STANDING COMMITTEE ON APPROPRIATIONS Briefing by Department of

STANDING COMMITTEE ON APPROPRIATIONS Briefing by Department of Water Affairs on the management of the Internal Construction Unit. Presentation by Zandile Mathe Deputy Director General: NWRI 11 February 2014 1

CONTENTS 1. Purpose 2. Background 3. Progress 2

PURPOSE Briefing by Department of Water Affairs on the management of the Internal Construction Unit. 3

Background 4

WATER TRADING ENTITY National Water Resources Infrastructure Water Resources Management CD: Infrastructure Development Chief Financial Officer Water use allocations CD: Operations Revenue Management Water Quality CD: Construction Supply Chain Water use Control CD: Engineering Financial Accounting Planning and Implementation Management Accounting Assets Management 5

WTE TOTAL INCOME 2013/14 TOTAL WTE AUGMENTATION R 2. 09 billion WTE TOTAL Income R 10 billion Infrastructure R 1. 5 billion TOTAL WTE REVENUE R 7. 8 billion NWRI support R 207 million Finance R 162 million ECC 6 upgrade R 88 million Pro-to CMAs R 356 million NWRI R 3. 2 billion TCTA R 4. 1 billion Proto-CMAs R 147 million 6

Overview: branch structure DDG: NWRI Engineering Services Construction Management Infrastructure Operations Capital Projects Mechanical and Electrical Engineering Construction Support Strategic Asset Risk Management Civil Engineering Construction Equipment Northern Operations Infrastructure Development Management Integrated Environmental Engineering Eastern Operations Technical Engineering Support Services Southern Operations Central Operations 7

Construction Management Unit Construction Management: The purpose of the Construction management is to construct new water resources infrastructure and rehabilitate existing infrastructure to meet social water needs and to facilitate economic growth and development. DIRECTORATE PURPOSE Construction Support Is responsible for the construction of new water resources infrastructure. They also supply administrative, Human Resources, Financial; Human Relations support and Safety and Security for the 5 Construction Units Construction Equipment They manufacture and refurbish mechanical equipment. It also ensures the procurement, operation, maintenance, rebuilding and disposal of construction equipment 8

Progress 9

Governance Challenges • • Construction unit would execute and project managed the same project. This affected the segregation of duties between construction management unit and Infrastructure development unit. Construction units were guaranteed internal construction jobs without competing with the external service providers. This affected the total project costs as costs were not benchmarked with the market. Progress • • The construction unit is now employed as a contractor by the Infrastructure development unit and the independent project managers are appointed from infrastructure development unit. Construction unit gets requested to submit the proposal to execute the project before the job can be awarded to them. The approval to award is based on price, quality and ability to deliver. 10

Governance Challenges • • The progress on the projects were not easily available to Top Management. This is due to the fact that there were no proper reporting structure. There was no proper project methodology in place. This impacted on projects monitoring as Gantt charts and project plans were not easily available. Progress • The appointed project managers are expected to report the progress on projects on monthly basis or as when required. • The project methodology is now enforced. The project plans and Gantt charts are prepared and projects progress are monitored on the regular basis. 11

Financial Management Challenges • • The budget for new infrastructure, Dam Safety Rehabilitation Programme (DSRP) and Water Services resided within the control of the construction units. This model resulted in the allocation of budget being done without consulting financial expects. The total projects costing were done without looking at the activities on bill of quantities as the bill of quantities were not easily available. This resulted in under/over costing of the projects. Progress • The allocation of budget is managed from the office of the Chief Financial Officer (CFO) and the budget reside with the infrastructure unit instead of construction unit. Construction unit is paid based on the work done. • The projects are now being costed at an activity level based on the bill of quantities. 12

Financial Management…Cont Challenges Progress • The costing unit did not exit within Water Trading Entity. • • The actual project cost were overstated due to the fact that construction unit was making profit on the internal projects. • • The was no separation between operational expenditure and capital expenditure. • The Water Trading Entity is in the process of appointing quantity surveyors to assist in project costing. The internal profit made by construction is identified and adjustment are made to ensure that there is compliance with accounting standard. The internal order system was implemented as a temporary measure to separate operational expenditure and capital expenditure 13

System Challenges • • • There was no system in place to cater for the project costing on the ERP system. The monthly projects cost are available after 4 -6 weeks due to delays in projects cost allocation. There was no system of managing the flee that construction unit has. There was no proper project management system in place. Progress • WTE is in the process upgrading the current ERP system to include the following modules that will cater for construction environment; v v • Project system (PS) Fleet management (FM) Portfolio and Project Management (PPM) Plant Maintenance (PM) The implementation of the above modules will ensure that project cost are real time. 14

Audit Opinion Challenges • In 2011/12 the construction unit obtained a disclaimer opinion. The issues raised were as follows: v No policy in place to manage abnormal costs. v Lack of proper costing system in place. v Lack of segregation of duties. v Construction making internal profit. v Discrepancies on accounting and costing depreciation. v Inability to separate operating and capital expenditure. Progress • In 2012/13 the construction unit was unqualified with matters of emphasis. The following were put in place: v Abnormal cost policy. v Internal profit were eliminated. v The accounting depreciation policy was aligned to the construction costing policies. v Internal order project was implemented to account for capital expenditure. 15

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