and disclosures Accounting policies review Coordination of audit process and audit files Reconciliations of general ledger account balances Leave and other staff related Provisions

20. AFS PREPARATION AND AUDIT PLAN 2011/12

21. Summary Project Plan MarAprMayJun 04.11.18.25.01.08.15.22.29.06.13.20.27.03.10.17.24. 01. Jun 2012 Audit Committee Quality review Draft AFS Performance info & budget Recons & Supporting schedules System Closure Pilot AFS 07. Mar 2012 AFS submission Audit Commences Activity

22. AFS PREPARATION PROCESS Mapping accounts and accounting policies Supporting schedules for each B/S account Requests for information Working papers System closure Year-end journals and approval

23. Technical Accounting Issues Accounting Framework: GRAP applicability Technical opinion – accounting treatment of assets financed off budget by TCTA Changes in accounting policies: Revaluation and Deferred revenue Measurement of water services revenue and expenses Rehabilitation provision Completeness of revenue Work-in-progress and Inventory Impairment of assets and Review of useful lives

24. EARLY ADOPTION OF GRAP Directive 9 – Issued by the Accounting Standards Board – GRAP is effective: 1 April 2013 for all Public Entities – Early adoption is allowed

25. REASONS FOR EARLY ADOPTION Focus on public sector accounting issues e.g. the recognition of non-exchange revenue Focus on accountability and transparency not on max profit for shareholders Save costs and effort – Due to current review of policies and plans – Expert knowledge available

26. REASONS FOR EARLY ADOPTION GRAP more simpler than IFRS in some respects – Assist with recognition of deferred revenue – Discounting is simpler (rules based) – Recognition of revenue simpler – Less disclosure requirements (PPE, Intangibles, Financial Instruments)

27. CHALLENGES Budget information to be disclosed Changes in accounting policies – Retrospective application Limited knowledge on GRAP by officials

28. AUDIT PROCESS Preparation of audit file – All WP to be send through to AFS prep team – Communication with auditors > one message

29. AUDIT COMMUNICATION QC notified about AG communicationOfficials notified on the same dateOfficials (Regions and HO) respond within 3 days (max)Day 3: QC & management review commentsDay 4: Officials finalise commentsDay 5: Management finalise comments and Response to AG