Quarterly Performance Review Workshop Legal & Institutional Issues Arising

1. Quarterly Performance Review WorkshopLegal & Institutional Issues Arising Karen van der Merwe 1 November 2013 Mpekweni, Eastern Cape

2. Issues Arising from 31 October 2013 discussions at Mpekeweni, Eastern Cape

3. Impact of Troica MOUs on RBIG business processes regarding contracting? • Troica: Russian word for committee of three members (DWA, DCOG and Human settlements) • Impact of DBAC decision making on IA arrangements • Retrospective approvals • What to do when a municipality is under s139?

4. What to do when Sch 5 money is “chowed” • Eg. Thaba Chweu, Bushbuckridge, Mopani • How to re-allocate a Sch 5 grant • eg. Limpopo is still in planning phase and NCape has projects which can spend more but have no budget • What is the difference between a DORA Sch 5B and a Sch 6B grant?

5. How does the Construction Unit get paid? • What must DWA do if a claim from an IA looks irregular (procedurally or value for money?) • Eg. ISD consultants in KZN • Land issues - what are the options for securing rights to land – is a 99 lease adequate? • Condoning irregular expenditure – what is the role of NT under DORA? • Conversion of Sch 5 to a Sch 6 Grant – how?

6. How should we reflect “commitments” in our current RBIG contracts? • Updating of Project Sheets • What should we do with the R100m assets? • How do we ensure CBOs are promoted for rural schemes? • Impact of s78 on WSA decision making • Remuneration of waterboards • How do project managers respond when water boards act outside of the DWA delegations

7. Issues arising • Contracting arrangements • What influences roles and responsibilities? • IA Issues and developments • December 2012 application for retrospective IA approval and conditions • Contract • Project sheets (commitments) • What to do if a water board has no capacity? • Water Board Remuneration • Implementation • R100m assets • WSP mechanism issues (CBOs) • Land Issues • DORA • DORA Frameworks • MWIG: What to do if WSA is not performing • MWIG: How to reallocate a Sch5B Grant • Condoning irregular expenditure

8. Contracting Arrangements

9. Background • The Chief Director: Regional Bulk is responsible or managing a number of programmes including: • Regional Bulk Infrastructure (RBIG); • Municipal Water Infrastructure Grant (MWIG); • Accelerated Community Infrastructure Programme (ACIP) • National Transfer Programme (NTP). • The programmes each have their own objectives and sources of funding, conditions and accordingly roles and responsibilities • There is a drive towards programmatic standardization, but the sources of funding and structure and conditions of funding influence the legal nature of the roles and responsibilities and accordingly nature of the contractual arrangement • DWA is accountable in all programmed – but for what?

10. Challenges • Audit queries (ACIP to comply with RBIG conditions) • Standardisation of business processes – different for each programme • Mechanism for transfer/ payment of funding to WSAs, water boards and IAs • Waterboard remuneration models • Appointment of Implementing Agents (DBAC substantive and procedural requirements) • WSA capacity

11. Public Finance Impact on DWA Grant funded programmes and transfers to water services authorities

12. S213 of the Constitution • There is a National Revenue Fund into which all money received by national government must be paid, except money reasonably excluded by an Act of parliament • Money may be withdrawn from the National Revenue Fund only: • In terms of an appropriation by an Act of Parliament; or (Appropriation Act) • As a direct charge against the National Revenue Fund, when it is provided for in the Constitution or an Act of Parliament (DORA)

13. S2 of DORA: Objectives • Provide for the equitable division of revenue raised nationally among the three spheres of government • Promote predictability and certainty in respect of all allocations to provinces and municipalities, in order that municipalities and provinces may plan their budgets over a multi-year period and thereby promote better coordination between policy, planning and budgeting • Promote transparency and accountability in the resource allocation process, by ensuring that all allocations are reflected on the budgets of provinces and municipalities and by ensuring that the expenditure of conditional allocations is reported on by the receiving provincial departments and municipalities

14. Appropriation Act • Promulgated annually • To appropriate money from the National Revenue Fund for the requirements of the State for the 2013/14 financial year • to prescribe conditions for the spending of funds withdrawn for the 2014/15 financial year before the commencement of the Appropriation Act for the 2014/15 financial year • and to provide for matters incidental thereto • Direct allocations to public entities funded from national revenue fund (waterboards) provided for separately

15. Sources of Municipal Funding • Intergovernmental transfer • Equitable share • Unconditional equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it • funds operational expenditure of basic service delivery • Grants from other departments • Currently funds capital projects or capacity building • Own revenue • User charges (tariffs) and local taxes (rates on property) • Borrowing • For capital projects

16. Equitable share & Grants • Equitable Share: • Unconditional allocation of nationally raised revenue to local government to fund basic service delivery (DORA Sch3) • Conditional Grant • Direct (Sch 5B – specific allocations to local government) • Grant in kind (Sch6B – allocations-in-kind to local government for designated special programme) • Unfunded mandate: • Term used to describe an expenditure assignment that is not funded • Occurs where government has the responsibility of conducting the function but lacks suitable revenue raising capacity or does not receive the grant necessary for the performance of the function • Finance follows function (funds will be allocated to the municipality which has the power)

17. Issues to note regarding DWA conditional grants: • Local government has the Constitutional power and function for • “potable water supply systems and domestic waste water and sewage disposal systems” • Sch4 Part B of the Constitution • Local government is structured in 3 categories • A (Metro) • B (local ) or • C (district) • The power and function for municipal water services (per Constitutional definition) vests in metros and district municipalities, unless otherwise authorised by the national Minister of Local Government • S84 Municipal Structures Act

18. Power and Function: Proposal • WSA has right to funding where it is a local government power and function • Distinction between: • Assets of national significance (NWRIA) • Assets of Regional Significance (Water Utilities) • Municipal services Assets (Local Government) • Institutional realignment process and legislative review process: need to create the authority for water utilities in regard to assets of regional significance • Proposed that Minister be empowered to declare the nature of the assets (roads model) • If it is an asset of regional significance – accountability vests in the Minister for the assets

19. RBIG FUNDING SCENARIOS

20. RBIG Scenarios National Treasury argue that there are potentially three scenarios for RBIG funded projects • A direct conditional grant to a WSA (DORA Sch5B) • Transfer to WSA in terms of DORA payment schedule • Use it or lose it • An indirect conditional grant for the benefit in kind of municipalities (DORA Sch 6B) • DWA nominates an implementing agent to implement the project on behalf of DWA • DWA transfers the financial value of the asset to the municipality for the municipality to take accountability for ownership and operations • A direct conditional grant to water boards • Waterboard owns and operates the infrastructure • DWA funds the social component which a municipality would have contributed to the water board SUBJECT TO WRITTEN INSTRUCTION FROM NT TO DG

21. 1. RBIG funds municipal services infrastructure SUBJECT TO WRITTEN INSTRUCTION FROM NT TO DG • One WSA • WSA owns and operates existing infrastructure • Funding will expand the WSAs ownership and operational responsibility • WSA will be the implementing agent • WSA not under s139intervention • WSA has not defaulted on other direct grant conditions • More than 50% of MIG not spent over MTEF period • (PMU capacity indicator) • Project value equal to or less than R100m • DORA direct conditional grant • Sch 5B • DWA accountable to ensure grant conditions are met • WSA to ensure project implementation

22. 2. RBIG funds municipal services infrastructure • More than 1 WSA • DWA nominate and contracts IA to implement the project on behalf of DWA • DWA to transfer the asset (project expenditure value) to the WSA upon completion of project • DWA to recommend independent operator (WSA as owner has final say ito s78) • Indirect grant for the benefit-in-kind of a WSA • Sch 6B • DWA account for project implementation via IA

23. 3. RBIG funds regional bulk infrastructure owned and operated by water board • WSA/s benefit/s (benefit-in-kind) by supply of subsidised water for social component • Regional Bulk infrastructure (not municipal service) • Implementing Agent is not WSA • Ownership will not be WSA • Gazetted in Appropriation Act as direct grant to water board • Not in DORA at all, although WSA will benefit indirectly from capital grant subsidy to a waterboard for the social component • DWA to ensure intended benefits for municipalities is achieved by regulating bulk supply price

24. MWIG FUNDING SCENARIOS • Direct Conditional Grant (Sch5B) • Transfer to WSA identified in DoRA in terms of a payment schedule published by NT • WSA has right to funding if conditions are complied with • WSA can contract with Implementing Agent • Is WSA the Department’s Implementing Agent?

25. RRU AND ACIP FUNDING SCENARIOS • Support and funding from DWA to WSAs – from DWA’s internal appropriated budget in execution of its Constitutional duty to support local government • WSA identifies need and motivates Project • Business Plan is approved by DWA • Project is executed by WSA • Is WSA the Departments Implementing Agent?

26. Contracting Scenarios Consider impact of: “source of funding” “risk transfer”

27. Source of Funding • DORA Sch 5B direct conditional grants to WSAs: • Eg. MWIG/ WSOTS/ RBIG(???) • WSAs are not DWA’s implementing agents – but receive the funding in their right as WSA • WSAs assets and project • DWA to ensure grant conditions are met • DORA Sch 6B indirect conditional grants to WSAs • Eg. RBIG • DWA is accountable for implementing the projects • DWA thus appoints implementing agents on its behalf to implement projects

28. Source of Funding • Funding water boards through Appropriation Act • Nationally raised revenue earmarked for transfer to water boards • is waterboard DWA’s IA or is DWA transferring money to waterboard to implement directly, subject to conditions • Funding WSAs through DWA internal funding support programmes • Eg: ACIP and RRU • DWA is supporting the WSA to implement the WSA’s elected, procured and managed contracts • ACIP is essentially co-funding to WSA • WSA is not DWA’s implementing agent? • Conditions are managed through approval of business plans and monitoring of implementation

29. Conclusion: Risk Transfer • RBIG: • Funds regional and municipal bulk supply assets • All programme risk is with DWA (significant and ongoing) • All project risk is with DWA • DWA to nominate and contract implementing agent • MWIG • Funds interim/ intermediate municipal service delivery • All programme risk is with DWA (significant for 3 years only) • All project risk is with the WSA • WSA to appoint and contract implementing agent • ACIP • Support funding to WSAs to accelerate community infrastructure • All programme risk is with DWA (small internal funds) • All project risk is the WSA • If WSA doesn’t have capacity and DWA nominates waterboard as DWA’s IA, to spend DWA’s money for the benefit of the municipality, then the municipality receives the benefit in kind. This will then necessitate a transfer of assets

30. Implementing Agent Issues and developments

31. December 2012 Submission • In December 2012 CD: RBIP submitted a request that DBAC approve that IAs on current RBIG and ACIP projects that were in the process of being implemented, be listed on the Department's list of approved IAs • The reason for this was to ensure that IAs could be paid (we had experiences where certain municipalities could not be paid by DWA because they were not on the IA list) • We also argued it was to align with internal DWA SCM procedures (audit issues) • This was only for current projects already being implemented as at December 2012

32. Dec 2012 DBAC Approval • DBAC approved the IAs listed (ie. munics and water boards implementing projects at the date of submission who were not on the IA list), provided that certain documentation was submitted • SCM advised that docs required were: • the SCM policy and the financials of the WSA

33. Dec 2012 DBAC Condition • Because of the volume of documentation required, and the fact that docs were submitted over time, we have since made a number of submissions to DBAC to receive the documents • The first submission was accepted, subject to the updating of certain procurement threshold amounts by the WSAs in their policies • We complied  by sending notification to the WSAs • Since then submissions of documentation for noting are being rejected by the DBAC • essentially arguing we should be using water boards • Challenge: Dec 2012 Submission was for projects already being implemented • there are already contracts in place • we just needed DBAC to note and approve the existing arrangements (which was done by DBAC in December)

34. Latest DBAC Condition • 17 October 2013 DBAC has approved a submission to appoint Municipalities as implementing agents at its meeting which was held on  17 October 2013. • The following Municipalities’ projects were regarded as irregular expenditure and to be disclosed: • Karee Municipality for the Van Wyksvlei  bulk water supply • Tsantsabane Municipality for the Tsantsabane waste water treatment works and water supply • Renosterberg Municipality for the Vander Kloof/Petrusville bulk water supply • Siyanda District Municipality for the Kenhart bulk water supply, Tsantsabane waste water treatment works and Riemvasmaak bulk water supply • It was resolved that: • The irregular expenditure process to be followed by requesting condonement of the expenditure by the Acting DG. The request will be sent via SCM directly to the Finance Misconduct Advisory Committee. • SCM should  ensure that Municipalities (as per attached submission) who are not listed on the National Treasury’s database, be listed as approved implementing agents. • SCM to ensure that the Municipalities’ SCM policies comply with National Treasury’s prescripts.

35. New Projects Post Dec 2012 • For RBIG projects – it is DORA Sch 6 funding • DWA is accountable for the spending of the money • DWA thus appoints implementing agents • As undertaken in the December 2012 submission: • any new RBIG projects will consider institutional arrangement as part of the Implementation Ready Study Phase • capacity and alternative implementing models will be considered • institutional arrangements need to be debated and finalized with reference to the scope of the project (what infrastructure is being built and where) and the specific issues relevant to that specific project • Submission to DBAC to new Projects will consider and motivate all the factors regarding IA arrangements • FOR ACIP: We are proposing an annual submission to DBAC with the list of projects and WSAs or DWA nominated contractors to implement • For MWIG: WSAs receive transfer in terms of DORA payment schedule

36. RBIG PROJECT CYCLE • Identification of a project through the Master Planprocess government priorities • Prioritisationof project using a set of criteria • If prioritised, a scoping report is developed for approval • If approved, a feasibility study is compiled addressing the requirements • If there is a technical solution and the feasibility has been approved, an implementation readiness study is compiled to address the institutional, social and other issues • If the IRS is approved then DWA’s internal funding approval processis followed • Gazetted in DORA / Appropriation Act • Contract signed and implemented • Hand over and exit

37. RBIG: Implementation Ready Studies • The Technical feasibility study identifies the project, the needs, the options and the preferred solution, with preliminary technical designs • These studies are supposed to: • Identify the project • Identify on which land it will e developed • Who will fund it (RBIG can fund the social component only). Co-funding must thus be determined • Who will own it • Who will operate it • What it will cost to operate it and how the operating costs will be funded • Based on the outcome of the interrogation above, it will be ascertained who should implement the RBIG-funded project

38. Water Boards Capacity • What if no capacity • Give a clear mandate with scope and budget • Prefereably as the primary function of the waterboard • If no response escalate to CD:RBIGwho will escalate to Minister • Expecatation that water boards must perform • We must faciliate the water boards grow their capacity sustainably

39. Minister’s Vision • Minister is the executive authority of the waterboards • Shareholder compacts concluded • In regard to RBIG and MWIG Minister expressed views that water boards are an extension of the Department and the preferred model for implementing the infrastructure projects • January 2013: • Shareholder compact to be updated with performance indicators • An undertaking to review water board remuneration model to align with level of risk undertaken • Argument in support is generally around capacity – but how do we demonstrate value for money?

40. Challenges • Water Boards approach the IA arrangement very differently • Current delegations don’t take into account level of risk required to be managed by water board as Department’s Implementing Agent • Need to distinguish where water board received funding directly to co-fund the social component of water board infrastructure • And where water board is DWA IA for DWA infrastructure to be transferred as a benefit in kind to the WSA • Negotiation of IA Fee is outside the mandate of the regional project team • DWA SCM Delegations need to be interpreted, standardised and communicated • Some water boards need upfront working capital to fund projet implementation

41. DWA SCM Delegations • Section 26 of the Department’s  Acquisition Management Delegations dated 1 April 2012 provides on page 43 that   26. IMPLEMETING AGENT FEE I.) a project of value</= R3million = 10% ii.) a project of >R3million and </= R10million = 7.5%; and iii.) a project of more than R10million =5%/ • It further provides that “In cases where Implementing Agents would like to claim hourly rates, the hourly rates must be approved by the DBAC, prior to signing the IA Agreement.”

42. DWA RBIG Business Processes • DWA to approve IRS • Regional PCC to prioritise and recommend project • DWA to submit to capex and senior management • DG to issue letter approving project and project budget • RBIG Funding allocation letter • DBAC to approve IA arrangements and contracts • Note that RBAC has delegated authority up to R2m (Study phase contract)

43. Umgeni’s Approach • Where implementing the projects as the Department’s implementing agent, with public funding • Argue that s30 activity cannot be funded by Umgeni Water • Note s42 of the Water Services Act provides that WBs have to manage their primary activity and each of its other activities as separate units. • In our view this does not equate to the interpretation that the water board cannot provide bridging funding to be repaid - but it does have to account for it separately. • Remuneration: • IA mark up on direct costs • IA mark up on external project costs • 10% on disbursements incurred • Payment mechanism: • Advance funding, with claims being substantiated in arrears, together with progress reports • Interest accrued on advance funding not always allocated to the project

44. Eg.Greater Mbizana • Budget: R600m • 5% IA fee is charged on all internal direct project-related costs that are claimed in accordance with the procedures that have been established within Umgeni Water (viz. the submission of a formal claim signed by the Business Unit Managers for staff who are working on the project) for services rendered to the project. • 5% IA fee is charged on all external direct project-related costs such as consulting engineers, contractors and suppliers. • 10% administration fee is charged on all project-related disbursements (with the exceptions given below). • All costs associated with construction-related insurance premiums, and payments made to Eskom for new electricity infrastructure for the project, made on behalf of external parties, are claimed at cost (i.e. with no mark-up)

45. Eg. Inquza Hills Study Phase • Budget: R12m • Advance claims according to projected cash flows at the start of each financial year • Unused portions of advance funding shall attract interest at the repo rate minus 2% and accrued to the project account on a monthly basis • Any unused portion of advance funding received shall be repaid to the Department within 3 (three) months of the completion of the Study Phase • Implementing Agent fees and claiming procedure. • 7.5% IAfee charged on all project- related costs, including both internal Umgeni Water costs and external costs (including, inter alia, consulting engineers, consultants, environmental practitioners, contractors and suppliers); and • 10% administration fee shall be charged on all project-related disbursements.

46. Eg. ACIP North West • DWA approved WSAs business plan for period commencing April 2013 • WSA use ACIP funding to co-fund a large project being implemented by WSA • WSA owns infrastructure and is accountable for project • e.g. meter installation • WWTW refurbishment • DBAC has not approved WSA as DWA IA for capacity reasons • Water board imposed on the project • Water Board charge 10% “IA Fee” with no risk – essentially payment agency • R2m project to install meters – now has to fund a R200 000 payment surcharge as DWA cant pay WSA directly ie only R800 000 to go to project or alternative funding to be found for water board

47. Issues to clarify with SCM and IO • What does the IA Fee include (definition of “project”) • Can the water board claim internal costs in addition to the IA Fee • Is the IA Fee inclusive or exclusive of VAT • Does the IA Fee have to be paid in advance by law ie. S42 of the Water Services Act • Who benefits from the interest accrued as result of a pre-payment of an IA Fee? • Is the IA remuneration model under review?

48. Implementation

49. R100m assets • Originates from Water Services Act • In terms of s73(1)(a) of the Water Services Act, the Minister may transfer or dispose of any water services work belonging to government. • In terms of s73(2)(a), no water services work owned by the Minister may be transferred or disposed of without the approval of Parliament if its value exceeds an amount specified by notice in the Gazette from time to time by the Minister with the concurrence of the Minister of Finance, and (b) without prior consultation with all affected water services institutions, if its value is within the specified amount. • “Critical Value” was Gazetted by Minister in 2000 • National Transfer Policy 2003: Obliged to transfer all water services assets by law. Capacity must be built in WSA by CoGTA • Cabinet 2009: Returned DWA submission to transfer Limpopo assets saying- capacity of WSAs?? • Cabinet thus introduced the issue of capacity. It also questioned the fundamental assumption of the Transfer Policy • We now also have the RBIG funded schemes

50. R100m Assets • Assets of regional significance (as determined by the Minister) need to be classified as such and by s41 directive – transferred to a water board (in anticipation of water utilities) • Parliamentary approval will be required considering the following: • Objective issues: • The value of the infrastructure; • The nature of the infrastructure (water services or primary bulk); • Subjective arguments: • Institutional stability of the municipality (the accountability of which vests with DCOG and NT); • Capacity of the municipality to operate and maintain the infrastructure sustainably over the long term (DWA to demonstrate that it has supported the WSA); • Capacity of the municipality to receive and benefit from the support provide by DWA to develop the required skills and expertise to operate the infrastructure; • Circumstantial issues: • Availability of a water board to accept the directive to manage the infrastructure as a primary function; • Affordability of the bulk supply from the infrastructure (ie. Can those benefitting from the bulk supply afford to pay for the service, or must NT support the benefiting municipalities with bulk subsidies?) • This is not encroaching on local government’s Constitutional power in regard to municipal service delivery • In response to the counter-argument raised that water boards also don’t have the capacity to operate the schemes, it must be remembered that “form follows function”. The water boards currently don’t have the function, and accordingly can’t gear up on capacity. If they were to be allocated the function (by directive of the Minister in terms of the current Water Services Act; alternatively as part of moving the function to the National Water Act). With the certainty of the mandate, water boards could then plan to access and sustain the capacity in their business model. It is given that capacity has to be developed to manage the bulk schemes. Based on the last 10 years experiences, it can be argued that water boards are the more appropriate institutional structure to develop and sustain that capacity required to operate regional bulk schemes sustainably over the long term.