MHLATHUZE WATER/AMANZI

1. MHLATHUZE WATER/AMANZI PRESENTATION OF THE 2017/18 ANNUAL REPORT Presented by Mr Mthokozisi P. Duze (Interim Chief Executive) 06 MARCH 2019

2. Presentation Content • Background • Financial year highlights • Governance • Overview of organisational performance • 2017/18 Audit Outcome • Operating statement • Statement of financial position • BBBE/BBE Spend • Reflections

3. Background • Mhlathuze Water is one of South Africa’s leading water utilities providing services mainly to the Northern KZN • Area of operation extends to the entire KZN province • Supplies raw, clarified and potable water to both municipal and industrial customers • Owns and operates one of the biggest off-shore effluent disposal systems in the country • Implements water and waste water infrastructure projects on behalf of various government departments • Provides operation and maintenance services on water and waste water bulk infrastructure to municipal and industrial clients • Operates and maintains the Tugela-Goedetrouw Inter-basin Transfer Scheme on behalf of DWS

4. Financial Year Highlights • Drought interventions • Nongoma and Abaqulusi projects – identification and protection of water sources, and borehole reticulation. Benefiting a total of approximately 3379 households • Reservoirs at the Nsezi Water Treatment Plant • Construction of two 20 Ml reservoirs completed and the system has been commissioned • SCADA Phase 2 • The Nsezi Water Treatment Plant operates on an automated system with all relevant pumpstations • Pump station upgrades • TronoxPumpstation upgraded and commissioned in February 2018 . It is now able to meet the future demands for the areas it supports • Upgrade of electrical works and pumps at the Mondi Pumpstation completed, now operational • EmpangeniPumpstation upgraded and commissioned in February 2018

5. Governance • Accounting Authority • Mhlathuze Water Board was dissolved on 26 April 2017 and the Minister appointed the Interim CEO as an Accounting Authority until the new Board is appointed • Process of appointing Board commenced in May 2018 and the new Board was subsequently appointed on the 05th December 2018 • Independent Audit and Risk Committee • An Independent Audit and Risk Committee was appointed in August 2017 to oversee all strategic financial and risk matters

6. Overview of organisational performance • Out of the 41 planned Shareholders Agreement targets, 28 were achieved, which accounts for 68% of the planned targets • 13 (32%) targets were not achieved

7. Overview of organisational performance13 targets not achieved

8. Overview of organisational performance13 targets not achieved

9. Overview of organisational performance • A Clean Audit was received on performance information for 2017/2018 • This compared to the 2016/2017 set of performance information that was riddled with qualifications. • A single, but minor issue was raised in the management report. • This related to the targeted number of bulk agreements. However, the matter was corrected as recorded on the Annual Report • Based on performance of 68% for 2017/2018, no performance bonuses were paid to any management staff

10. FY 2017/18 Audit • An overall qualified audit opinion was expressed by the AG • Qualification emanated from: • Receivables From Exchange Transactions: • Overstatements of Accounts Receivables on Secondary Activities (Section 30) – inter-divisional journals not eliminated on consolidation at year end

11. FY2017/18 – Irregular Expenditure • All new Irregular Expenditure resulted from: • Spend > R500k on contracts entered into using an RFQ process • Deviation from SCM process not approved • Prior years Irregularities balance (R248,7m) • Process followed to date: • Investigations on all confirmed Irregular Expenditure concluded • Disciplinary processes concluded • Criminal charges laid with SAPS • Accounting Authority submitted request seeking condonation from National Treasury • Way forward: • Referral to Accounting Authority for removal

12. FY 2017/18 Inherent Risks • The following inherent risks were identified by the AG: • Investigations into potential fraudulent activities: • The Chief Executive being on suspension pending finalisation of the forensic investigation and legal action • Some of EXCO members were subjected to forensic investigation & disciplinary process relating to non-compliance with SCM policies • Fraud risk factors that may lead to misstatements due to fraud: • Possible overpayment of claims on invoices due to not having adequate & complete contracts register • Unjustified variation to capital projects resulting in irregular, fruitless and wasteful expenditure • Media articles & whistle-blower reports of potential irregular, fruitless and wasteful expenditure

13. FY 2017/18 Inherent Risks • The majority of the irregularities emendated from prior year audit periods, but only discovered during the 2016/17 audit period and some projects are still under implementation which led into the irregularities rolling over to the 2017/18 financial year • An Audit Recovery Plan was developed to address findings arising for the AG audit • Good progress in resolving findings noted by AG has been reported by Internal Audit. Majority of findings have been addressed and will be audited by the AG during their interim audit in April 2019.

14. FY2017/18 - Operating Performance • The Surplus for the Year increased by 22% from prior year due to cost containment measures amidst lower water sales volumes

15. FY2017/18 - Operating Performance • Revenue is earned in the following operating segments: • Section 29 (Bulk Water Sales & Waste Water Disposal) • Section 30 (Operating & Maintenance; Project Implementation)

16. FY2017/18 - Operating Performance • Steady increases amidst drought conditions

17. Statement of Financial Performance

18. FY2017/18 – Financial Position Current Ratio Debt Equity Ratio Stronger liquidity status & less reliance on financing asset acquisitions, thus reduced risk exposure.

19. FY2017/18 – Financial Position Interest Turnover Ratio Return on Assets Debtors Days • Stronger ability to service interest on outstanding debt • Significant improvement in efficiencies in utilising assets to generate earnings • Great effort in collection of debtors, thus improving cash flows

20. Statement of Financial Position

21. BBBEE/BBE Spend • The target for 2017/18 was 50.1% of discretionary spend on black owned companies • The total spend on goods and services was R365m of which R194m was spent on black owned companies • The actual achievement was 53,14%

22. Tariff Proposal for FY2019/20 • As per Circular 23 of the MFMA, Mhlathuze Water engaged the Water Services Authority (City of uMhlathuze) on proposed tariffs for FY2019/20. • This engagement was further extended to other industrial customers, to create transparency. • The proposed tariff pack was submitted to the Department of Water & Sanitation within set deadlines, to allow for consideration & tabling by the Minister. • The tariff proposed for the Water Services Authority is discounted as an initiative to give back to the community.

23. TARIFF COMPONENTS

24. PROPOSED TARIFFS

25. PROPOSED TARIFFS

26. GOVERNMENT LEVIES • Government levies comprise of the following: • Water Research Levy (increases 1st of July) • Water Resource Management Fee (increases 1st of April) • Water Use Tariff (increases 1st of April) • The current DWS proposal is as follows:

27. PROPOSED TARIFFS

28. PROPOSED TARIFFS DROUGHT

29. Reflections • The Financial Overview has highlighted operational challenges mainly due to the current drought which has exerted some pressure on the financial sustainability of the organisation. • The organisation has however shown great resilience through these turbulent times and remains sustainable in the medium to long term. • Although the impact of the drought is short term, the organisational culture needs to be improved to focus more on better management of operational expenditure and cash flows, prioritisation of capital projects and the driving of the growth strategy.

30. THANK YOU